Application of CAP reform on dairy farming in the ...

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Mogelijke gevolgen voor Nederland en de EU. Report 6.02.03, LEI, The Hague. Blandford, D. and B. Hill (2002), Workshop on the Farm Household - Firm Unit,.
Application of CAP reform on dairy farming in the Netherlands H.C.J. Vrolijk, C.J.A.M de Bont and K.J. Poppe LEI, Dutch Agricultural Economics Research Institute1 The Netherlands

1

Introduction and problem statement

Milk production is in most of the EU member states an important agricultural activity, with a high production value. The European dairy policy is part of the Common Agricultural Policy (CAP). In the seventies the budgettary costs of the dairy policy increased strongly. The dairy policy consisted of 40% of the total costs of the CAP in 1980. Among others, the introduction of the quota system reduced this share till less than 10% of the CAP expenditures. The current CAP reform will change this again. CAP was designed to achieve a number of goals. One of these goals is to provide a fair standard of living to those active in agriculture. In this paper we will analyze how the CAP reform will affect the incomes of agriculture in the Netherlands and especially those in dairy farming. To provide a basis for understanding the developments and the impact of these developments this paper also describes the evolution of farm incomes in dairy in the nineties and the impact of the CAP on this evolution. Chapter 2 provides a brief background on agriculture in the Netherlands and especially the important role of dairy in agriculture. Chapter 3 gives a description of the historical impact of CAP on dairy, both from a qualitative and quantitative point of view. Chapter 4 analyses the impact of the current CAP reform on Dutch agriculture in general and the effect on the dairy sector in more detail. Chapter 6 describes the conclusions and provides some discussion on the role of CAP and the data instruments to analyze the impacts of CAP.

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Dairy farming in the Netherlands

Dairy farming is one of the major types of farming in the Netherlands. Table 1 gives the distribution of commercial farms in the Netherlands2. Almost one third of the farms in the Netherlands belong to the dairy type of farming. The average size of a specialized dairy farm is 113 economic size units (esu). 1

The author(s) would like to express their gratitude to several researchers of the LEI who contributed to CAP reform evaluations described in this paper: John Helming, Jakob Jager, Walter van Everdingen, Hubert Sengers, Boudewijn Koole, Tom Kuhlman and Koos de Vlieger. 2 Farms with a minimum size of more than 16 esu are considered to be commercial farms in accordance to the demarcation in the Farm Accountancy Data Network (FADN). The farms are categorized according to TF8 typology of the DG-Agri of the European Commission.

Table 1 Importance of different types of farming in the Netherlands (2003) Number of Type of farming farms Field crops 10,341 Horticulture 10,356 Other perm crops 3,922 Dairy 21,768 Grazing livestock 9,388 Granivores 5,517 Mixed 4,524 Total 65,816 Source: agricultural census 2003

% of farms 15.7 15.7 6.0 33.1 14.3 8.4 6.9

Sum of esu (*1000) 923 2348 433 2458 512 612 414 7700

% of economic value 12.0 30.5 5.6 31.9 6.6 8.0 5.4

Average size in esu 89 227 110 113 55 111 91 117

There is some regional dispersion in the occurrence of dairy farming. Figure 1 shows the regional distribution of dairy farms. A darker color means more added value from dairy farming per square kilometer. The same figure also displays the distribution of the dairy processing industry (the larger the diameter of the circle the larger the number of people employed). The regional dispersion of the dairy processing industry clearly follows the distribution of the dairy farming.

Figure 1 Intensity and location of dairy in the Netherlands (source LNV, 2004)

