Modelling the Impact of Decoupling on Structural Change in the Farming Sector: integrating econometric and optimisation models

This paper analyses implications of the 2003 Mid Term Review of the CAP, particularly decoupling of direct payments from production, for Irish farming. Using the Irish FADN data base, an integrated modelling approach involving optimisation models and econometric estimation has been developed to analyse the continued economic viability and the changing structure of farming. Farm level adjustments in response to policy reform are modelled to facilitate the estimation of the effect of a policy on structural aspects of Irish farming such as the number of farms, the proportion of full and part-time farms, the number of dairy farms, the volume of production, the level of farm income and the viability of farming. The first step in this approach is to develop, and solve annually, a profit maximising linear programming model for each farm included in the FADN data set. These linear programming models use results generated by three exogenously estimated models. These results are of three types: (i) estimates of the effect of policy on the rate of entry and exit from farming and thus farm numbers; (ii) more ‘positive’ projections of the effect of policy on the allocation of farm labour; and, (iii) projections of reallocation of exiting farmers’ land and milk quota, within the sector and quantitative estimates of how policy changes might affect that reallocation. The use of the proposed modelling approach suggests that farm numbers will decline over the next five years and, the rate of decline will accelerate further after decoupling relative to a continuation of Agenda 2000 policies. Decoupling is likely to result in a more positive economic outlook for beef farming with an increase in the number of economically viable beef farms. The number of beef farmers relying on income from outside the farming sector will however increase. Dairy farmers will face a price cost squeeze and that the pace of structural change in this sector of farming will accelerate due to decoupling. Despite an increased availability of milk quota for farmers remaining in business, the number of economically viable dairy farming businesses is set to decline.