1. 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

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 4. Results (2) 10  FEM: calculated using within estimator  presence of heteroskedasticity => the robust standard errors  R 2 = 96.81 % => the conformity with data is high  95.30 % (rho = 0.9530) of the variance is due to differences across panel  material, and RDP subsidies statistically significant  fixed effect exists

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

12. 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  95.76 % (rho = 0.9576) of the variance is due to the differences across panel  Breusch and Pagan Lagrangian multiplier test for random effects => also a random effect present

13. 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, 83.64 and 26.39 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

14. 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

15. 7. References  BEARD, N., SWINBANK, A., Decoupled payments to facilitate CAP reform. Food Policy, 2001, vol. 26, no. 2001, pp. 121–145, ISSN 0306-9192.  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 0306- 9192.  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 0306-9192.  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 0161-8938. 15

16. Thank you for your attention. Czech University of Life Sciences Prague, Faculty of Economics and Management pechrova@pef.czu.cz