Table 1 shows that in the Netherlands types of farming prevail that are not highly affected by the direct support from the CAP. In horticulture, including permanent crops and intensive livestock farming, which are important in the Netherlands, the support is limited. Dairy farming, although affected by the CAP, is also not affected by the support payments until now (except for maize and slaughter premiums). The foregoing is clearly illustrated by Figure 2 (Vrolijk, et al., 2004) that shows the distribution of subsidies in the European Union from 1995 till 2002. Between 1995 and 2002, total subsidies on production in the EU amounted to 13.4% of production value. In the Netherlands the average subsidies as percentage of production value were the lowest of all member states. Belgium, Denmark and Italy were also below the average.In Finland, subsidies on production were on average 55% of the value of agricultural production. A large part of these subsidies (65%) were 'other subsidies on production'. The amount of subsidies as a share of production value decreased between 1995 and 2002 in Finland. Other countries with higher than average shares of subsidies are: Greece, Ireland, Luxembourg, Austria and Sweden. Subsidies on production as percentage of production value in Germany, Spain, France, Portugal and the UK are more or less equal to EU-average. For the European Union the total amount of subsidies on products increased from 24.1 billion euro in 1995 to 28.1 billion euro in 2002 (16.6%). Between 1995 and 2002 the other subsidies on production increased from 10.5 billion Euros to 12.3 billion Euros. 60.0 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0

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Figure 2 Subsidies as % of production value, average and difference 2002-1995 (source EAA)

With the current CAP reform major changes will be brought to the dairy sector. These changes will be described in next chapter. The quantitative impact of these changes will be estimated in chapter 4

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Historical impact of CAP on dairy farming in the EU3

In this section the historical impact of CAP on dairy farming in the EU will be described. Section 3.1 describes the development of the dairy policy of the Common Agricultural Policy. Section 3.2 describes the empirical impact of these policies on the incomes and structure of the dairy sector in the European Union. This also provides a base for understanding the expected impact of CAP reform on the dairy sector as will be described in section 4.

3.1

Description of dairy policy of the CAP

Milk production is the main farming activity in almost all EU countries and for the EU as a whole. It accounts for some 18% of the total value of agricultural production. In 1984 the EU introduced a quota system for the dairy production. Dairy producers, which exceed their allowed volume, are confronted with a high levy, often labelled as the 'super levy' (115% of the EU target price of milk). The allowed volume was based on the volume of production in 1983 minus 4%. The quota system was introduced to maintain the level of guaranteed prices for the dairy producers. During the period 1984-1990 some additional reductions (8.5%) in the allowed volumes were introduced. The reform of the CAP in 1992 included some reductions of the intervention price of butter. The Agenda 2000 decisions included:  a 15% reduction of the target price of milk and the intervention prices of skimmed milk powder and butter in the period 2005-2007;  an increase of the milk quota of (in total) 1.5% in these years;  the introduction of direct payments related to the quota volume. The level of compensation, including a general compensation and the national envelopes, is about 60% of the price reductions. The decisions of the EU farm ministers in June 2003 maintain the general approach of the proposals of the European Commission: market support at a lower level, direct compensations for the lower price of products concerned and a decoupling of the direct payments from the actual production. On this general line of decoupling some partial exemptions are made possible for cereals as well as potato starch and the beef and veal sector, and member states have also some flexibility in the timing of the introduction of decoupling. The decisions of the farm ministers in June 2003 include:  the increase of milk quota will be, as was agreed in the Agenda 2000, 1.5% without extra quota before an evaluation of the actual decisions;  a reduction of butter price of 25% in the coming years instead of 35% as well as a restriction of the intervention of butter;  a reduction of the skimmed milk powder price of 15% in the coming years instead of 17.5%;  abolishment of the target price for milk;  the direct payment will be 35.50 euro per 1,000 kg milk.

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This chapter and part conclusion are partly based on the report ‘Evaluation of farm income in the European Union’ (Vrolijk et al. 2004). This reseach was conducted on behalf of the European Parliament.

Table 2 Decisions on dairy June 2003 Aspect Reduced price butter Reduced priced skimmed milk powder Compensation for price reductions (euro per 1.000 kg) Modulation Increase quota Duration quota system

3.2

Decision (June 2003) 25% (2004-2007) 15% (2004-2006) Increasing till 35.50 euro from 2006 Increasing till 5% from 5,000 euro (2007) + financial mechanism 1.5%; further increase will be considered Till 2014/15

