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Different CAP support systems - evaluation of the impact on supply of agricultural products

Published in Proceedings of the International Scientific Conference Economic Science for Rural Development (Latvia) Issue 14 ISSN 1691-3078 pp. 67-74

DIFFERENT CAP SUPPORT SYSTEMS – 
EVALUATION OF THE IMPACT ON SUPPLY 
OF AGRICULTURAL PRODUCTS 
Mg.sc. Guna SALPUTRA, Head of sector economic and policy analysis unit, LSIAE 
Dr.oec. Andris MIGLAVS, Head of department of agricultural development 
and economic relations, LSIAE 

Summary 
A unified methodological approach is required in order to perform within the policy harmonization process the quantitative evaluation of the impact of various elements of the CAP direct support systems upon the supply of agricultural products and its structural changes. Possibilities of formalization have been assessed on the basis of the econometric model of agricultural and food products AGMEMOD, which is used and developed for all Member Countries incl. Latvia within the Framework 6 Programme Project „AGMEMOD 2020”. 

The AGMEMOD models mainly focus on the effect of direct payments and responds on changes in key European market prices as a factors incentive for production development. For taking into account the impact of a new support unrelated to volume of production, presumptions are made for the present 
regarding it’s formalization via supply inducing coefficients – multipliers, or incentive price. It is assumed that the support related to a product or to the resource for its production has direct impact upon the volume of supply. The support granted for the land irrespective of the type of obtained product can act as an additionally stimulating factor, however, it should be evaluated as negative if the payment rate constitutes the economic bases for alternative business activity. 

Results of the research show that in order to improve policy analysis in the AGMEMOD model, it should be taken into account that both the policy systems and the fiscal envelopes are variable by 2013. 
To make the models capable to incorporate the switches in agricultural policy regimes implementation of the envelopes for all types of direct support and direct support measures currently not included should be similarly applied for all countries. The multipliers measuring the weight of impact of the direct support on production are crucially important for the calculations.  Consequently, for future evaluation of compliance of the values of these multipliers, the analysis of econometric coherences is required. 

Key words: Common agricultural policy, direct support system, policy harmonization, modelling. 

