Assessing the Impacts of Single Farm Payments on Farm Investment and Output in French Arable Farms: a Dynamic Stochastic Farm Household Model with Debt Constraints

The Common Agricultural Policy has radically been reformed in 2003 with the introduction of “decoupled” direct payments. Economic theory suggests that direct payments are expected to have no impact on production in a static deterministic environment with perfect markets for capital and labour. But if factor market imperfections or uncertainty are taken into account, this is no longer true. Taking into account these potential impacts, the empirical literature has studied the impacts of farm payments. However, most studies are based on assumptions such as perfect markets, risk neutrality or static environment. Recent researches have also often neglected the role of debt constraints. The paper develops and numerically solves a dynamic stochastic farm household model with occasionally binding debt constraints and investment adjustment costs. The impacts of direct and counter-cyclical payments are explored and compared to an increase in the intervention price. Results show that both types of payments will positively impact on investment, but the impacts on output will not be as significant as it is with an increase in intervention price. Further, the degree of decoupling of Single Farm Payments in the French crops sector is found to be significantly linked to the degree of capital market imperfections.