NEWMEDIT N. 412005

The difficultrelationshipbetweenAgriculturalPolicy,Income,Labourand SustainableDevelopment

MARIA DE BELÉM MARTINS*, MARIA RAQUELVENTURA-LUCAS**, RUI FRAGOSO**

Jel classification: R110, Q180, C610

Agricultural and ruraldevelopment policyshould undoubtedly pro-mote:- a competitive agricultur-aI sector inside the EU;-a sustainable market-ori-

ented agriculture;- an effective rural deve1-opment.

The key issue is nowhow we shall approachpossible changes in poli-tics considering that Eu-rope has set new objec-tives. How shall we incor-porate the multifunction-ality concept?

Given the nature and s-cope of current and futurechanges within the CAP,this paper tries to providesome answers to thisquestionoIt is necessary toevaluate the impact of dif-ferent policies on typicalfarms and agriculturalsystems, referring to spe-cific regions and areas.Considering two differentfarms, both typical of A-lentejo region, in theSouth of Portugal, wesimulate the effects ofsome policy scenarios,

drawn fiom the current situation. ln the first scenario, wemaintain the present expectations, which will be true until2006. ln the second scenario, we decouple payments fiomproduction, giving the farmer the exact amount he is re-ceiving now. Finally, in the third scenario, we decouplepayments, but on the basis of the labour expenditure of thefarm.

AbstractThis paper analyses the impact of some policy schemes, in the current frame-work of CAP, on retums, labour and sustainable development of typical crop-ping and livestock farming systems in the south of Portugal. Three scenarioshave been worked out: in the first one, the current expectations will be main-tained until 2006. In the second, the payments decoupled from production willgive the farmer the exact amount he is receiving now. Finally, the third sce-nario considers the decoupled payments on the basis ofthe labour expenditureof the farm. A mathematical programming model, combined with the ErosionProductivity Impact Calculator (EPIC) Cropping Systems model is used to de-termine the impact degrees according to the system and scheme scenarios e-valuated. Economic results (net margin) and environmental results (nitrateleaching, soil erosion, and biodiversity changes) are obtained for each systemand scenario. Results point out a significant adjustment of production plansin the two systems studied, that will move towards extensification and im-provement of sustainable development but with subsequent reductions in thefarm retums in the CAP 2006 scenario. Moreover, the decoupled paymentsseem to have a positive impact on the environmental parameters, althoughthey affect negatively the total retums of farms.

RésuméCe travai! analyse l'impact d'un certain nombre de mesures, qui relevent ducadre actueI de la Politique Agricole Commune (PAC),sur les revenus, le tra-vai! et le développement durable des systemes agricoles et d'élevage typiquesdans le Sud du Portugal. Trois scénarios sont présentés: dans le premier, lesattentes actuelles persistentjusqu'en 2006; dans le deuxieme, le désaccouple-ment par rapport à la production permettra à l'agriculteur de recevoir lesmêmes subventions qu'aujourd'hui ; et dans le troisieme, onpropose le désac-couplement sur la base de lá dépense liée áu travai!. Un modele de program-mation linéaire combiné avec le modele Erosion Productivity Impact Calcula-tor (EPIC) est employé pour déterminer l'impactde ces scénarios. Des ré-sultas économiques (marge nette) et environnementaux (lessivage des ni-trates, érosion du sol et altération de la biodiversité) sont évaluéspour chaquesysteme et scénario. Ces résu/tas nous montrent un ajustement significatif desplans de production dans les deux systemes étudiés, qui vont conduire à l'ex-tensificationet à l'accroissementde . la durabilité,mais avecdes réductionssignificatives des revenus obtenus dans le scénario CAP 2006. En plus, ledésaccouplement semble pouvoir exercer un eflet positif sur les parametresenvironnementaux, malgré des conséquences négatives sur le revenu total del'exploitaticm.

1. IntroductionAs food needs in the Eu-

ropean Union were satis-fied and exceeding sup-plies grew up, the produc-tivity paradigm dominat-ing Europe after WorldWar II was substituted. Af-ter Cork declaration, in1996, Agenda 2000 hasset the new goal of multi-functional paradigm forEurope in the next years.

One possibility for ap-plying this idea in practice,thereby contributing to theproper functioning of agri-cultural markets, is repre-sented by payments un-linked to production. S-ince 1960, agricultural e-conomists have suggestedthis kind of payments to[make agricultural policyreform easier (Swinbank,2002). The agreementreached in Brussels in Oc-tober 2002 allows to havea clear idea of the agricul-tural budget available forthe future, which meanswe have the opportunity oftrying to guarantee long-term safety to our agricul-ture (Fischler, 2002).