Introduction 
The current Common agricultural policy (CAP) of the European Union is focused towards reformation 
of the support system with a view to facilitate increase of competitive capacity of the producers of agricultural 
products. The diverse social and economic structure and production structure in the rural areas of the 
Member States determines the selection of the applied policy within the framework of the direct support 
schemes established by the EU legislation. The new Member States can use at least until 2009 the transition 
period support system, one of advantages of which is a flexibly applicable assignment of additional national 
funding from the national budget. The old Member States on their part, are supposed to change over to a 
new system by 2007, either preserving the historical amounts of the support on farm-level or developing a 
regionally diverse support policy through support for a certain or a special quality product, or through full 
decoupling taking no efforts in stimulating the supply of certain products. 
It is expected that by 2013, the policy harmonization process will take place, and such diverse policy 
systems will be equalized to the utmost. In view of different types of support applied in various Member 
States on the level of both sectors and farms and regions, there is challenge to develop an analytical approach, 
which would enable evaluation of the impact of policy upon the supply of agricultural products and the 
changes in its structure and which would be methodologically well-grounded. 
From the point of view of policy evaluation, formalization of the policy harmonization process is 
Guna Salputra, Andris Miglavs x Different CAP support systems - evaluation of the impact on supply of agricultural products
Economic Science for Rural Development No
68 14, 2007: 67 - 74
required in order to determine by quantitative methods how do the different types of agricultural support 
systems affect production. 
The aim of the report is to show the possibilities of quantitative assessment of the impact of the various 
elements of the direct support systems proposed by CAP upon the supply of agricultural products within 
the context of the policy harmonization process. 
The possibilities of formalization will be evaluated on the basis of the econometric, dynamic model of 
agricultural and food products AGMEMOD, which was developed for all Member Countries incl. Latvia 
within the Framework 5 Programme Project, and is used and adapted in compliance with the CAP being 
developed within the Framework 6 Programme Project „AGMEMOD 2020”. 
1. Current Policy modelling – based on 
policy factors impact evaluation in pre-reform period. 
The AGMEMOD models [5] used for assessment of policy impact on supply of agricultural products 
are mainly focusing on the effect of coupled direct payments and responds on changes in key European 
market prices. 
In the time period starting from 1992, where the Common agricultural policy was implemented generally 
via production related direct support (payments per area and animal head), it was possible to evaluate 
direct payments as incentive factors for production development (see Table 1). The modelling approch 
elaborated according to the EU agricultural policy under “Agenda 2000” in reference period until 2004 is 
in general appropriate also for New Member States (NMS) as the pre-accession support was granted mostly 
coupled to agricultural production, crop area or animals. 
Table 1 
Direct support incorporation in AGMEMOD models 
Sectors 
modelled 
Direct support measures according to 
AGMEMOD modelling approach 
Effect on use of production 
resources 
Grains Grain compensation payment Grain area 
Rapeseed Rapeseed compensation payment Rapeseed area 
Beef Sucker cow premium Number of sucker cows 
Pork - 
Poultry - 
Milk - 
Source: AGMEMOD 
Since the EU enlargement in 2004 NMS have implemented Single area payment (SAP) scheme (with 
the exception of Slovenia and Malta which joined to the Old Member states (OMS) classical “Agenda 2000” 
policy) while the new CAP reform with the four main measures – changes in market support, decoupling 
of support from production, cross compliance requirements and support modulation, was agreed. SAP for 
NMS is a transitional scheme to reformed policy where part of direct support funding became available for 
the first time without obligation to produce certain production [2]. That raises a question about appropriate 
modelling approach (see Figure 1). 
In order to take into account the impact of the support unrelated to production upon the volume of 
produce, the block of the Latvian AGMEMOD model was supplemented with the new support measures, 
during the time period of which the variable rates are calculated inside the model taking into account the 
values of the sector envelope and the reference, as well with presumptions regarding it’s formalization via 
supply inducing coefficients – multipliers, or incentive price. The policies variables related to sectors which 
are analysed and included in AGMEMOD model and their conformity with the current agricultural policy 
measures implemented in Latvia are reflected in Table 2. 
Guna Salputra, Andris Miglavs x Different CAP support systems - evaluation of the impact on supply of agricultural products
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Prices 
of agricultural products 
Resources involded 
in production, Y 
Agricultural 
land 
Livestock 
herd 
Crop 
production 
Livestock 
production 
Direct support per 
area and animal head 
(reference period), x
Direct income support 
(simulation period) 
?
Y=f(x)
Figure 1. Modelling of direct support 
Source: LSIAE 
Table 2 
Direct support implementation in Latvian AGMEMOD model 
Adjustments in Latvian model 
Sectors 
modelled 
Direct support 
measures 
according to 
AGMEMOD 
modelling 
approach 
Effect on use 
of production 
resources 
Current 
CAP 
measures 
Support rates 
calculated inside the model 
Multipliers 
reflecting 
impact 
weight 
1 2 3 4 5 6 
Grain 
compensation Grain area 
Top-ups 
for arable 
crop area 
Based on sector envelope, top-up 
rate, reference area for arable 
crops 
1 
Grains 
 Grain area Decoupled 
SAP 
Based on national ceiling, phasingin rate, eligible area for SAP 0.3 
Rapeseed 
compensation 
Rapeseed 
area 
Top-ups 
for arable 
crop area 
Based on sector envelope, top-up 
rate, reference area for arable 
crops 
1 
Rapeseed 
 Rapeseed 
area 
Decoupled 
SAP 
Based on national ceiling, phasingin rate, eligible area for SAP 0.3 
Suckler cow 
premium 
Number of 
suckler cows 
Top-ups 
for suckler 
cows 
Based on sector envelope, top-up 
rate, reference number of suckler 
cow 
1 
Decoupled 
SAP 
Based on national ceiling, phasingin rate, eligible area for SAP, 
average livestock density treshold 
0.3 Beef 
 
