Lecture 11 Analysis of decoupling Economics of Food

Lecture 11. Analysis of decoupling Economics of Food Markets Alan Matthews

Questions and lecture outline • Can a payment to farmers ever be fully decoupled? – Identification of mechanisms whereby payments may influence production – Empirical evidence? • What would design of decoupled payment look like? – US Production Flexibility Contract payments introduced in 1996 FAIR Act – EU Single Farm Payment scheme – Bond scheme proposal (Swinbank and Tangermann)

OECD definitions • Full decoupling – Where payment does not influence production decisions of farmers – Both shape and position of supply and demand curves should not be affected • Effective full decoupling – Where policy results in a level of production and trade equal to that which would have occurred under free market conditions – Example: price support combined with quota – May result in same equilibrium level of output but not necessarily same response to shocks – Shape of supply (or demand) curve affected

Degree of decoupling • A measure of the production and trade effects of a policy package relative to those of an effectively fully decoupled policy • Compare policy packages having the same ex ante impact on total PSE

Decoupled payments? • Static effects – Arise from changes in the incentive prices of outputs and inputs • Insurance and wealth effects – Payment increases farmer’s wealth and this can affect farmers’ attitude to risk (wealth) – Payment may affect the degree of risk faced by the farmer (insurance) • Liquidity affects – Payment may ease credit constraint and boost investment • Expectations about future policies • Influence entrance/exit from farming

Decoupling – static effect - no (less? ) incentive to produce - more extensive production P S Pi Pm Q 1 Q 2 Q

Source: OECD 2005

Decoupled payments in EU – production effects • Size of effect can depend on modelling issues • For EU/Ireland effects, see – FAPRI Ireland – Dixon and Matthews

Future of decoupled payments • Link to land creates land market distortions • Compatibility with WTO Green Box rules • CAP Health Check proposals – upper and lower limits – move to more uniform area payment