Single Payments of the CAP: Where Do the Rents Go?

Abstract Based on a simple graphical model we analyze the effects of the single payment scheme (SPS), introduced in the EU in 2003 on land prices and the distribution of rents. In particular, we are interested in if the single payments are capitalized into agricultural land values. All three different ways to implement the SPS are discussed: the historical model, the regional model and the hybrid model. We show that the outcome crucially depends on the proportion of eligible agricultural area to entitlements and which model is in place. Key words: single payments, CAP, decoupling, agricultural land prices (ProQuest: . denotes formulae omitted.) Introduction The 2003 Fischler Reform of the Common Agricultural Policy (CAP) of the EU entailed some significant changes. Perhaps the most important one is the introduction of the single payment scheme (SPS) which replaces most old schemes by one new single payment per farm. In addition, this payment is decoupled in a sense that farmers may use their land for any agricultural activity with some minor restrictions. In fact, farmers do not even have to plant anything as long as they keep their agricultural area under a "good agricultural and environmental condition" (EC-Regulation 1 782/2003). l In practice, EU member states have some freedom in implementing the SPS. They can choose to fully (Germany, Ireland, Italy, the UK, New Member States) or partially (all other countries) transfer the old schemes (mainly animal and area payments) into the new SPS. In addition, they can choose between the so called standard (or historical) model, where the single payments for any specific farm depends on its received payments in the reference period 2000 to 2002 (most EU- 15 countries including Austria, Belgium, France, Greece) or the regional model, with the same payment per hectare for each farmer in a defined region or country (in Germany after 2012, the UK after 2011, all New Member States) and the hybrid model, a mixture of the two first mentioned models (in Denmark, Finland, Germany until 2013, Luxembourg, Sweden, the UK until 2012). In practice, farmers receive a number of entitlements equal to the average hectares they planted in the reference period. They can sell the entitlements with and without land and they can lease out the entitlements with land. However, for each entitlement to be activated in each single year the farmer has to have one hectare of eligible land (either owned or leased). Given this, the SPS is not decoupled from land. Therefore, the question remains to what extent the single payments are capitalized into land prices. The study in hand contributes to this question. In particular, we adopt a simple graphical model initiated by Isermeyer (2003) to look at the different models (historical, regional, hybrid) and derive the effects on land prices and the distribution of rents. Obviously, this question is crucial for the future competitiveness of the EU agriculture since high land prices inhibit structural change. The rest of this paper is organized as follows. Section 2 describes the utilized theoretical model. Section 3 derives the distribution of rents given the three different ways the SPS can be implemented. Section 4 discusses the results. Theoretical model In an attempt to model the effects of single payments on land prices our point of departure is a model developed in Isermeyer (2003). We adopt his model of the land rental market for the land (selling) market. Moreover, while Isermeyer (2003) assumed the same value for all payment entitlements our model includes situations with homogenous and heterogeneous entitlement values and is therefore able to capture the different ways of implementation in all EU countries. In addition, we also provide an analysis of the distribution of rents from single payments under different policy designs. Since entitlements are tradable with and without land we distinguish between the market for land and the market for entitlements (Figure 1). …