Impact of alternative implementations of the Agenda 2000 Mid Term Review

Bio-Science EngineeringBio-Science EngineeringDepartment of Agricultural EconomicsDepartment of Agricultural Economics

Impact of alternative implementations

of the Agenda 2000 Mid Term Review

An application of SEPALE

Department of Agricultural Economics

Structure of the presentation

■ PMP

■ Basic model description: SEPALE

■ MTR

■ MTR implementation in SEPALE

■ Results

■ Problems: optimisation

■ Discussion


PMP


SEPALE: main characteristics

■ Belgian FADN data■ Simultaneous optimisation of farm level profit

functions■ Simulation results can be aggregated according to the

farm's localisation, type and size ■ Exchange between farms of land and quota■ Constraints:

● Land at regional level● Quota at farm and regional level● Animal feed through CES function

■ Solved with GAMS


SEPALE: calibration of profit functionP X + subsidies – Q/2 X² - H X

Q and H are cost function parametersP: priceX: production

■ 1st derivative to X is zero: MC = MR P = Q X + H

■ Total costs observed including seeds, fertilizers, pesticides, contract work and land = Q/2 X² - H X

■ Two equations and two unknown parameters parameters can be directly calculated

■ Constraint to prevent that total land use of the sample does not change


MTR

■ single farm payment replaces the direct payments to activities

■ direct aid is linked to compliance with rules, called cross-compliance

■ Modulation: system of progressive reduction of direct payments: 5% in 2007 beyond 5000 euro per farm


MTR in SEPALE: decoupling

■ The reference amount is divided over the reference area to assign the payment entitlement per ha for each farm

■ Area with eligible crops, all crops except potatoes and vegetables in open air, can activate the subsidy entitlements



■ Three situations could occur:1. The same area of eligible crops as during the

reference period: same direct payments

2. Increasing eligible area does not increase the amount of direct payments.

3. The amount of direct payments decline by a reduction of the eligible land



■ two farm level constraints should be added: Activated area ≤ Reference area

Activated area ≤ Eligible area

■ The direct payments extend the profit function, as follows:

Profit + activated area * reference amount


MTR in SEPALE: modulation

■ Should be added during optimisation because farms can avoid reductions by transfers of direct payment entitlements

■ Two parameters controlled by policy:● Modulation threshold: amount free from

reductions

● Modulation percentage: percentage reduction


MTR in SEPALE: transfers of entitlements

■ Can occur both with as without transfer of land.

■ Each member state can confiscate a certain percentage of the transferred entitlements.

■ Transfers with land: 10% of the entitlement can revert to the national reserve

■ Transfers without land: up to 30% can revert to the national reserve.


MTR in SEPALE: transfers of entitlements■ 7 constraints and 7 extra variables

● Calculation of the amount of not activated entitlements ● Calculation of the average value of not activated

entitlements ● Calculation of free eligible land per farm● Calculation of acquired land ● Constraint to prevent transfers beyond the free eligible land● There should be more not activated entitlements than

transferred entitlements● Complementary slackness constraint to prevent farms from

being buyer and seller at the same time


Impact analysis

■ 159 arable and cattle farms for which data were available for the year 2002

■ Impact on supply and gross margin of:● Decoupling ratio

● Modulation percentage

● Modulation threshold

● Transfers of direct payments?


Decoupling – land use

-8

-6

-4

-2

0

2

4

6

8

10

0 50 100 decoupling ratio

change in land use (%)

nonsubsidizedcrops

nonsubsidizedfodder crops

non eligiblecrops

subsidizedfodder crops

subsidizedcrops


Decoupling – gross margin

-0,4

-0,2

0

0,2

0,4

0,6

0,8

1

0 50 100 decoupling ratio

change in gross margin (%)

small

medium

large

extra large


Modulation percentage – gross margin

-1

-0,8

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

10 15 20 25 30 modulation percent


Small

Medium

Large

Extra Large


Modulation threshold – gross margin

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

0,8

1

5000 4000 3000 2000 modulation threshold


Small

Medium

Large

ExtraLarge


Problem: numerical optimisation

■ no progress at all in the solution process. the optimality criteria have not been satisfied ● ABS function

● Discontinuities

● Complementary slackness constraint

■ multi-extremal decision models can be very difficult to solve, standard optimization strategies are not always sufficient


Conclusion + discussion

SEPALE: individual farm-based sector model■ Advantages:

● to account for the individual farm structure ● to simulate impact according to farm

characteristics● to simulate transfers between farms

■ Disadvantages:● Limited data for calibration at farm level● More complex model structure


Further research

■ Functional form

■ Environmental indicators

■ Demand side – link with other EU member states

■ Transaction costs

■ Risk

Impact of alternative implementations of the Agenda 2000 Mid Term Review

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