Bio-Science Engineering Department of Agricultural Economics Impact of alternative implementations of the Agenda 2000 Mid Term Review An application of SEPALE

Department of Agricultural Economics Structure of the presentation ■PMP ■Basic model description: SEPALE ■MTR ■MTR implementation in SEPALE ■Results ■Problems: optimisation ■Discussion

Department of Agricultural Economics PMP

Department of Agricultural Economics SEPALE: main characteristics ■Belgian FADN data ■Simultaneous optimisation of farm level profit functions ■Simulation results can be aggregated according to the farm's localisation, type and size ■Exchange between farms of land and quota ■Constraints: ● Land at regional level ● Quota at farm and regional level ● Animal feed through CES function ■Solved with GAMS

Department of Agricultural Economics SEPALE: calibration of profit function P X + subsidies – Q/2 X² - H X Q and H are cost function parameters P: price X: production ■1st derivative to X is zero: MC = MR P = Q X + H ■Total costs observed including seeds, fertilizers, pesticides, contract work and land = Q/2 X² - H X ■Two equations and two unknown parameters  parameters can be directly calculated ■Constraint to prevent that total land use of the sample does not change

Department of Agricultural Economics MTR ■single farm payment replaces the direct payments to activities ■direct aid is linked to compliance with rules, called cross-compliance ■Modulation: system of progressive reduction of direct payments: 5% in 2007 beyond 5000 euro per farm

Department of Agricultural Economics MTR in SEPALE: decoupling ■The reference amount is divided over the reference area to assign the payment entitlement per ha for each farm ■Area with eligible crops, all crops except potatoes and vegetables in open air, can activate the subsidy entitlements

Department of Agricultural Economics MTR in SEPALE: decoupling ■Three situations could occur: 1. The same area of eligible crops as during the reference period: same direct payments 2. Increasing eligible area does not increase the amount of direct payments. 3. The amount of direct payments decline by a reduction of the eligible land

Department of Agricultural Economics MTR in SEPALE: decoupling ■two farm level constraints should be added: Activated area ≤ Reference area Activated area ≤ Eligible area ■The direct payments extend the profit function, as follows: Profit + activated area * reference amount

Department of Agricultural Economics MTR in SEPALE: modulation ■Should be added during optimisation because farms can avoid reductions by transfers of direct payment entitlements ■Two parameters controlled by policy: ● Modulation threshold: amount free from reductions ● Modulation percentage: percentage reduction

Department of Agricultural Economics MTR in SEPALE: transfers of entitlements ■Can occur both with as without transfer of land. ■Each member state can confiscate a certain percentage of the transferred entitlements. ■Transfers with land: 10% of the entitlement can revert to the national reserve ■Transfers without land: up to 30% can revert to the national reserve.

Department of Agricultural Economics MTR in SEPALE: transfers of entitlements ■7 constraints and 7 extra variables ● Calculation of the amount of not activated entitlements ● Calculation of the average value of not activated entitlements ● Calculation of free eligible land per farm ● Calculation of acquired land ● Constraint to prevent transfers beyond the free eligible land ● There should be more not activated entitlements than transferred entitlements ● Complementary slackness constraint to prevent farms from being buyer and seller at the same time

Department of Agricultural Economics Impact analysis ■159 arable and cattle farms for which data were available for the year 2002 ■Impact on supply and gross margin of: ● Decoupling ratio ● Modulation percentage ● Modulation threshold ● Transfers of direct payments?

Department of Agricultural Economics Decoupling – land use

Department of Agricultural Economics Decoupling – gross margin

Department of Agricultural Economics Modulation percentage – gross margin

Department of Agricultural Economics Modulation threshold – gross margin

Department of Agricultural Economics Problem: numerical optimisation ■no progress at all in the solution process. the optimality criteria have not been satisfied ● ABS function ● Discontinuities ● Complementary slackness constraint ■multi-extremal decision models can be very difficult to solve, standard optimization strategies are not always sufficient

Department of Agricultural Economics Conclusion + discussion SEPALE: individual farm-based sector model ■Advantages: ● to account for the individual farm structure ● to simulate impact according to farm characteristics ● to simulate transfers between farms ■Disadvantages: ● Limited data for calibration at farm level ● More complex model structure

Department of Agricultural Economics Further research ■Functional form ■Environmental indicators ■Demand side – link with other EU member states ■Transaction costs ■Risk