Historical impact of CAP on income and structure of dairy farming

3.2.1 Structural changes in the dairy sector during the nineties During the nineties the number of specialised dairy farms in nearly all member states fell rapidly (Table 3). In most countries the number of dairy farms at the end of this period was some 30 to 40% lower than at the beginning of the nineties. The reduction was especially strong in Spain where the number of farms was reduced by more than 50%. Given the constant dairy quota per member country this meant a strong growth in production of milk per farm (although some farms just became 'statistically' less specialised due to a reduced number of dairy cows with increased milk production per cow and unchanged land surface or increased beef production). This growth was realised by a growing herd size as well as a growing yield per cow in most member countries (Table 3 and Table 4). The UK, the Netherlands and Ireland show a lower structural growth. Table 3 Number and size (esu and number of cows) of specialised dairy farms Number of dairy farms Average size per farm (x 1,000) (esu) Years avg. avg. yearly avg. avg. yearly Country 90-92 98-00 trend 90-92 98-00 trend Germany 138.3 96.4 -4.4 30.3 44.8 5.0 France 111.3 70.0 -5.6 28.7 44.2 5.5 Italy 64.7 42.4 -5.2 17.8 36.5 9.4 Belgium 15.2 8.8 -6.7 49.4 66.9 3.9 Luxemburg 1.5 1.0 -5.8 48.4 61.4 3.0 Netherlands 36.1 27.7 -3.3 71.5 113.9 6.0 Denmark 15.8 9.6 -6.1 60.0 100.8 6.7 Ireland 41.4 31.1 -3.5 31.3 42.0 3.8 UK 34.9 27.0 -3.2 70.8 93.6 3.6 Greece 2.2 2.1 -0.3 4.8 9.1 8.3 Spain 85.4 41.5 -8.6 9.2 14.6 5.9 Portugal 21.7 14.0 -5.3 7.3 17.3 11.3 Austria 27.8 17.5 Finland 22.2 42.9 Sweden 13.5 68.0 Source: FADN-CCE-DG Agri; adaption LEI.

Average number of cows per farm avg. avg. yearly 90-92 98-00 trend 24.6 34.5 4.3 30.8 37.0 2.3 19.6 32.8 6.6 37.2 45.8 2.6 36.0 38.8 0.9 47.9 57.7 2.4 39.9 62.2 5.7 31.8 37.9 2.2 71.0 81.1 1.7 20.2 18.1 -1.4 11.2 23.0 9.4 10.5 19.4 8.0 14.6 17.0 32.4

The average farm size in dairy farming per member country is very different (Table 3). Three member countries (UK, the Netherlands and Denmark) have average dairy farms around 100 esu. Greece, Portugal, Spain and Austria however have still farms under or around 20 esu. In most member countries the size increased with some 50% or even more during the nineties. This means a fast structural development in this decade. The main factor in this is the increase of the herd size per farm. Herd size per farm increased almost in all countries (Table 3). Italy, Spain, Portugal and Denmark show the fastest increase, with on average more than 6% per year. This is one of the main reasons for the favourable income development in Italy and Spain. Germany was also in the position to increase the number of dairy cows per farm at a faster rate than for example France and Belgium. This growth combined with the high increase of yields per cow in Germany and Italy (Table 4) has lead to an improvement of incomes. Table 4 Price and productivity in dairy farming Price per 100 liter (euro) Years avg. avg. yearly Country 90-92 98-00 trend Germany 31.4 31.1 -0.1 France 28.7 31.3 1.1 Italy 42.3 38.7 -1.1 Belgium 28.4 29.9 0.6 Luxemburg 33.7 31.7 -0.8 Netherlands 31.9 31.8 -0.1 Denmark 34.2 33.2 -0.3 Ireland 26.0 28.7 1.2 UK 26.4 27.7 0.6 Greece 31.8 32.9 0.4 Spain 27.8 28.6 0.4 Portugal 29.9 27.1 -1.2 Austria 29.9 Finland 33.1 Sweden 33.6 Source: FADN-CCE-DG Agri; adaption LEI.