Number of 
suckler cows, 
cattle slaughter 
weight through 
the incentive 
price for beef
Top-ups 
for fodder 
crop area 
Based on envelope for fodder crops, 
top-up rate, reference area for 
fodder, average livestock density 
treshold 
0.6 
Source: LSIAE according to Latvian AGMEMOD model 
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Columns 4 to 6 show adjustments done regarding introduction of the SAP scheme policy into the 
Latvian AGMEMOD model. All support available for arable crops is introduced in the model through the 
calculations of expected gross return per ha which affects the area allocated for certain crops. The direct 
support for cattle sector is built up from payments for suckling cows, decoupled SAP and fodder crops 
affecting the volume of beef. Single area payment and top-ups for fodder are added to beef incentive price 
increasing the margin between beef price and input costs. This means that part of decoupling effect is moved 
to the market effect, which occurs via changes of incentive prices for agricultural outputs or inputs – with 
a foreseeable responds of farmers [3]. 
Taking into account that the supply inducing impact of the direct support will be essentially decreased 
since introduction of SAPS, different multipliers are set based on expert assumption on how decoupled 
payments could affect the production decisions. The rates of multipliers applied for subsidies depend on 
the nature of support payment. The multiplier of value 0.3 is applied in the model to reduce fully decoupled 
support factor’s impact on production. If the payment is kept coupled with production (product related 
top-ups for SAP scheme up to 2008) the multiplier is set to 1. For fodder crops the multiplier is set to 0.6 
due to the reason that fodder payments are area based being more incentive factor for beef production. 
Recalculated per tonne of beef meat on the ground of assumption on animal density threshold these payments 
are added to the market price for beef in order to get the incentive price. 
Assumptions regarding differentiated impact of support measures under different evaluation of multipliers 
are applied in AGMEMOD models of all countries and in Latvian model as one of NMS as well. According 
to the Latvian model results, the share of subsidies covered by the model and to be granted for producers 
of agricultural commodities modelled in the total envelope (national financial ceiling) in 2013 is expected 
to be only 54%. This calculation is done for baseline scenario, in which the maximum permitted coupling of 
subsidies to the production is assumed. A part of the rest of direct support is forecasted to be paid for 
sectors not included in Latvian AGMEMOD model (e.g., potatoes, green fodder areas) or distributed outside 
the agricultural sector for the land maintained in good agricultural condition. Comparing the actual gross 
agricultural income with the income level where support factors influencing production decisions are 
adjusted with multipliers, the first one is higher by 9%. These “adjusted” subsidies and incomes are 
shown in the bottom of Table 3. 
Table 3 
Agricultural output value, subsidies, 
feed costs and gross income in Baseline scenario, Latvia (2005=1) 
 2005 2006 2007 2008 2009 2010 2011 2012 2013
Agricultural output value 1.00 1.03 1.10 1.18 1.20 1.23 1.26 1.29 1.33
Subsidies 1.00 1.17 1.26 1.27 0.84 0.95 0.98 1.00 0.99
Feeding costs 1.00 1.01 1.06 1.09 1.09 1.10 1.11 1.13 1.16
Gross agric. income 1.00 1.06 1.13 1.21 1.15 1.20 1.23 1.26 1.28
Subsidies * 1.00 1.17 1.24 1.20 0.49 0.56 0.57 0.59 0.59
Gross agric. Income * 1.00 1.05 1.13 1.20 1.10 1.14 1.17 1.20 1.23
Source: Latvian AGMEMOD model calculations; * - adjusted with multipliers 
The modulation measure is not introduced in the model directly through the decrease of support rates; 
however, the threshold for farms subject to modulation is quite low and can be assumed with regard to all 
farms. There are no opportunities for analysis of the effect of cross compliance requirements on supply of 
agricultural products. 
2. OMS and NMS different policy systems – demanding unified 
approach in AGMEMOD model for assessment of the effects on common market 
In 2007 within the framework of CAP there are two direct support schemes applicable in Member 
states incorporating diverse forms of their implementation [1]: 
• SAP scheme (according to current legislation - transitional to SP scheme only in NMS until 2009) - 
Guna Salputra, Andris Miglavs x Different CAP support systems - evaluation of the impact on supply of agricultural products
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diverse policy systems due to the quite flexible application of top-ups. Different complementary 
support measures for each country may result in different share of CAP support introduced and 
evaluated in model as incentive factor; 
• SP scheme - diverse support systems (from fully decoupled to utmost coupled, with the prevalence 
of historical or flat rate regional payments in OMS and Slovenia and Malta) and different assumptions 
how to simulate them, may result in different assessment of similar support as incentive factor for each 
country. 
• From 2013 when top-ups will be phased-out and fully reformed policy must be implemented 
agricultural policies in NMS and OMS are supposed to be harmonized. The development of policy 
harmonization process is reflected in Figure 2. 
 
