P AUL F EICHTINGER AND K LAUS S ALHOFER *
3. Effects of policies on land rents and land allocation
The effects of these policy measures on land rent are depicted in Figure 4.1.
In the case of uniform area payments and SFPs in the regional model, Ricardian land rent increases by the same amount for all acreages, independent of land quality. The rent function R is shifted upwards in a parallel manner to Rregional/area payments. In contrast, a price support policy
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clearly favours land with higher productivity. Hence, we observe a rotation of the rent function to Rprice support rather than a shift. It is debatable to what extent the area payments policy of the 1992 MacSharry reform and the AGENDA 2000 reform can be represented by our Rregional/area payment function.
Area payments in the CAP were defined by a payment per tonne multiplied by the average historical yield of a region. Hence, one could argue that land quality still played a major role in the amount of payment per acreage and that the reform did not change the distribution of rents among different land qualities. In this case, the distribution of rents between the 1992 MacSharry reform and the 2003 Fischler reform remained close to Rprice support rather than to Rregional/area payments.
Figure 4.1 Land rent function under different policies
As with price support, higher quality land also benefits more per acreage than lower quality land with SFPs in the historical model, as depicted by Rhistorical. The difference between Rhistorical and Rprice support depends on the extent to which SFPs in the historical model correlate with land productivity. Given that rents under price support were transferred directly into yield-dependent area payments later on, we can also expect SFPs in the historical model based on these payments to follow a similar distribution with regard to land quality.
Land ordered by quality Land rent
Amax
THE IMPACT OF THE CAP ON LAND RENTS AND LAND ALLOCATION |47 Therefore, what should become clear from the discussion of Figure 4.1 is the difference between the regional model (or uniform area payments) and all the other CAP support measures, which favour high quality land.
While our analysis so far has been concerned with the effects of policy instruments on land rents under a given land use, in most cases farmers face more than one production possibility and therefore have to decide how to allocate their land. To analyse the effects of different policy measures under alternative land uses, we introduce an outside option with a constant per acreage rent independent of land quality. Our model can illustrate, in a very stylised way, the fact that good quality land can be used for crop farming where rents vary considerably with land quality, with extensive grassland use as an outside option where land quality does not play a (considerable) role. It is also a stylised presentation of a situation where the amount of land under production is not fixed, since the outside option could be to take land out of production.
In this extended model, a farmer is assumed to maximise total profits by allocating land between the two different utilisations in an optimal way.
We assume the outside option to be eligible to receive SFPs, but not area payments or price support. Figure 4.2 shows the land rent function for producing the “regular” output (R) and the outside option (O). A* denotes the land quality where the land use changes without any government support.
Allocation changes induced by price support (Rprice support) and uniform area payments (Rarea payments) are also illustrated in Figure 4.2. Both policies shift some land away from the outside option and into production of the regular output. Uniform area payments do this to a greater extent (from A* to A*area payments) than price support (from A* to A*price support), since the support of low quality land is higher with area payments.
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Figure 4.2 Influence of price support and area payments on land allocation
During the implementation of SFPs as the core innovation of the 2003 Fischler reform, countries were generally able to choose between a regional and a historical model. Figure 4.3 shows that with the introduction of the regional or the historical model, both rent functions, producing the
“regular” good (Rhistorical, Rregional) and the outside option (Ohistorical, Oregional), are shifted. This shift is parallel with the regional model, but not with a historical model. As both land uses are subsidised, land allocation does not change and remains at A*. Furthermore, in the historical model both curves are steeper and as with price supports, therefore, higher quality land is subsidised disproportionally higher than land of lower quality.
Land ordered by quality Land rent
O
A*price support
A*area payments A*
THE IMPACT OF THE CAP ON LAND RENTS AND LAND ALLOCATION |49 Figure 4.3 Influence of SFPs in the regional model and the historical model on land
allocation
4. Conclusion
Over many decades, government support for EU farmers played a central role in the CAP. Major changes occurred in 1992 – from price support to coupled direct payments – and in 2003 (implemented in 2005) – from coupled to decoupled payments. The objective of this chapter was to investigate the impact of different government support measures on land rents and land allocation, explicitly taking into consideration that land quality is heterogeneous.
Our main findings can be summarised as follows. Price support before the MacSharry reform, area payments as implemented from 1992 onwards and SFPs in the historical model all distribute farm support unequally with respect to land quality. All three support schemes favour land with higher productivity. This is not true for uniform area payments, but holds true for the way area payments were implemented in the CAP. In contrast, SFPs in the regional model (and uniform area payments) uniformly distribute support with respect to land quality. Which support is
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preferable depends crucially on policy objectives. Lower land quality often correlates with lower farm income. To this extent, policies favouring higher quality land may increase income inequalities in the sector and seem inappropriate, or at least inefficient, to support low income.
With regard to land allocation, we were able to show that price support will change land use to a lesser extent than uniform area payments, since the latter support low quality land more. If one has the goal of keeping as much land as possible in production, then area payments on land, independent of land quality, are favourable. Even more efficient would be a targeted subsidisation of lower quality land (e.g. less-favoured areas payments). SFPs do not change land use in comparison to a situation without support, as long as all land uses are entitled to payments.
However, SFPs do change land use in comparison to the situation before the 2003 reform. Some of the land is shifted to the outside option, and hence might be left idle or converted from crop to grassland.
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