Production per cow (100 liter) avg. avg. yearly 90-92 98-00 trend 51.5 61.5 2.2 52.0 56.9 1.1 46.3 56.7 2.6 46.7 54.9 2.1 53.3 63.2 2.2 65.8 74.4 1.6 60.4 69.5 1.8 44.2 48.3 1.1 55.9 62.1 1.3 41.6 37.7 -1.2 41.8 51.9 2.7 44.2 55.7 2.9 52.7 73.4 80.0

Yields in kg per cow are relatively high (7,000 kg or more) in Scandinavia and the Netherlands. The gain in productivity per cow was at a high level in Portugal (yearly 2.9%) as well as in Spain, Germany, Belgium, Luxemburg and Italy (more than 2% per year). An exception to this rule of growing milk yields per cow is Greece. In this country yields per cow came in recent years under 4,000 kg. Prices of milk, in nominal terms (Table 4) were more or less constant during the nineties in most member countries. There is a large difference in prices between member countries. Italy has by far the highest level, around 40 eurocents per kg. The prices showed a slight decrease. Prices in Ireland, the UK, Spain and Portugal were in most years lower than 30 eurocent. Prices in France, Germany, Belgium, the Netherlands and Denmark are comparable, in most years just above 30 eurocent. The favourable situation in Italy is mainly due to the extra revenues from high premium cheese making (sometimes on the farm). Italian farmers also benefit from producing in a net-importing country, where competitors face more transportation costs to the market.

3.2.2 Impact on incomes in the dairy sector One of the main aims of the CAP is to guarantee a fair standard of living of the farming population. Therefore it’s important to look at the results of a group of farms but also at the underlying differences between farms. Spain and Italy show a favorable income development for dairy farmers (Figure 3) accompanied by a fast growth of the average herd size in the nineties (Table 3). 45

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Figure 3 Development of family farm income and ESU during the nineties (average 1990-1992 compared to average1998-2000) Source: FADN-CCE-DG Agri; adaptation LEI.

The absolute income level in Italy is in recent years much higher than in countries with a comparable average herd size (Germany, France, Ireland and Sweden). A main reason for the high-income level in Italy is the high price of milk in Italy, which is somewhat 20% higher than in all other countries. In fact this situation did not change in the period 1990-2000. In all countries nominal milk prices (in euro) were more or less stable with changes of less than 10% over the years. The Netherlands, the UK and Greece show a fall in incomes in nominal terms. Incomes in the dairy sector show a wide variety. Figure 4 provides information for the year 1999. Italy and the UK show the largest differences in income per farm. In Italy 50% of the farms had an income less than 20,000 euro. The UK as well as Denmark and Sweden had many dairy farms with a negative income. Relative low milk prices in the UK and high fixed costs in Denmark and Sweden are the main factors. The highest median incomes are achieved in Belgium and Luxemburg. The other countries have median farm income values around 20,000 euro. The southern countries Greece, Spain and Portugal, and Sweden are falling behind.

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Figure 4 Distribution of family farm income (in euro) of specialised dairy farms, 1999 Source: FADN-CCE-DG Agri; adaptation LEI.

3.2.3 Subsidies in the dairy sector The level of direct subsidies related to the total revenues of dairy farms is relatively high in Austria, Finland, Luxemburg and Sweden. The reasons for this are compensations for less favoured and artic regions, especially in Finland. On the other hand subsidies are low in the Netherlands, Spain and Belgium. Dairy farms in these countries have only a relatively small acreage of cereals as well as a small herd of specialised beef animals (bulls, suckler cows). Figure 5 gives information about the level and the composition of subsidies during the period 1998 till 2000. The level of subsidies is the highest in Luxemburg, Finland and Sweden. The average subsidy per farm during these years is the lowest in the Netherlands, Greece, Spain and Portugal. In Finland, the UK, Ireland and Sweden farms get a substantial amount of livestock subsidies. In Denmark and France the crop subsidies are the most relevant part. The total amount of other subsidies is high in Luxemburg, Austria, Sweden and Finland. Although, at a much lower level, the share of other subsidies is rather high in Germany, France, Italy and Belgium. Comparing the level of subsidies with the farm incomes in Figure 3 it shows that the average farm income would still be positive without subsidies, but at a very low level. Finland and Sweden would have negative average incomes without subsidies. In all countries the number of farms with negative incomes would strongly increase.

