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19.03.2010 Studies
 
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  • EU Land Markets and the Common Agricultural Policy

EU Land Markets and the Common Agricultural Policy

Johan F.M. Swinnen, Pavel Ciaian and d’Artis Kancs, 2010.

Content

  • Analysis of the effects of direct income support based on 11 country studies and 18 regional studies.

Findings

  • The impact of CAP subsidies on land prices is relatively modest compared to other factors (urban sprawl, infrastructure development).
  • The impact on rental prices is stronger than on land prices.
  • On average, the switch to direct income support “appears to have been weak and it has not led to lower capitalisation than under coupled policies“. “Introduction of the SPS appears to have increased capitalisation in the least productive countries. The SPS seems to have put a floor on land values in less productive regions (e.g. in Sweden and parts of the UK).“
  • The distribution of the SPS payments to landowners appears to differ markedly among the member states. "From our country studies, it seems that landowners benefit most from the SPS in Finland and Sweden (60-100% of the value of the entitlement) and least in Greece and Ireland (0-10%)."
  • Due to the significant differences in land prices (factor 20:1) and rental prices (factor 7:1) across member states, the effects of one euro of direct income support also differs (being greater in member states where land prices are low).
  • The market price for entitlements in most member states "is between one and three times the annual face value of the entitlement. A simple calculation would indicate that with perfect markets and without uncertainty, the entitlement price would be in the range of four to five times the face value if the SPS were to run until 2013 or in the range of ten to twenty if the SPS were to run indefinitely. Several factors may explain the observed gap in the entitlement price between theoretical expectations and empirical evidence: i) uncertainty about the future of the SPS (e.g. modulation and the health check), ii) the additional costs of the SPS (e.g. administrative costs), iii) the taxes and fees imposed on transactions and iv) credit market imperfections. The low market price of the entitlements may also reflect the capitalisation of the SPS into farmland values.“
  • ”The SPS seems to constrain farm exit and increase part-time farming.“
  • ”The impact of the SPS on hired labour appears small.“
  • Many complicating factors limit the findings: 1) few data (relatively recent introduction of direct income support; few transactions on land markets; long duration of rental contracts, so that few have been renewed since the introduction of direct income support); 2) global food markets have experienced major changes over the past few years, making it complicated to isolate the effect of the SPS on agricultural land markets; 3) heterogeneity across EU (e.g. regulation of land and rental markets, regional/hybrid/historical SFP model, regulation of SFP entitlement trading).

Comment

  • The degree of capitalization of direct income support into land values will remain a vexing issue for empirical research. But the question of what share of subsidies goes to farmers (as a reward for farming) and what to landowners (who often are farmers) should not matter for CAP reform. Income support should go to poor households, regardless of employment sector, and thus not be part of the CAP.