Impact of the 2003 Mid Term Review of the Common Agricultural Policy

25/04/2006

Impact of the 2003 Mid Term Review of the Common Agricultural Policy

Special Article in the QEC, Spring 2006 By Prof. Alan Matthews, Department of Economics and IIIS, Trinity College, Dublin and Dr. Janine Dixon, Department of Economics, Trinity College, Dublin. The Mid-Term Review of the Common Agricultural Policy in 2003 introduced a radical change in the policy regime for Irish agriculture. The various direct payment schemes introduced under successive reforms of the EU's Common Agricultural Policy (CAP) were replaced by a Single Farm Payment (SFP). Another important element of this reform was an additional reduction in dairy product intervention prices, with compensation to dairy farmers added to their SFP.



Two economists at Trinity College Dublin, Janine Dixon and Alan Matthews, have now projected the likely impact of these changes on national GDP, agricultural output and incomes, land use and greenhouse gas emissions using a computable general equilibrium model of the Irish economy. The great advantage of this type of model is that it takes account of the knock-on effects of agricultural policy changes on upstream and downstream industries as well as on the economy as a whole.



The authors find that the economy wide effects of reform in the agricultural sector are minimal, with a small positive impact on GDP of 0.03%. This reflects the fact that primary agriculture now contributes less than 2.7% to Irish GDP.



Significant change in the allocation of resources within the agricultural sector is foreseen. There will be a shift away from the activities which previously enjoyed coupled support, Cattle, Sheep and Cereals, and an increase in other land use activities, including Forestry. A reduction in agricultural greenhouse gas emissions will occur as a result of this.



In the short run (next two years), the researchers project a fall in aggregate agricultural output of 5.6%, with a fall in labour input of 11.8%. Over a longer term perspective (5-7 years), they project a fall in aggregate agricultural output of 9.4%, and a fall in labour input of 12.9%. There will be a reduction in the output of those commodities which previously received coupled subsidies. Output of cattle is projected to fall by 15.4%, sheep by 15.5% and cereals by 41.8%. Resources from these sectors will move into the production of Other Livestock (mainly pigs and poultry but also horses), fruit and vegetables, other crops and forestry.



The Mid-Term Review reforms have a small positive impact on aggregate farm income of around 3.5% in the short run but disappearing in the medium term. However, because of the sharp fall in the labour input into agriculture, there will be a significant boost to per capita farm income, of between 12.5 and 14.8%.



Total greenhouse gas emissions from land use activities will be reduced by 11.9% in the short run and 14.9% in the long run as a result of the MTR reforms in the agricultural sector. The most important contribution to the reduction in emissions is the change in the composition of agricultural output away from Cattle.



These findings indicate that a substantial amount of adjustment to a more market-oriented agricultural policy regime is likely to take place over the next few years, regardless of what happens to the ongoing WTO trade negotiations.