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Figure 5 Average amount of subsidies of specialised dairy farms during the period 1998-2000 Source: FADN-CCE-DG Agri; adaption LEI.

3.2.4 Conclusion on the development during the nineties and the impact of CAP On the specialised dairy farms the incomes showed a small increase and incomes remained at a level that is higher than on farms specialised in field crops, permanent crops or (other) grazing livestock and intensive livestock. There are differences between member states. Negative income trends are observed in the UK, Greece, the Netherlands. Italian dairy farmers keep performing very well, thanks to their specialisation in niche cheese markets and being an import country. Spanish farmers improved their performance strongly. Swedish farms benefited under the CAP regime. In Finland and Austria the income remained at the same level. Notwithstanding the quota system, the number of specialised dairy farmers decreased sharply in all member states, often with 3 to 6% per year. This is due to the rise in milk yields per cow, that forces a reduction in the number of cows and provides an incentive to farmers to devote a relatively larger part of their production capacity to other activities like beef, sheep or crops. The remaining specialist dairy farmers are much larger in terms of cows, ESU, assets and ha. In several member states the total amount of assets grew with 10% per year or more in nominal terms. In some cases like the Netherlands an active quota market was established to support structural change, and investments in quota are now a substantial part of the farms assets. These investmens have a strong influence on the economic performance of the sector (Berkhout et al., 2002; Vogelzang et al., 2003). The analysis of income trends in the nineties reveals some interesting observations on the role of the CAP reform on income development. First of all it is concluded that economic processes like farm expansion (to reap the fruits of economies of scale), specialisation, reducing labour input, increasing capital, and restructuring the industry concerning the number of farms (leading to concentration) goes on in all sectors, 'reformed' by policy interventions in the early nineties,

unreformed under the CAP or nearly untouched by the CAP (like horticulture). An exception is perhaps the (reversal of) the trend of specialisation in dairy production, but the other processes (like the concentration and capital investment) confront the dairy farmers with at least as many strategic decisions and changes in their farm management as their colleagues in other sectors. In general this implies that regime changes in the CAP, like the McSharry reforms, if well designed, do not seem to hurt the economic efficiency of the sector. It also implies that keeping the policy stable, like in dairy, does not mean that there are no changes in the sector. Also in that case there are winners and losers in the economic competition.

4

Consequences of CAP reform in the Netherlands

Several studies have been conducted by the LEI to assess the impact of the CAP reform on agriculture in the Netherlands. An initial evaluation was made of the impact of the proposals of the commission of January 2003 (Bont, de et al., 2003d); the impact was reassessed after the final decisions on the reform were made (Bont, de et al., 2003a). Furthermore there have been studies on the impact on specific groups of farms or regions, for example a study was made on the impact on the northern region (Smit et al., 2004), separate studies were made on the veal sector (Bont, de et al., 2003c), the potato sector (Janssens and Prins, 2004) and the dairy sector (Bont, de et al., 2003b). In this section some highlights of these studies will be described (the full details can be found in the underlying reports). A distinction is made between first order effects (impact of CAP reform on the farm given the current structure) and second order effects (impact of CAP reform on the structure of agriculture).

4.1

First order effects: Effects on the income of farmers

The decrease in milk price will especially affect the (specialized) dairy farms. Mixed farms and other grazing livestock farms are affected to a lesser extent. Other types of farming are hardly affected by these measures. In case of a 20% decline in the milk price, and a modest increase in milk quota, the revenues of dairy farms will decrease by 23,000 euro. The decline in revenues will be partly compensated by the increase in premiums. The premiums will increase by 13,000 euros per farm till a level of 17,000 euros (including the current level of premiums). The average premium of all agricultural farms after the reform will approach the 13,000 euro. In section 2 it’s illustrated that the level of subsidies in Dutch agriculture is rather limited compared to other EU-countries. Due to the current reform, the Dutch agriculture (excluding horticulture) will become much more dependent on the premiums. The premiums will increase till on average 40% of the current level of income, excluding horticulture (Table 5). For some types of farming this dependency will become even higher, especially the cattle and other grazing livestock farms. In the dairy sector the level of premiums will rise till 50% of the income. At the moment, the share of premiums is only 10%. Given the current structure of the farms and modulation above 5,000 euro, 70% of all farms will be affected by modulation. For specialized dairy farms this is even 90%.

