THE IMPACTS OF THE EU SUBSIDIES ON THE PRODUCTION OF ORGANIC FARMS Marie Pechrová Czech University of Life Sciences Prague, Faculty of Ecoomics and Management February 4th, 2014

1. Content  Introduction  Materials and Methods  Results and Discussion  Conclusion  References 2

2. Introduction  Aim: to estimate the production function of the organic farms in the CR and assess to what extend EU’s agricultural subsidies influence the production  CAP founded at the beginning of the European Communities; supported the incomes of agricultural holdings and stabilized the production  the guarantee prices and payments linked to the production lead to the overproduction  => decoupled payments (McSharry’s reform in 1992, Fishler’s reform in 2003) 3

3. Methodology (1)  Fixed Effect Model (FEM) and Random Effect Model (REM)  FEM: the farm-specific dummy variables or the farm-specific constants to account for individual characteristics that may influence the production such as the management and sowing method  1) model with dummy variables for each farm  2) model with time effect  α i (i = 1... N) is farm-specific intercept  y it - a vector of dependent variable – production  β 0 - the constant (intercept)  X k,it (k = 1... p) is a matrix of explanatory variables, p is the total number of explanatory variables in a model  u it - error term 4

3. Methodology (2)  Wald F-test for fixed effect for each farm present  The goodness of fit assessed by coefficient of multinomial determination (R 2 )  Statistical significance tested by t-test  coefficient of intraclass correlation ( ρ ) - how much of the total variance is given by the differences across panel  Wald test for the heteroskedasticity. - FEM re- estimated using robust standard errors 5

3. Methodology (3)  REM: if time-invariant characteristics unique to the farm have significant influence on the production  α - the common intercept  u it - between-entity error  ε it - for within-entity error  Breusch-Pagan Lagrange multiplier test tested if there is random effect present  Hausmann test - decide between FEM and REM 6

3. Methodology (4)  panel data observed for Czech organic farms (2005–2012)  sources: Albertina database, State Agricultural Interventional Fund  y it - production = sales of own products and services and change of the stock of own activity by i th farm in time t; deflated by the price index of agricultural producers (2005 = 100)  x 1,it - material = consumed material and energy (deflated by the industrial producers’ price index, 2005 = 100)  x 2,it - capital = long-term assets (deflated by the industrial producers’ price index, 2005 = 100)  x 3,it - labor = ratio of personal costs and average wages in agriculture in particular region  x 4,it - acreage of farmland corrected to take into account land quality in particular region 7

3. Methodology (5)  3 groups of subsidies:  x 5,it – direct payments (SAPS and top-up)  x 6,it – Less Favourable Areas payments (LFA), agri- environmental measures (AEM) from Horizontal Rural Development Programme (HRDP) and Rural Development Programme (RDP), and other investment subsidies from RDP  x 7,it – other subsidies from European Agricultural Guarantee Fund and Common Market Organization  50 organic farms in a sample with 292 observation (the minimum observation was 1, maximum 8, and average 5.8 for one farm 8

4. Results (1) 9  50 organic farms in a sample; 292 observation (min. observation 1, max. 8, average 5.8 for one farm) Fixed-effects (within) regression model

4. Results (2) 10  FEM: calculated using within estimator  presence of heteroskedasticity => the robust standard errors  R 2 = % => the conformity with data is high  % (rho = ) of the variance is due to differences across panel  material, and RDP subsidies statistically significant  fixed effect exists

4. Results (3) 11 Random effect GLS regression model

4. Results (4) 12  REM: estimated already with robust standard errors using General Least Squares (GLS) regression  model is statistically significant  parameters for material and RDP subsidies are statistically significant  % (rho = ) of the variance is due to the differences across panel  Breusch and Pagan Lagrangian multiplier test for random effects => also a random effect present

4. Discussion FEM is interpreted: The signs for parameters of majority of explanatory variables are positive. Increase of material (x 1 ) and capital (x 2 ) by 1 thousand, labour (x 3 ) by 1 employee, land by 1 ha (x 4 ) brings the increase of the production by 1.27, 0.18, and thousand CZK resp. Direct payments (x 5 ) and other subsidies (x 7 ) slightly decrease the amount of production. => This is desirable as those subsidies were decoupled from the production and should not have significant influence on it. Only subsidies from RDP (x 6 ) mildly increase the production (their increase by 1 CZK brings the increase of by 3.2 CZK). 13

6. Conclusion  The aim was to assess the impact of EU agricultural subsidies on production of organic farms.  McSharry’s reform in 1992 and Fishler’s reform of CAP in 2003 decoupled the direct payments from production.  SAPS and other subsidies mildly decrease the production.  => The decoupling of the direct payments had desirable effect.  On the other hand, agri-environmental payments from RDP and HRDP, LFA payments, and other subsidies from RDP tend to increase the production.  => It might be due to the fact that RDP includes also investment subsidies for farms’ modernization which can lead to higher output. 14

7. References  BEARD, N., SWINBANK, A., Decoupled payments to facilitate CAP reform. Food Policy, 2001, vol. 26, no. 2001, pp. 121–145, ISSN  BREEN, J.P., C. HENNESSY, T. C., THORNE, F. S., The effect of decoupling on the decision to produce: An Irish case study. Food Policy, 2005, vol. 30, no. 2005, pp. 129–144, ISSN  CISILINO, F. et al., The effects of decoupling on the COP sector in Italy: an ex-post performance analysis. PAGRI, 2012, vol. 2, no. 2012, pp. 47–63.  KATRANIDIS S. D., KOTAKOU, C. A., Are CAP Decoupling Policies Really Production Neutral? 12th Congress of the European Association of Agricultural Economists – EAAE 2008, 2008, vol. 12, no. 2008, pp. 1–8.  OFFERMANN F., NIEBERG, H., ZANDER K., Dependency of organic farms on direct payments in selected EU member states: Today and tomorrow. Food Policy, vol. 34, no. 2009, pp. 273– 279, ISSN  VIAGGIA, D., RAGGIB, M., GOMEZ Y PALOMA, S., Farm-household investment behaviour and the CAP decoupling: Methodological issues in assessing policy impacts. Journal of Policy Modeling, 2011, vol. 33, no. 2011, pp. 127–145. ISSN

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