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
Department of Agricultural Economics
PMP
Department of Agricultural Economics
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
Department of Agricultural Economics
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
Department of Agricultural Economics
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
Department of Agricultural Economics
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
Department of Agricultural Economics
MTR in SEPALE: decoupling
■ 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
Department of Agricultural Economics
MTR in SEPALE: decoupling
■ 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
Department of Agricultural Economics
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
Department of Agricultural Economics
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.
Department of Agricultural Economics
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
Department of Agricultural Economics
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?
Department of Agricultural Economics
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
Department of Agricultural Economics
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
Department of Agricultural Economics
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
change in gross margin (%)
Small
Medium
Large
Extra Large
Department of Agricultural Economics
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
change in gross margin (%)
Small
Medium
Large
ExtraLarge
Department of Agricultural Economics
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
Department of Agricultural Economics
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
Department of Agricultural Economics
Further research
■ Functional form
■ Environmental indicators
■ Demand side – link with other EU member states
■ Transaction costs
■ Risk
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