The average deduction is almost 500 euros per farm. For veal farms this amount is around 2,000 euro. The total reduction from Dutch agriculture amounts 30 million euro, that is 4% of the total amount of premiums. Changes in the system of reductions, due to the financial discipline, could further increase this amount. Table 5

Direct effect on income (2012) of the CAP reform for specific types of farming (in 1.000 euro) with 16% reduction price of milk and 5% modulation above 5.000 euro Arable

Dairy

Family farm income per farm 32.2 31.0 Effect price decrease and quota increase (-) 0.0 17.6 Premiums (+) 0.0 13.4 Modulation (-) 0.35 0.6 Total effect on income (-) 0.35 4.9 Idem in percentage of income (-) (in %) 1 16 Share of premiums in income 2002 (in %) 35 55 Source: LEI, calculations based on FADN and Agricultural Census.

Calf fattening 30.0 0.0 0.0 1.9 1.9 6 141

Total 29.1 9.0 6.8 0.5 2.7 9 44

The effect of the reform on the milk price as received by the farmers is an important factor in analyzing the effect of the reform on the income of these dairy farmers. The effects of the CAP reform on the price a farmer will receive will differ between member states. It depends on factors like the products produced, the strategy of the dairy industry, the degree of self-support of a member state, ease of access to the market, and the power of the dairy producers and industry in the retail chain (Bont, de et al, 2003c). In case of a decline of 20% the income can decrease with more than 30% (Table 6). Table 6

Direct effect on income (2012) of the CAP reform on dairy farms (in 1.000 euro) with different reductions in milk price

Reduction in milk price (in %) 12 16 20 Family farm income per farm 31.3 31.3 31.3 Effect price decrease and quota increase (-) 12.7 17.6 22.6 Premiums (+) 13.4 13.4 13.4 Modulation (-) 0.6 0.6 0.6 Total effect on income (-) 0 4.9 9.9 Idem in percentage of income (-) (in %) 0 16 32 Source: LEI, calculations based on FADN and Agricultural Census.

If the actual decline in price would be limited to 12% than there is hardly a decrease in income. The increase in quota and the premiums would offset the decline in prices. Based on the characteristics of the dairy industry in the Netherlands a decrease of 16% is most likely. In that case the decrease in income is around 16%. A more intensive extent of modulation could still result in a decrease in incomes. Due to the different ways to transfer the premium rights, with or without land or in combination with rent, it is difficult to clearly indicate the effect on the value of land. Assuming that the rights are transferred with the sale of land it could result in an increase of the value of land (depending on the premium per hectare). Due to the decrease of incomes in agriculture and especially the dairy sector it is likely that the value of land and also the value of milk quota will decrease.

4.2

Second order effects: effects on the structure of agriculture

The previous calculations are based on the current structure of agriculture. Due to the changes of the policy, farmers are likely to react. These reactions could lead to abandoning agriculture, to a change of production or other changes. In this section an estimate is made of the second order effects of the CAP reform. Table 7 shows an increase in the number of dairy cows due to an increase of the milk quota. The total livestock will decrease. When the direct payments will be decoupled the marginal costs will be higher than the revenues. The livestock will decrease until the revenues will equal the marginal costs. Table 7 shows that the cattle for fattening will decrease with 54% (under the assumption of fully decoupling). This reduction will also decrease the costs of the removal of manure. This can lead to a slight increase in the pigs and poultry sector. Table 7 Effects of CAP reform on the structure of agriculture in the Netherlands (x 1.000 animals or ha)

Dairy cows Cow fattening Calf fattening Breeding pigs Fattening pigs Poultry Grassland Maize Grains Starch potatoes Potatoes, crops, vegetables, bulbs Other arable crops Total area agricultural land Source: Calculations DRAM model.

