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The reform of Common Agricultural Policy in Latvia: Opportunities and Projections. Kopējās lauksaimniecības politikas reforma Latvijā: iespējas un prognozes

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The reform of Common Agricultural Policy in Latvia: Opportunities and Projections 

Danute Jasjko, Ludmila Fadejeva

Introduction

Implementation options for Common Agricultural Policy (CAP) reform adopted in 2003 is a big challenge for Latvian policy makers and society, as well as for the different groups of interest, particularly – agricultural producers and rural inhabitants. The main principles and political measures chosen for Latvian agricultural and rural policy development might be crucial for making of Latvian agricultural sector more efficient, which will be able successfully compete on the European and world markets. Additionally the policy changes expected in the nearest future should provide the narrowing the gap between social and economic development in different regions of Latvia. That is why the following main questions were tried to answer in the present article:

a)      How implementation of CAP reform may affect development of Latvian agricultural sector?

b)      How essential can be the CAP reform effects due to introduction of rural development measures (mainly payments for less favoured areas within the second pillar of CAP) on the development of Latvian agricultural sector?

The article describes the results of the research carried out within the framework of the project “The Implementation of Reformed EU CAP in Latvia: Direct Payments Regionalisation and Differentiation Opportunities” elaborated in Latvian State Institute of Agrarian Economics (LSIAE) for request of Latvian Ministry of Agriculture.

The article consists two main sections. The first section briefly describes the set of policy scenarios analysed for implementation of CAP reform in Latvia as well as the quantitative methods used for analytical assessment of these scenarios. The forecasts of policy effects designed on the sector level according to the different alternative policy options (scenarios) are reflected in the second section with the particular focus on potential development of different rural territories (regions) of Latvia.

1.                  The analytical framework for the policy impact measuring and CAP reform implementation scenarios in Latvia

On 26 June 2003 the decision about the fundamental EU Common Agricultural Policy reform was made. Decoupling of direct payments from the agricultural production is one of the most essential reform measures which change essentially the principles of earlier EU agricultural policies by ensuring more flexible market-requirement based on decision and strategy opportunities for farmers [1].

In order to evaluate CAP reform impact on agricultural sector and rural development in Latvia it is necessary to take into consideration the mutual complimentary coherence of both CAP pillars. Only optimal balance of political measures may facilitate the long-term sustainable, market oriented agricultural and rural development, help to meet life quality, environment and food quality standards. Therefore, both direct payments and rural development measures should be formalised in order to estimate Latvian agriculture sector development under CAP reform conditions.

However making the quantitative assessment of impact of rural development measures, some specific features of economic analysis should be taken into account.  Rural development measures (according to political purpose and impacts) are mostly oriented on encouraging of economic development of rural territories, whereas direct support measures mostly are oriented on development of agricultural production and particularly commodities. Therefore the mathematical formalisation of rural development measures on the base of commodity modelling approach has limited ability for policy analysis when interaction of measures from both pillars should be carried out. In such cases it is possible to quantify only those rural development policy measures, which require similar to direct payments mechanism of administrative implementation. That is why in preset study among wide set of rural development measures only payments for the Less Favoured Area (LFA) were formalized in LAPA commodity model used for CAP reform analysis. At the same time it is important to stress that the LFA measure itself absorbs 56% of the total rural development financial aid assigned for Latvia in 2006, i.e. EUR 83,3 mill.

Application of the economically mathematical modelling approach on the base of Latvian Agricultural Policy Analysis Model (LAPA) gives possibility to carry out reliable and comprehensive assessment of structural changes in agricultural sector on the base of long term projections, as well as to analyse agricultural and rural development strategies, considering both – direct support to agricultural production and policy measures for development rural areas. On the base of this model it is possible to simulate implementation of different policy scenarios, making forecasts for production of main agricultural products, level of regional and sectors income, and use of main resources for agricultural production. The GAMS (General Algebraic Modelling System) software was used for practical calculations according to the different policy scenarios.

There are several important political options for new EU member states to be chosen by policy makers concerning 1) terms of introduction of CAP reform 2) degree of support de-coupling of direct support from production 3) opportunities for differentiation and regionalisation of direct support to agriculture; 4) ability of combining 1^st and 2^nd pillar policy measures. On the base of above mentioned options four main reform implementation scenarios were formalised and assessed:

D9 scenario (full decoupling in 2009) envisages that CAP reform in Latvia will be implemented in 2009. Direct payments will be fully de-coupled from the agricultural production. Both single payment and complimentary national direct payments (CNDP) will be paid on a land basis. Payment entitlement according to the single payment scheme (SP) is equal value among regions and sectors.

