Effects of policy instruments on farm investments and production decisions in the Spanish COP sector

Abstract

Our article assesses the impacts regarding on-farm investment and production decisions resulting from the Partially Decoupled (PD) payment scheme implemented during the 1990s and first half of the 2000s within the framework of the Common Agricultural Policy (CAP). The Spanish Cereal, Oilseed and Protein (COP) sector is taken as a case study regarding this effect due to its economic and political relevance in Spain. The empirical analysis is applied to farm-level data from 2000 to 2004 using the Farm Accountancy Data Network (FADN). We use a reduced-form application of the dual model of investment under uncertainty and estimate a system of censored and uncensored equations. PD payments are found to increase short-run production and generate a statically significant increase in the investment in farm assets. Results also show the importance of assessing the effects of PD payments in a dynamic framework as applied in this article.

Keywords:

• common agricultural policy
• decoupling
• farm investments
• production

JEL Classification::

• Q12; Q18; D80

Notes

¹ We use 1000 pseudo-samples of the same size as the actual sample, drawn with replacement, to provide a sample of parameter estimates from which we estimate the parameter covariance matrix. For each pseudo-sample of data, Shonkwiler and Yen's (1999) two-step method is applied to estimate the parameters of the model. The covariance matrices are derived from the distribution of the replicated estimates generated in the bootstrap process. The SEs of the marginal effects are also derived using the replicated marginal effect estimates from the bootstrapped samples.

² Almost 90% of our farms do not invest in machinery and equipment, while more than 95% have zero investment in farm buildings and land improvements. As a result, both variables are considered as censored.

³ Almost 64% of the farms did not plant oilseed or protein crops. Therefore this variable was considered as censored. Conversely, less than 1% of the farms did not plant cereals and thus the variable was not considered a censored one.

⁴ This variable was treated as noncensored since only a 0.04% of observations are null.

⁵ Considering land area as an indicator of wealth may not capture all sources of farmer wealth, especially when nonfarm assets are relevant. It is important to note however, that information on nonfarm wealth is not available from our database.

⁶ However, investment literature acknowledges a usual negative relationship between age and on-farm investments.

⁷ As pointed out by a referee, farmers that invest more may have borrowed more and therefore may be forced by their lenders to buy insurance. Simultaneity issues may thus arise, which could bias our results.