The agricultural policy need is not at issue. Markets cannot be responsible for food safety, environment protectionand rurallandscape maintenance, and the reinforcement ofagriculture competitiveness in the weaker rural areas willcontribute to the economic cohesion of the European U-mono

" Universidade do A)garve, Campus de Gambelas, Fat;.o-Portugal','f Universidade de Evora, Dep. Gestão de Empresas, Evora -Portugal

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2.The analytical frameworkAgricultural policies that support market prices, in which

the productivist paradigm was built, have a great impacton resources use intensification, with consequences on theirquality and bio-diversity.

Farms can be seen as a space where three fundamental el-ements interact (Van der Ploeg et aI., 2002):

Figure 1. Development process on a farm

Rural

Developrnent

DResources

The farm development can take place on any sideof this triangle. To increase agricultural production,the c1assicalapproach is used, based on the produc-tivist paradigm, i.e., we reinforce the productive a-gricultural activities, assuring that income by pro-duction unit is higher. On the other triangle direc-tions we can consider that enhancing the resourcesimplies obtaining new resources or, more impor-tant1y, increasing their intrinsic value and, finally,promoting rural development implies joining newnon-agricultural activities to the. usual agriculturalactivities. ..

These three views of the problem can be interde-pendent. For example, the enhancement of the re-source intrinsic value, such as soil, orowater qualitycan imply the strengthening of rural development,thus creating the conditions for the development ofnon-agricultural activities with or without direct orindirect effects on agricultural activities.

More generally, we can state that the agriculturalproduction value and the agricultural cost evolved

inversely, and they tended to become c1oser.ln the next fig-ure, and according to Van der Ploeg et aI. (2002), we showhow this proximity was reached in Holland, from 1950 to2000.

A shows the economic crisis of the present agriculturalsystem in the European Union, which is represented by theincreasingly lower difference between total agriculturalproduction (in M.V.) and costs. B shows the ecological cri-

sis we live in Europe today - a production in-tensification, linked with costs each time lessuntied to nature that we can perceive, for ex-ample, in the substitution of organic fertiliza-tion by chemical fertilization. Finally, C repre-sents what we can call the structural crisis - in-creasing production is more and more difficultdue to the quota system.

Partially decoupled payments and the intro-duction of agri-environmental measures in theCAP reform, in 1992, were the first attempt tocorrect the negative impact of policies strict1yoriented to production, valuing the role farmshave as landscape and rural space guardians.Agenda 2000 reinforces these points elicitingthe rural development and multifunctionalityparadigm as the bases of future agriculturalpolicy.

The literature review shows that farm-levelmodels can provide more details about individ-ual impacts than large-scale models. More-over, 1) farming systems will change in re-sponse to the new policy measures under theold and new CAP policies; and 2) the levels ofsustainability and bio-diversity change as the

Agricultural

Figure 2. .Costsand agriculturalproduction evolution over time, in monetaryunits

Total agricultural production

1950

Costs

2000 tirnr

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NEWMEDIT N. 4/2005

farming systems change.These aspects led us to the use of a micro-economic

model that allows to take into account simultaneously thefarming systems, the economic and institutional frame-work, particular1y policy measures, and also the effects onthe environment.

We developed a bio-economic model at farm leveI,which integrates a mathematical programming model anda plant growing simulation model, in order to estimate theeconomic and environrnental impact of different policymeasures on typical farming systems of Alentejo region,in southem Portugal, and, consequent1y, their effects onfarm income, employment and bio-diversity/landscape.

The formulated programming model allows to examinethe impact of some political scenarios, resulting fromCAP, on the farming systems.

The model fits the calculation of the implications of d-ifferent resource endowments, different market condi-tions, and improved new technologies (Hazell and Nor-ton, 1986). For each farming system, the leveI of sustain-.ability is estimated using EPIC, which. was previouslycalibrated for erosion rates, water pollution and cropyields. Then, the levels of soil erosion, water pollutionand the crop yields are inc1uded in the linear program-ming model. For each optimal solution of the bio-eco-nomic model, the total sustainable parameters (erosionleveI, water pollution, the degree ofbio-diversity) and thetotal economic parameters (farm income and labour) arecalculated. The farming systems inc1ude dryland cerealfarming systems (intensive and extensive), livestock(sheep and cattle) and irrigated crops using conventionaland conservation farming technologies. Each farmingsystem is supposed to have a different effect on sustain-

ability which is assumed to vary from leveI 1 - high de-gree ofbio-diversity present in naturallandscape-, to lev-eI 6 - low diversity degree, present in intensive farmingsystems. Further characterisation of the farming systemsinc1uded in the model is presented in Annex 1.

