Original publication: April 2014
Authors: Teagasc, Dr. Thia Hennessy
Shortlink to this post: http://bit.ly/2zaFcNU
Family farming is the predominant business model in European agriculture. The key challenges faced by family farms are considered in this briefing note and the effectiveness of policy measures in the EU, both the current measures and those agreed for the 2014 to 2020 period, in tackling these challenges is examined. The main conclusions are that Pillar I policies have transferred substantial funds to family farms and have ensured the survival of many farms that would have otherwise gone out of business. However, the more targeted policies contained in Pillar II have been, and continue to be, more effective in addressing the specific challenges facing Europe’s family farms.
Background and objectives
In recognition of the unique and substantial contribution of family farms to global agriculture, the FAO have designated 2014 the “International Year of the Family Farm”.
While family farming is at the heart of the European Model of Agriculture and has been supported by the CAP for many years, a number of factors, both internal and external to the family, continue to threaten the efficacy of the family farming business model. It is in this context that the European Parliament’s Committee on Agriculture and Rural Development (COMAGRI) commissioned this briefing note. The purpose of the note is:
- To assess the effectiveness of current CAP measures and domestic Member State policies in supporting family farming, and
- To evaluate the effectiveness of the new CAP (2014-2020) and to describe the main family farming opportunities and limits related to the new CAP mechanisms
Over 97 percent of Europe’s farms are family farms, including large and small, full-time and part-time farms. The challenges facing family farming are diverse and differ by MS, farm size and family structure. Hence designing effective policies to support family farming, in all its shapes and sizes across the EU, is difficult. Supporting the family farm has been at the centre of the CAP since its foundation. CAP Pillar I schemes, first price support and latterly decoupled direct payments, have transferred significant funds to family farms over the decades. These subsidies have significantly boosted farm incomes and have facilitated the survival of a large number of family farms that otherwise would have been economically nonviable. Pillar I subsidies are often criticised as favouring large and more productive farms, but it must be noted that in many cases these large farms are family operated. Pillar I subsidies, especially decoupled direct payments, also act as an income stabilisation tool by reducing the exposure of the farm family to market and production risk. The risk free nature of the payments can also relax the credit constraints facing family farms and alleviate many of the problems of access to credit. The overall impact of CAP Pillar I policies on the sustainability of the family farming model is far-reaching and complex and can be difficult to disentangle. On the one hand the policies have been successful in maintaining a large number of family farms in business which in itself is desirable. However, this has slowed the pace of structural change in the sector, a process that is desirable from an economic perspective as it allows new entrants to the sector, allows existing farms to expand and exploit economies of scale and facilitates the transfer of resources to the most efficient farms, thus making the overall farm sector more competitive. The Pillar I subsidies, which are land based, have also inflated agricultural land prices and rents thus making access to farmland for families wishing to expand, and for new entrants, limited and expensive.
In general, CAP Pillar II policies have been more targeted than Pillar I. Pillar II policies have successfully supported intergenerational transfer through retirement and succession schemes and promoted farm modernisation through investment schemes. While these schemes have enhanced the opportunities of family farms, evaluations have shown that they do not always represent “good value for money”. Other Pillar II schemes have indirectly supported farm families by improving access to services and amenities in rural areas and the overall quality of life for rural inhabitants. The income earned from off-farm employment is a crucial supplement to low-farm incomes for many farm families. The success of Pillar II schemes in stimulating economic activity and employment opportunities in rural areas has facilitated the pluriactivity of many farm families.
The latest reform of the CAP presented an opportunity to develop tools to further enhance family farming. While many of the new schemes available under Pillar I can be used to address the unequal distribution of direct payments between farmers and to channel a greater proportion of the budget to small family farms, the optional nature of these schemes means that the final impact on the family farm will depend on decisions taken at a MS level. Furthermore, the schemes under Pillar I remain largely untargeted and as such are likely to have little impact beyond their duration. Payments remain linked to land and so there will be a continued leakage of support to land owners and an inflation of land prices, albeit finding a practicable alternative to land based payments is difficult.
The Small Farmers Scheme will simplify access to the CAP for many small farms and this is likely to be particularly welcomed by the NMS, although the definition of a small farm and the minimum eligibility criteria are likely to prove contentious.
Milk quota removal will lead to the elimination of costly rents in the sector and allow farmers to become more market oriented. However, there is some concern that expanding farmers and new entrants may overinvest and find themselves in financial difficulty particularly given the likelihood of continued price volatility. Farm advisory services offering business planning and investment appraisal advice should be aimed at those entering and/or expanding milk production.
Price volatility is likely to continue as a major threat to the economic viability of family farms. Domestic policies such as multiyear tax smoothing, as well as CAP policies such as the income stabilisation tool, insurances and the crisis reserve fund are all useful tools to help insulate the family farm from price risk. The direct payments made under Pillar I will also continue to act as an effective buffer against market risk. Private risk management alternatives such as futures and forward contracts should also be promoted through farm advisory services and agricultural education providers.
The new Pillar II places considerable emphasis on knowledge transfer and innovation. Clearly family farms can benefit from more effective transfer of knowledge and research allowing them to adopt new technologies on their farms more quickly and hence reap the economic benefits. While the funding available for the innovation and farm advisory schemes is significant, their success will be highly dependent on the level of farmer participation and so significant efforts will be required to encourage participation.
The start-up aid for young farmers is significantly enhanced in this rural development programme, especially when it is considered in conjunction with the provisions under Pillar I. The potential total value of the aid is substantial and is likely to be sufficient to stimulate genuine new entrants, thus overcoming a major criticism of previous programmes. The requirement to submit and fully implement a business plan is also a welcome development and is likely to contribute to improving the competitiveness of holdings. The current programme does not make provisions for an early retirement scheme. It is acknowledged that the problem of generational renewal is as much about “getting old farmers out” as it is about establishing new farmers. While previous schemes have been criticised in national evaluation reports, the complete omission of an early retirement scheme in this programme is worrisome.
Research has revealed that successful intergenerational farm transfer is highly dependent on planning, timing, mutual trust and a shared understanding of the transfer process by the two generations. Specialist succession planning advice and support for alternative business models that allow the two generations to “share” management responsibility can be effective tools in facilitating the successful transfer from one generation to another.
Link to the full study: http://bit.ly/529-051
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