Basis 2002 1,485 252 713 1,007 5,591 100,332 1,000 214 234 48 247 149 1,893

Reference 2012 1,190 205 670 941 5,199 86,367 905 175 243 40 258 145 1,766

CAP reform 2012 1,212 95 670 947 5,354 88,076 922 177 223 40 255 149 1,765

Difference % 1.9 -53.7 0.0 0.6 3.0 2.0 1.9 1.1 -8.2 0.0 -1.4 3.0 0.0

With respect to other agricultural activities, Table 7 shows a slight increase in the area of maize. The area of grains will slightly decrease. In case of a partly decoupling of the direct payments this decrease will be less. The total acreage of potatoes, vegetables and flower bulbs will go down. For potatoes and vegetables this can be explained by the regulation that the acreage cannot be increased on farms receiving premiums. Subsequently, the impacts of these changes on the sectorial incomes are described. The income in the DRAM model is the remuneration for the production factors (land, capital and labor). The income of the dairy sector is expected to decrease by 6.2% due to the CAP reform. This decrease is mainly explained by the decrease in milk price (with 16%). The negative impact of this decrease in milk price is not offset by the positive effects of the expansion of the milk quota, the increase in compensation payments and the decrease of the costs of removal of manure. The changes in the dairy farming also have an impact on the dairy industry. The lower milk prices affect the whole chain. The revenues and the income of the dairy industry will decrease. The turn over of the meat industry will slightly increase. This is the

consequence of some contradictory development. The number of pigs, poultry and dairy cows will increase. This will compensate the decrease of fattening cattle. The turn over of other processing industries will decrease due to a decrease in the acreage of grains, potatoes and vegetables. The total effect of the CAP reform on the Dutch economy is estimated to be negative, 166 million euro (-0.1%). Table 8 Effects of CAP reform on sector income 2012 (x mln. Euro)

Dairy farm Cow fattening Calf fattening Pigs Poultry Arable Vegetables in the open air Bulbs Other agriculture Dairy processing industry Meat processing industry Other processing industry Suppliers Total Source: Calculations DRAM model.

Basis 2002 2,268 140 204 709 368 586 294 320 3,678 1,331 1,109 1,116 204,168 261,178

Reference 2012 1,954 98 164 515 273 547 313 481 3,926 1,398 1,006 1,321 214,243 273,371

Cap reform 2012 1,833 136 223 534 278 583 391 480 3,907 1,261 1,011 1,264 214,186 273,205

Difference % -6.2 37.9 36.2 3.6 1.9 6.7 24.8 -0.3 -0.5 -9.8 0.5 -4.3 0.0 -0.1

Impact of coupling or decoupling of slaughter premiums The calculations in the previous section assume decoupling of slaughter premiums. In this section, the option will be described in which the slaughter premiums will be coupled to production. The effect on the number of fattening cows and calves is described in Table 9. In case of decoupling the number of fattening calves slightly decreases. Low prices and low slaughter premiums make it less attractive (the slaughter premium of all calves will go down till around 28 euro; the assumption is made that the supply of veal will increase in Europe and thus will lead to a lower price). Table 9 Effects of coupling and decoupling of slaughter premiums on number of animals (x 1.000 animals) Basis 2002 Dairy cows 1,485 Fattening cows 252 Fattening calves 713 Source: Calculations DRAM model.

Reference 2012 1,190 205 670

Decoupled (% difference) 1.9 -53.7 0.0

Coupled (% difference) 2.3 -45.2 -6.4

Table 10 describes the income effects of the scenario of coupled slaughter premium payments on the dairy, fattening cows and veal sector and the effect on the meat industry. The table clearly shows that it does not have an impact on the dairy sector. Comparing the results of the coupling and decoupling scenario, it clearly shows that result under decoupling are more positive for the incomes in the production sectors and the meat industry. A fully decoupling in Europe would lead to a lower production and therefore higher prices. In case of coupling, the slaughter premiums would be

rather low in the Netherlands (due to circumstances in the reference period) and the prices would go down, this would have a negative impact on the incomes. The meat industry is confronted with contradictory developments. Decoupling would result in a decrease of cow and calf slaughters but in more slaughtering of pigs and poultry and somewhat higher prices. Table 10 Effects of coupling and decoupling of slaughter premiums on sector income 2012 (x million Euro)

Dairy farming Beef fattening Calf fattening Meat industry Source: Calculations DRAM model.