The model can be specified as follows:Max E(n) = ~j ~a ~t ~b (Pjf(ku.t))-CkK(j,t) + A(j,a.t)) x(j.a,t,b)

s.a. ~j ~a ~t ~b x(j,a,t,b)::::S~j ~t ~b x(j,a,t,b) ::::Da

Ku,t) ::::O; e X(j,a,t,b) ::::O;

where: },a,t and b indicate ,the farming system, the com-pensatory and agri-environmental subsidies, the produc-tion technologies and the effect on bio-diversity, respec-tively (see appendix 1); x is the decision variable whichdefines the area (ha) occupied by the farming syst~m;!(ko.t) is the production function of} farming system ac-cording to the technology t; KO,t)is the vector of thechanging inputs used in the production process of} farm-ing system with technology t, Ck is the unit cost of the d-ifferent variable inputs used; p} is the final price of prod-ucts; AO,a,t)is the parameter of the agricultural paymentswhich are function of the farming system; S is the vectorset of the available production inputs (land, labour andfixed capital); and D is the parameter to modulate the dif-ferent policy schemes.

The objective function, Max E(:rt),is the maximisationof the net margin or the long-term revenue. It representsthe return ofthe production systems to the land, fixed cap-ital, permanent labour and management. This model wasapplied to two typical farms data of Alentejo region inPortugal. One of the farms is representative of drylandfarming systems and another is representative of mixed,irrigated and dryland farming systems.

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Table I. Results

Economic results

Liauid Man:dn Production Subsidies Caoital Fixed costs

Farm I 96,5 205,8 98,0 124,9 82,3

Farm 2 69,5 90,0 100,6 66,3 54,9

Activities % ofland)

1 2 3 4 5 6 7 8

Farm I . 24,5 - 61,7 5,4 - - 8,4

Farm2 - - - 71,9 19,4 - - 9,7

Environmental oarameters

N leaching Soil erosion Biodiversitv

(Kg/ha) (tonlha) % land at leveI 1 % land at levei 3 % land at leveI 4

Farm I 45,3 2,7 8,5 67,1 24,5

Farm 2 36,8 1,31 1,7 91,3 -I - Industrial vegetables 5 - Half-extensive drvland activities with sheeo

2 - Innovative irrigated activities 6 -Extensive drvland activities with canle

3 -Traditional ÍlTigated activities 7 -Extensive drvland activities with sheeo

4 - Intensive drvland activities 9 - Set-aside area

Source: Model results (2003),

NEW MEDIT N. 4/2005

3. ResultsTable 1 presents the results obtained in the CAP 1997

scenario, which reflects prices and subsidies in 1997.The other three scenarios are the following: the CAP

2006 scenario shows the prices predictions for productsand production factors in 2006 and income and produc-tion subsidies, should Agenda 2000 be maintained. TheFM decoupling and FM labour aids scenarios are two al-tematives of agricultural policy, which allow the multi-lateralliberalization ofworld trade and the complete de-couplement of income subsidies from production. In thefirst scenario we consider that farmers will have a directpayment (an income subsidy) with no relation with pro-duction, but on the basis of the CAP 2006 scenario -they will receive exactly the same amount of subsidiesas in the past. In the second scenario, the subsidy is di-rectly linked with labour, and we consider that the work-ers' salaries will be fully paid by agricultural policyfunds.

The changes of prices and subsidies in the Agenda2000 scenario (CAP 2006), although that policy main-tains the 1992 reform principIes, prove to have a sig-nificant impact on income, production options and theenvironrnent.

The net margin suffers from reductions of more then40%, for both farms. These reductions are c1early linkedwith the decrease in agricultural production and the sub-sidy reduction, which is higher than the reduction in op-erational costs.