C9 scenario (maximal coupling scenario in 2009) envisages that CAP reform in Latvia will be implemented in 2009. Direct payments will be coupled with agricultural production (cultivated hectares or heads of livestock) at the maximum level. The rest of payments will be paid on a land basis. Payment entitlement according to the single payment scheme is equal value among regions and sectors.

In addition to C9 scenario, which is contrary to D9 scenario, two scenario modifications have been made – C9_crops (C9c) and C9_livestock (C9l). They are implemented with a purpose to assess the effect of partial coupling of direct payment in particular agricultural sectors. C9l assume full coupling of direct support only in grazing sector, whereas C9c scenario – in field crops’ sector.

According to all scenarios defined, the impact of different support strategies to less favoured areas (LFA) in Latvia was analysed on the base of two alternative policy options assessed during the study:

1)         LFA support will remain constant during the next EU policy programming period (from 2007 to 2013) at the level succeeded in 2006;

2)         LFA support will be gradually decreased during time period from  2007 to 2008 and will be completely abolished since 2009.

2.                  The assessment of Latvian agriculture and rural area development due to implementation of different policy scenarios

2.1.      Impact of LFA support and perspectives for use of agricultural land in Latvia

Amount of agricultural land use and changes in land structure is one of the most important criteria for assessments of CAP reform. Depending on policy strategies carried out for support of less developed areas in Latvia, the different effects on use of agricultural land structure can be predicted.

Changes in structure of agricultural land projected if LFA payment is kept unchanged since 2006

Assuming that LFA payment is kept constant since 2006 the calculation results show that structure of agricultural land used will not change significantly comparing scenarios described above. At the sector level, the distribution of agricultural land between production of arable crops, fodder crops and uncultivated pastures and meadows is quite similar for whole simulation period from 2006 until 2013 in all scenarios analysed. At the same time implementation of CAP reform might essentially affect land use strategies in different regions of Latvia with quite diverse intensity of land use for agricultural production.

Analysing of land use strategies after CAP reform implementation at the regional level, there is sense to assume that decoupling of direct payment might motivate farmers to stop the production of certain agricultural commodities and, keeping land in the good agricultural and environmental conditions, switch to the other type of business on rural areas (even not related to agriculture), obtaining still payment entitlement per a hectare. Switching of farmers to the other businesses could take place in regions with relatively lower cropping capacity and undeveloped production infrastructure (e.g. Latgale region in Eastern part of Latvia). At the same time coupling of direct support to agricultural production may favour the further development of agricultural activities, particularly in the regions with the already intensive agricultural production (e.g. Zemgale region).

Figure 1. The forecast of agricultural land use* in Zemgale and Latgale regions of Latvia in 2006, 2009, and 2013 according to the different policy scenarios

Source: LSIAE estimation

* LFA payments are kept constant at the 2006 level

However comparing the simulation results carried out for the different scenarios under the assumption about continuation of LFA payment until 2013 shows that during whole simulation period the share of unused land in Zemgale region may even decrease, what is contrary to the idea stated above (Figure 1).

The simulation results reflected in Figure 1 can be explained by comparing amounts of LFA and direct support, which will be possible to obtain since starting new policy programming period (since 2006) and implementation of CAP reform (since 2009 according to study assumptions). Until year 2010 the differences between rates of direct payment according to CAP reform implementation scenarios will not exceed LVL 10 per ha, but differences between LFA payment in regions might reach the level of LVL 35 per ha.

That’s why LFA support (as additional support paid together with direct payments to farmer) instead of direct payments can become the main determinant for farmers’ decision-making strategies in Latvia concerning to the land use in different regions. Due to higher LFA support, gained in Eastern parts of Latvia, they can be motivated to switch from an active agricultural production to non-productive agricultural activities in rural areas. Due to the effect of a high LFA support rates, less developed rural areas may turn, generally, to the grassland cultivation (e.g. Latgale region), at the same time in regions with an intensive agriculture production (e.g. Zemgale region) the share of unused agricultural areas may even increase. Thus the further continuation of rural development support for less favoured areas on the level of year 2006 with simultaneous introduction of CAP reform will diminish the role of direct support reformed on agricultural development and arise the threat of overcompensation of agricultural production in some regions of Latvia.