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Basis 2002 2,268 140 204 1,109

Reference 2012 1,954 98 164 1,006

Decoupled (% difference) -6.2 37.9 36.2 0.5

Coupled (%difference) -6.2 26.7 -9.2 -2.8

Conclusions and discussion

Compared to analyses based on the proposals of the European Commission in January 2003 (Bont, de et al., 2003d) the final decisions on the CAP reform have a more limited impact on the incomes in agriculture in the Netherlands. This is especially true for the dairy sector, but it also applies to arable farming. For the dairy sector this is caused by the lower price decrease (ca. 20% instead of 27%) and a higher compensation (ca 60 instead of 50%). The income of specialized dairy farmers is expected to decrease by 32% with a milk price decrease of 20%. The actual outcome is still dependent on the ultimate effect on the price of milk received by the farmer. The results of the analyses show that the consequences of the CAP reform for the agricultural sector and the related industry (suppliers and processors) are rather limited. In most agricultural sectors the production will not change a lot. On a more disaggregated level, the reform does have effect on certain regions (the so called meadow region) and certain sectors, for example dairy and fattening cows. These sectors are expected to strongly decrease, especially when decoupling will take place in the Netherlands and only to a limited extent in the other EU-countries. At an individual farm level, farmers in the dairy and fattening cows sector will suffer negative effects. Dairy farmers in the Netherlands will suffer a larger decrease in income (and also Danish farmers) compared to some other EU countries. This is not only due to the higher expected decrease in prices, but also due to the lower profit margin per kilogram of milk compared to other countries such as Italy and France. The decrease in dairy prices in the EU seems to be sufficient for the WTO negotiations in the DOHA round. 10 percent of the dairy production is sold on the world market. The export as share of production of the EU has decreased during the last years, due to production cuts and former agreements (WTO- Urugay). During the same time, imports from New Zealand have increased. The analyses shown in this paper are mainly based on FADN data. FADN mainly collects data on agricultural activities. To judge the fair standard of living, other information is needed. For the future, a more pressing issue is the gathering of data on cross compliance and household income (Vrolijk et al., 2004). There is a strong need

to be better informed on the income of the household and the way that farming is (not) taxed by national governments. This is not only of interest to monitor a level playing field in the EU, but can also be of interest in international negotiations. For instance a recent paper by researchers of the USDA-ERS and the LEI (Gundersen et al., 2003) showed that direct payments in the US are even less well targeted to low income farmers than in the Netherlands. In the US farm safety net payments are relatively similar across different income categories and therefore, these payments do not meet the standards one usually ascribes to a social safety net. The paper also showed that many US farmers benefit from non-agricultural income support. As such issues will be part of the (international) debates in the coming years, if one likes this or not, data collecting systems should innovate and provide relevant data on household income (Hill, 1996; Hill, 2000; OECD, 2002; OECD, 2003; Blandford and Hill, 2002). Furthermore, the direct payments make the dependency of the farms on the CAP more transparent, for themselves and for the public (Vrolijk et al., 2004). As payments are coupled to production (capacity) the distribution of the subsidies on the cereal and grazing livestock farms is very uneven. A small part of the farms take up most of the public money. In some cases the amount of subsidy received by a farm is higher than its income, which suggests that decoupling make sense as it makes cost savings possible and improves the transfer efficiency of the policy. Decoupling or not, more and more the public will tend to see these payments not as a compensation for the price decrease that farmers experienced quite some time ago in a CAP reform, but as an income support in line with article 39 of the EU Treaty, unless the subsidy is replaced by a payment for a public service in the multi-functionality concept. That will lead to questions on the (non-farm) income-situation of subsidy-recipients that have large farms and assets and the reason why they benefit from two safety nets, an agricultural one and the normal social security system (Gundersen et al., 2003).

6

References

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