Consequences of 2003 CAP Reform for Dutch Agriculture

This paper examines the medium term consequences of the Luxembourg CAP reform agreement in June 2003 for Dutch agriculture. Under this agreement, the EC has proposed to reduce the amount of support to EU agriculture that is coupled to agricultural production and to replace it through decoupled payments. The Netherlands has chosen for fully decoupled direct payments for crops, sucker cows, bulls and ewe premiums, while it holds the slaughter premiums for calves and adult cattle coupled. As the effect of this policy measures will largely depend on the extent that the decoupled support will influence the behavior of the farmers regarding their real production decisions, we have experimented with different ‘behavioral repercussion’ levels for decoupled payments. By evaluating the effects of these experiments on farmer’s income levels, we could determine a kind of “optimal” farmers’ behavior as the result of decupling of payments. The CAP impact is measured against the baseline scenario, which is a view of the Dutch agricultural sector under the unchanged CAP (continuation of Agenda 2000). To construct the baseline and address the CAP effect, we have used the Dutch sub-model of AG-MEMOD model. This is an econometric, dynamic, multi-product partial equilibrium commodity model that includes the major arable crops and animal products. The dynamic characteristic of the model allows for multi-annual projections. Our simulation results show that the decoupling of direct payments will importantly influence the Dutch agricultural sector. In the grain sector, the farmers’ productions decisions will not be affected by the decoupling, i.e., farmers will continue to produce grains as would the policy not have changed. However, we expect a significant impact of the decoupling on the farmers’ income in this sector because the reactions of production costs and grain prices on production changes is relatively low compared with the decrease in grain production. In the beef and veal sector, producers are expected to react fully on decoupled payments. Thus, they would treat the new payments as fully decoupled. However, the incomes in the beef and veal sector will not be significantly changed. Although the reduced animal stock will negatively influence the income level, the lower production cost and higher producer prices will compensate for this effect. At last, the implementation of the new CAP will significantly lower the dairy prices and negatively influence the production levels. Nevertheless, the compensation payments will keep the farmers’ incomes in this sector above the baseline level.