Changes in structure of agricultural land projected if LFA payment is scaled down since 2006

To avoid the possible overcompensation in Latvian regions with an extensive agricultural production, LFA support after the end of the programming period 2000-2006 might be converted into over rural development measures (e.g. non-productive investments) or be abolished. However, in order avoid drastic variations in support levels, which might cause essential fluctuations in income of farmers and rural inhabitants it was assumed that LFA support could be decreased gradually until the 2009. Such assumption gives possibility to provide the estimation of “clear” CAP reform effect on the development of agricultural sector in Latvia both at regional and sector level.

If in the previous section agricultural land use was mainly affected by level of state support and regional differences in LFA payments rate, then in this section there are the other factors as production efficiency and productivity, level cost of production, level of direct support and prices analysed for CAP reform assessment. Now differences in the level of direct payment provided by coupled or decoupled payment schemes, according to the policy scenarios, might affect Latvian farmer’s motivation to produce particular types of agricultural commodities as well as structure of agricultural land used, sector revenues, use of main agricultural resources (e.g. labour).

Figure 2 The forecast of agricultural land use* in Zemgale and Latgale regions of Latvia in 2006, 2009, and 2013 according to the different policy scenarios

Source: LSIAE estimation

* LFA payments are gradually scaled down since 2006

Estimating of agricultural land structure in regions with an intensive agricultural production (e.g. Zemgale region), gives possibility to conclude that gradual decrease of LFA payment could give an additional impulse for those regions in the development of agricultural production (see Figure 2). Implementation of CAP reform since 2009 will raise the total amount of land used for agricultural purposes. Among the different policy scenarios the larger increase in land use is observed in case of C9 and C9_crops scenarios, when direct support will be maximally coupled to agricultural production. For instance in 2013 amount of agricultural land will achieve 374 thsd. ha. in Zemgale region, that is 5% higher comparing to D9 and C9_livestock scenarios.

At the same time in regions where agricultural production is not so intensive (as Latgale region for instance), gradual cut of LFA payment will essentially decrease farmer’s motivation to use the agricultural area for the grasslands and pastures cultivation (Figure 2). In this region the share of unused land will be able to succeed 34% in total amount of agricultural land for year 2013. Only case of full decoupling of direct support from the production (scenario D9) will facilitate land use in regions with extensive agricultural production. Percentage of unused land (including abandoned land as well) in D9 scenario could be about 26%in 2013.

2.2.      Projection for development of agricultural sector in Latvia

On the base of analytical estimations it is possible to conclude that relatively small differences in the levels of direct support rates among policy scenarios analysed (about LVL10 per hectare) will not change essentially the level of total sector income in the future (see Figure 3). Total income might become lower in case of C9 scenario due to a lower absorption capability for the public support, when direct payments are coupled with the particular agricultural commodity (crop or livestock) production and is lower comparing with reference amounts.

Figure 3 The forecast for agricultural sector income and agricultural output in Latvia according to different scenarios during the period from 2006 to 2013, mio.LVL

Source: LSIAE estimation

* LFA payments are gradually scaled down since 2006

In comparison to decoupling scenarios agricultural output can be slightly higher in case of coupled scenarios C9 (maximal coupling) and C9c (coupling of arable crops only). The higher support for particular product produced affects the higher production of that product as well (see Figure 3).

Making the long-term projections of Latvian agricultural sector development in accordance with different CAP reform implementation scenarios, requires use the assumptions about further efficiency and productivity increase, which should be based on projections about the development of technical progress as well as other external factors influencing agricultural production. In this respect increase in the productivity and efficiency might reduce the usage of main agricultural resources as labour, for instance. Therefore the projections for labour use in Latvian agricultural sector shows the downward tendencies of development for all scenarios analysed. However, coupling scenarios provide more intensive decrease in the labour force use, i.e. 25% cut for the time period 2005-2013 comparing to the 22% cut according to D9 scenario.

Evaluating the income effect of CAP reform implementation in different regions of Latvia, it could be seen that the biggest share of subsidies in the total income value per region belongs to the Eastern part of Latvia, where income from an agricultural production could be up to 57% in 2013, but the share of subsidies, in its turn, 43% (see Figure 4). According to scenarios analysed, full decoupling of direct payment (D9 scenario) would essentially increase farm income level in the less developed regions of Latvia, e.g. Latgale and Central Latvia. For the regions with an intensive agricultural production (mostly Zemgale region) coupling scenarios can be more attractive analysing them from the point of view of support obtained. For the other regions there are no any essential differences among scenarios for projections of income structure.

Figure 4 Projections of total income structure for agricultural sector in different regions of Latvia according to the different scenarios in 2013, mio. LVL

Source: LSIAE estimation

2.3.            Development trends for production of the main agricultural commodities in Latvia

Assessing CAP reform impact on the production of main agricultural commodities it is possible to conclude, some other policy measures applicable in the framework of common market organization have even more essential impact of the developments of some particular branches of agricultural production then CAP reform could have.