The relation between the production value and thesubsidies is maintained on farm 1 and is higher on farm2. On this farm, the production value represents only63% of the subsidies. These economic resuJts are as-cribable to the production extensification, which ismainly obtained in the system Extensive Dry Land withCattle. In the above case study, this policy leads to low-er incomes from agriculture and to the d~gradation of a-griculture compared to the other sectors of economy, s-ince it aIso reduces the operational costs and the pro-duction value. Nevertheless, the effects on the environ-ment are very positive, and are represented by a consid-erable drop in nitrate losses and soil erosion (more then50% on farm 2) and by asignificant biodiversity im-provement. . .

In the FM decoupling scenario, the incomé of farm 1is still getting lower - one third of the basic scenario -and the degradation of agriculture position with respectto the other sectors of economy continues. The produc-tion value and the operational co~ts are almost half ofthe basic scenario and 30% of the CAP 2006 scenario.These economic results undoubtedly show the adjust-ments through production extensification, which arec1ear when we analyse the changes of the productionplan and verify the increase in the Extensive Dry Landwith Cattle (from 74 to 83%) area and observe that the

area of Innovative Irrigation Crops (25.4%) has beenpartially substituted by Traditional Irrigated Crops(16%). On farm 2, there are no changes resulting fromCAP 2006. Conceming sustainability, this scenario, asthe previous one, is c1early better than the CAP 1997.

In the FM labour aids scenario, the net margin is 23. 5thousand euros on farm 1 and -6.3 thousand euros onfarm 2, which means an income drop of 76% in the firstcase and a situation of progressive abandonment of a-griculture in the second case. Nevertheless, despite avery low income in this scenario, the change terms arebetter for farm 1, which has now production values andoperational costs better than the basic scenario (11%and 61% more, respectively). The production plan isbased on Horticultural Industrial Crops (18.9%), whichrepresent a market-oriented choice, and Extensive DryLand with Sheep (81%). The latter is now the principalproduction option for farm 2.

4. ConclusionsIfwe want a competitive agricultural sector in the Eu-

ropean Union, which should be at the same time sus-tainable and market-oriented, while promoting sustain-able rural development, we will probably have to faceseriously the problem of decoupled subsidies to attainthis objective. Obviously, the way these subsidies willbe calculated, within the budget established in Berlin,will have a non-neglectable impact on the strength andsustainability of the CAP for the future. Nevertheless,this option affects farmers' choices. As underlined in theAgenda 2000 document, new functions will be asked tofarmers, within the multifunctional agriculture frame-work, in Europe for the future. Therefore, it seems thatthe agricultural policy option should consist in the trans-fer of funds from the 1st to the 2nd pillar to pay farmers

"for the environmental objectives they reach, thus allow-ing a fair standard of living and assuring agriculture sus-tainability in the future.

ReferencesFischler,F.,2002.Presentation of the CAP mid-termre-view, 15 July 2002, in www.europa.eu.intHazell, Peter B.R. & Roger D. Norton, 1986. Mathe-matical Programming for Economic Analysis in Agri-culture. Macmillan, Inc., New York, USA.Lucas, M. R., M. L. Godinho, R. Fragoso, 2002 TheEvolution of the Agri-Environmental Policies and Sus-tainable Agriculture, Xth EAAE Congress, Zaragoza,28-31 August, Zaragoza, Spain.Swinbank, A., 2002 Proposed Organised Session: TheBond Scheme Revisited, Xth EAAE Congress,Zaragoza, 28-31 August, Zaragoza, Spain.Van der Ploeg, J. D., Long, A. & Banks, J., 2002 LivingCountrysides -Rural Development Processes in Europe:the State of the Art. EIsevier bedrijfsinformatie, Doet-inchem, NL.

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Annex 1. Characterization of Agricultural Production Systems

Production system Activities Production tecbnique Effect on biodiversity

Irrigated Horticulture and Industrial cabbagexpotato-melon- cabbage xhorticulture pimento - onion

Innovative irrigation Industrial tomato.- dururn wheat-sugar beet - sunflower Traditional LEVEL 4

intensive

Traditional irrigation maize - sunflower

Traditional mobilization

LEVEL3

Intensive dryland sunflower - dururn wheat - wheat Direct seeding

Reduced mobilization LEVEL 4

ploughing - dururn wheat/wheat - Traditional mobilization

Half-extensive dryland with sheep forage - fallow LEVEL 2or cattle

durum wbeatlwheat - forage - Direct seedingfallow

Reduced mobilization LEVEL3

Extensive dryland with sheeptraditional

Extensive dryland with cattle forage - 6 years fallow Traditional with cattle from cross-breeding

. LEVEL I

Traditional with cattle from

regional breeding

Fallow Fallow LEVEL]