Figure 2. Policy harmonization 
Source: LSIAE according to R1782/2003 [1], R118/2005 [2]; * - excluding Slovenia and Malta 
Classification of direct support under different systems can be aggregated in two general groups: 
• Decoupled support (according to OECD classification of PSE components – payments based on historical 
entitlements [4]). 
• Coupled support (according to OECD classification of PSE components – payments based on output, 
the planted area or the number of animals [4]). 
In case the support is related to a product or the resource for production of the particular product, it has 
a direct impact upon the volume of supply. The support granted for the resource of production – the land 
irrespective of the type of obtained product can act as an additionally stimulating factor; however, it 
should be evaluated what decoupled payment rate constitutes the economic bases for alternative business 
activity, and therefore should be assumed as a negative facilitator of production. 
The approach for implementation of the policy selected by the state and the policy instruments, which 
should be classified as support for farmers’ income, affects the supply of agricultural products; however, 
the competitiveness of such products in the EU market and the motivation for their production will 
strongly depend on the support system applied by other countries for their producers. 
Therefore the weak point is modelling the direct payments without using all policy instruments applied 
and without the whole amount of available funds with market effects. 
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3. Improvement of policy modelling considering policy harmonization process 
On the ground of comparison between the direct support systems in the old and the new Member States 
and their potential development, for improvement of the policy analysis in the AGMEMOD model, it 
should be taken into account that both in the old and in the new Member States: 
• the policy systems are variable; 
• the financial envelopes of the direct support are variable. 
The old Member States have a variable structure of the envelope, which is gradually changed from 
historical farm payments into single-rate regional payments. The scope of the envelope gradually increases 
for the new Member States; consequently, the structure of the envelope also changes with gradual increase 
of the specific weight of decoupled payments and disappearance of the top-up payments related to production. 
Regarding NMS, the model must be capable to incorporate the switches in agricultural policy regimes. 
If there are no links between different policy measures in the model, in case of switch between policy 
schemes, policy effect will not be evaluated correctly due to the changes in policy objects. 
Scenarios cannot provide reasonable results if pre-accession support is omitted from the particular national 
model [6]. On the other hand, as the pre-accession support system was applied during transition period 
and was not consistent from year to year, it would be better to concentrate efforts on including more recent 
policy data (2004-2006) for estimation. Considering different topping-up rates applicable for different sub 
sectors (according to Council Decision 2004/281/EC) in order not to complicate transitional pre-reform 
policy block, top-ups could be exogenously calculated outside the model. 
At the same time, funding from the EU budget and their distribution according to common rules should 
be calculated inside the model in order to build the policy block transparent as the different modelling 
approach between the OMS and NMS will be in general not relevant from 2009, and not relevant any 
more from 2013 due to the SP scheme implementation in all Member States. 
1.ENV 
National ceiling 
4.EST 
EU budget 
6.NST 
National budget 
3.EPH 
Phasing-in rate 
5.TOP 
Topping-up rate 
2.MOD 
Modulation rate 
8.HPT 
Historical payments 
7.CPT 
Coupled payments 
1. ... n 
9.ART 
Arable reg. payments 
10.GRT 
Grassland reg. payments 
- 
- 
- 
= 
2.MOD 
Modulation rate 
If there is no difference between arable and 
grassland regional payments: 
= 11.AET 
Eligible area reg. payments 
Resources Allocation 
Cou
pled Decou
pled 
BALANCE 
Figure 3. Allocation of total direct support 
Source: LSIAE, [6] 
Therefore regarding modelling of policy instruments in national models two essential points should be 
similarly applied for all countries: 
• To calculate envelopes for all type of direct support (See Figure 3) providing the balance of amount of 
money granted to the sector, 
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• To add direct payments related to definite sub-sector and not included in model as a factor (e.g., 
slaughter premiums, payments for fodder areas and other policy measures which are not fully 
implemented yet) to incentive price in order to evaluate the impact of total support. 