Figure 5 Projections of cereals and milk production according to different scenarios during time period from 2006 to 2013, thsd.t

Source: LSIAE estimation

For instance milk sale quota introduced in 2004 after Latvian accession into the EU has significant effect on opportunities for development of Latvian dairy sector as a whole. Despite the relatively high development potential of Latvian milk sector, milk sales quota restricts production of milk as well. This is the main reason why there are no variation in forecasts for milk volumes sold in Latvia before or after the reform implementation among scenarios (see Figure 5). As beef production in Latvia is a side branch of milking sector, the introduction of different support schemes will equally affect beef sector development, when increase in milk production at the beginning of accession will be accompanied by increase of beef production as well. At the same time stabilising of milk production after 2008 will affect the stabilising of beef production on the level of 26,8 thsd. tonnes since 2009.

Both cereal and rape production forecasts show gradual decrease in a volumes of production after introduction of the reform in 2009 (see Figure 5). The decrease of crop area might be affected by the increase the area of uncultivated pastures and meadows, which might force out crop production from the agricultural areas due to rise the support level agricultural land kept in good agricultural and environmental conditions.

On the regional level coupling scenarios (C9, C9c) might give additional impulse for development cereal sector, particularly in regions with intensive agricultural production. In case of decoupling of direct support (D9 scenario), larger share of non-productively used land could be projected in structure of agricultural land.

Conclusions

On the base of quantitative assessment carried out the following conclusions is made:

1.                  If payments for less favoured areas in Latvia will be continued at the same level after 2006, the effect of CAP reform on Latvian agricultural sector development might be not so essential. LFA support (as additional support paid together with direct payments to farmer) instead of direct payments can become the main determinant for farmers’ decision-making strategies in Latvia concerning to the land use in different regions. Due to higher LFA support, gained in Eastern parts of Latvia, farmers can be motivated to switch from an active agricultural production to non-productive agricultural activities in rural areas.

2.                  The decrease of LFA payment rates could give an additional impulse for the development of agricultural production and land use in regions of Latvia with intensive agricultural production. Gradual decrease of LFA support could help to succeed CAP reform objectives, as to favour more market-oriented production and sustainable agriculture at the same time. Further continuation of rural development support for less favoured areas on the level of year 2006 with simultaneous introduction of CAP reform will diminish the role of direct support reformed on agricultural development and arise the threat of overcompensation of agricultural production in some regions of Latvia.

3.                  There are no essential differences among the scenarios of CAP reform implementation on the sector level. Excluding the impact of LFA support and assessing “clear” effect of reform, gives similar results for projections of total sector income, agricultural output and level of public support. Evaluating the income effect of CAP reform implementation in different regions of Latvia, it could be seen that full decoupling of direct payment (D9 scenario) would essentially increase farm income level in the less developed regions of Latvia, e.g. Latgale and Central Latvia. For the regions with an intensive agricultural production (mostly Zemgale region) coupling scenarios can be more attractive analysing them from the point of view of support obtained.

4.                  Assessing CAP reform impact on the production of main agricultural commodities it is possible to conclude, some other policy measures applicable in the framework of common market organization have even more essential impact of the developments of some particular branches of agricultural production then CAP reform could have. Production or sales quotas play particular importance in case of Latvian sugar beet and milk sectors.

References

1. Council Regulation (EC) No 1782/2003 of 29 September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers and amending Regulations (EEC) No 2019/93, (EC) No 1452/2001, (EC) No 1453/2001, (EC) No 1454/2001, (EC) 1868/94, (EC) No 1251/1999, (EC) No 1254/1999, (EC) No 1673/2000, (EEC) No 2358/71 and (EC) No 2529/2001


2. Rural Development Plan for Latvia For the Implementation of the Rural Development Programme 2004-2006, Ministry of Agriculture. –

http://www.zm.gov.lv/index.php?sadala=496&id=1343 (latvian version)

1. Lehtonen., H., (2001) Principles, structure and application of dynamic regional sector model of Finnish Agriculture. Economic research publications.- Helsinki.: MTT.- p. 266;

3. Eiropas Savienības kopējās lauksaimniecības politikas 2003.gada reformas ieviešanas Latvijas scenāriji un to īstenošanas novērtējums.- Riga: LSIAE, 2004.


4. Reformētās ES KLP pilnīga ieviešana Latvijā: iespējamā tiešmaksājumu reģionālā un nozaru diferencēšana.– Riga: LSIAE, 2005