Direct Payments in the CAP post 2013

Direct Payments in the CAP post 2013 Stefan TangermannDepartment of Agricultural Economics and Rural Development EP Workshop "CAP towards 2020", Brussels, 7 February 2011

The challenges • The Communication explicitly identifies three challenges external to the CAP • food security • environment and climate change • territorial balance • However, there is one additional challenge internal to the CAP: What is the future of direct payments?

Direct payments: backbone of the CAP? • Originally, direct payments had an important role, to compensate farmers for price cuts … but no decision on their future was taken • The Communication now suggests (implicitly) that they are to remain a permanent feature of the CAP … and proposes only very limited changes of other instruments • The Communication is essentially about the future of direct payments

Direct payments and the challenges • Provision of important public goods requires policy support, but … • Food security: no need for DP to stimulate extra production in Europe … and DP cannot enhance 'true' competitiveness • Environment/climate change: requirements are location-specific → Pillar 2 measures work best • Territorial balance: needs differ from place to place → Pillar 2 measures work best

Which role for direct payments? • The Communication suggests that DP are needed • to provide basic income support • as precondition for provision of basic public goods • Income support for equity reasons should be based on household income, like in other sectors • Provision of 'basic public goods' depends on land use … which would continue in most of the EU even in the absence of direct payments • DP per hectare to all farmers are a blunt instrument

The "active farmers" issue • Objectives cited in Communication do not provide basis for any definition of "active farmers" • agricultural activity vs other enterprises: management of natural resources can also be achieved by other activities • working farmers vs absent landowners: DP are capitalised in land values → tenants have little benefit, territorial development is not enhanced • 'normal' farm size vs super large farms: large farms can also provide public goods • "Active farmers" is a matter of public perception, rather than consistency with CAP objectives

Treatment of small farms • Providing more support (per hectare) to small farms is neither justified, nor would it enhance their 'true' competitiveness • Reducing transaction cost makes sense … not through making larger payments (e.g. same payment to all farms below threshold) … but through less requirements (cross compliance) • Payments could be made once in five years,or through marketable certificates ("bonds")to provide means for investments (on or off farm)

Impact on supply, and WTO compatibility • Communication proposals would not have noticeable impact on supply … unless "voluntary coupled support" were to become larger element • DP would probably continue to be compatible with WTO Green Box, unless • "active farmers" definition were to require production • "greening" component were to undermine decoupled nature of payments (e.g. permanent pasture, crop rotation)

Basic component of direct payments • Redistribution among Member States is a purely political matter, and no economic advice can be given regarding 'right' distribution • equity would require means testing • public goods provision requires specific targeting to natural, economic, social conditions • "Capping", in absence of means testing, does not improve equity … but distorts land market and has negative implications for structural development

"Greening" component • Would substitute for part of current payments … but generates less farm income • Which role is "greening" component thought to play? • 'Super cross compliance'? • new environmental issues? Why not yet included? • why not revise current cross compliance? • Moving measures from Pillar 2 to Pillar 1? • why is Pillar 1 better place? • would budget also move? And co-financing?

"Greening" component for public goods? • "Green" public goods are location-specific, because of either their nature or their costs → EU-wide policy under Pillar 1 is less efficient than more differentiated policy under Pillar 2 • Member State governments will be under pressure to make sure 'money from Brussels' actually flows • "Greening" component is not a convincing way to achieve better targeting • "Greeenig" component is proposed to make payments "more understandable to the taxpayer"

"Areas with specific natural constraints"and "voluntary coupled support" • Would areas with specific natural constraints receive larger payments than today? … or would budget be shifted from Pillar 2 to Pillar 1 (and why so?) • There are no good reasons to provide any coupled support … which effectively makes farmers pay for the costs of producing the outputs considered desirable (for which reasons?)

Conclusions (1) • Communication identifies important challenges … but proposes only limited changes to CAP … not a real reform • Meeting the challenges requires new policies • food security and 'true' competitiveness are enhanced through more innovation, R&D, education, training, less red tape, better functioning land markets, lower land prices • environment, climate change require location-specific measures on contractual basis, with local engagement • territorial balance is achieved through broad-based support to rural areas, infrastructure, social services, education

Conclusions (2) • "Greening" component is not a convincing way of achieving better targeting • Redistribution among Member States may be politically necessary, but there is no economic advice regarding 'right' distribution • "Capping" does not achieve equity, distorts land market • Coupled support should be terminated

Conclusions (3) • Provision of public goods is an important objective of the CAP, and requires public support … but support must be specific • Payments should be provided not per hectare, but per unit of public good provided (Pillar 2) • CAP should now enter into a new phase: market support → decoupling → targeting (1960s-1980s) (1990s-2000s) (post 2013) support per tonne … per hectare … per public good

Direct Payments in the CAP post 2013