As a production of commodities has become more independent on the level of direct support since 
introduction of decoupled payments, the multipliers (coefficients) are crucially important (not any other 
approach has been developed) in the calculations measuring the weight of impact of the direct support 
upon production. In order to perform an adequate analysis of the values of these multipliers, analysis of 
econometric coherences should be done: 
• relationship of the changes in the volume of support with the changes in the volume of production; 
• relationship of the re-distribution of the support outside the agricultural sector with externalities. 
In case the decoupled historical payments are applied along with the coupled payments in the same 
sector (e.g., historical payments in the beef sector and coupled payments for cattle breeding) in order to 
encourage continuation of the previous type of farming, a stronger weight of impact is expected. However, 
concerning historical payments, in general a gradual redistribution in agricultural sector is expected. 
4. Conclusions 
The research provides the bases to conclude the following: 
1. The AGMEMOD modelling approach elaborated to evaluate support as incentive factor for development 
of certain production should be improved in order to tackle new regimes of CAP. Since supply 
inducing impact of the direct support is decreased, expert assumptions on how decoupled payments 
could affect the production decisions should be applied. The decoupling effect could be partially 
attributed to the modelling of market effect - via changes of incentive prices for agricultural outputs 
or inputs, in order to presume foreseeable responds of farmers. 
2. In baseline scenario where the maximum permitted coupling of subsidies to the production is assumed, 
the share of subsidies covered by the model in the total national financial ceiling for Latvia in 2013 
is expected to be only 54%. Part of the rest of direct support is forecasted to be distributed outside 
the agricultural sector for the land maintained in good agricultural condition. 
3. Support related to a product or the resource for production of the particular product has a direct impact 
upon the volume of supply. The support granted for the land as a resource of production can act as an 
additionally stimulating factor. In case that decoupled payment rate constitutes the economic grounds 
for alternative business activity that should be assumed as a negative facilitator of production. 
4. The competitiveness of agricultural products in the EU market and the motivation for their production 
will strongly depend on the support system applied by other countries for their producers. Therefore 
all policy instruments applied and the total amount of available funds with market effects should be 
implemented in the models taking into account that: 
• both the policy systems and the financial envelopes of the direct support in mid term period 
are variable and moving to harmonized policy systems in OMS and NMS until 2013; 
• links between different policy measures should be established for modelling the switches in 
agricultural policy regimes in order to evaluate policy effects correctly in case of changes in 
policy objects. 
5. The multipliers important for measuring the weight of impact of the direct support upon production 
might differ in diverse schemes. In case the decoupled historical payments are applied along with 
the coupled payments in the same sector, a stronger weight of impact should be expected. In order 
to perform an adequate analysis of the values of these multipliers, econometric analysis based on 
the most recent data regarding changes in the volume of support, the volume of production, redistribution of the support outside the agricultural sector and externalities provided should be done. 
5. References 
1. Council Regulation (EC) No 1782/2003 of 29 September 2003 
// http://eur-lex.europa.eu/LexUriServ/site/en/consleg/2003/R/02003R1782-20060805-en.pdf 
Guna Salputra, Andris Miglavs x Different CAP support systems - evaluation of the impact on supply of agricultural products
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2. Council Regulation (EC) No 118/2005 of 26 January 2005 
// http://eur-lex.europa.eu/LexUriServ/site/en/oj/2005/l_024/l_02420050127en00150021.pdf 
OECD publications: 
3. “Decoupling agricultural support from production”// Policy Brief, November 2006 
//http://www.oecd.org/dataoecd/5/54/37726496.pdf 
4. “Methodology for the measurement of support and use in policy evaluation” 
//http://www.oecd.org/dataoecd/36/47/1937457.pdf 
FP6 project “AGMEMOD 2020” website: 
5. http://www.tnet.teagasc.ie/agmemod/index.html 
Unpublished materials: 
6. Emil Erjavec, Stane Kavčič “Harmonisations of Agricultural Policy (Direct Payments) Instruments” 
// University of Ljubljana, Slovenia