Development and Structure of Subsidies in Agriculture

Transcription

1 The International Scientific Conference INPROFORUM 2017, November 9, 2017, České Budějovice, , ISBN Development and Structure of Subsidies in Agriculture Jana Lososová, Daniel Kopta, Radek Zdeněk18 Abstract: The paper is based on the results of research on the economic development of a sample of agricultural holdings operating on the territory of the Czech Republic. Businesses are broken down by LFA share, enterprise size, and the dominant specialization. Attention is paid to both the overall development and changes in the structure and volume of subsidies and their impact on the profit of farms. Key words: Subsidies Farms Profit Agriculture JEL Classification: Q10 Q14 Q18 1 Introduction Subsidies in agriculture have an economic justification if the level of community welfare decreases due to the free exercise of market forces. Svatoš (1999) defines subsidies as a valuation of the public sector that affects the prices of products and services and the prices of factors of production. Bečvářová (2008) defines subsidies as transfers reflecting changes in the distribution of income, which are not connected with the flow of goods and services. The nature of agricultural production means that farmers are often unable to respond adequately to changes in the prices of agricultural product and production inputs. The result is an inelastic supply of agricultural products coupled with the inflexibility of demand for most agricultural products and leads to fluctuations in agricultural product prices, causing a fluctuation in farmers' income, which leads to a reduction in their well-being (Grega, 2005). Farm subsidies are an important source of income for farmers, especially if they farm in less favoured areas. Agriculture in the EU is one of the major sectors which employ almost 30 million people. The European model of agriculture ensures not only quality food but also permanent employment in rural areas. The aim of this article is to analyse the policy of subsidies in Czech Republic in which represents its comparison based on selected economic indicators and identifies adequate relations and dependencies between the indicators and subsidies based on economic reasons. The CAP receives approximately 40% of the total EU budget every year (EC, 2014). More than 70% of the money is used as a direct income subsidy (pillar I), approx. 20% can be used within the European Agricultural Fund for Rural Development (pillar II) and the rest of the money is used for payments to market price support. Compensatory subsidies within pillar II are provided in LFAs to prevent farmers from leaving the areas of natural restrictions. They represent about 4% of the CAP budget (EC, 2013). The European Commission endeavours to run environment-friendly agriculture in less favoured areas as it helps keep nature s diversity, increases the fertility of soil and protects soil from erosion. LFAs belong to areas endangered by emptiness and areas which suffer from specific natural restrictions. Nevertheless agricultural systems in less favoured areas are permanently forced to increase productivity and compete with intensive farming in more productive areas (de Graaff et al., 2011). Merckx and Pereira (2015) criticize the current CAP and argue, that subsidies emphasize the ubiquitous maintenance of farming and active management of the landscape, without identifying and targeting areas where rewilding marginal farmland may be beneficial for biodiversity and ecosystem services. These policies have two perverse effects. First, they promote the maintenance of agricultural practices in areas that could often be considered degraded from the point of view of several ecosystem services. Second, they distort land prices, artificially increasing the market value of marginal farmland. Furthermore, whilst subsidies may delay abandonment, they are unlikely in the long run to achieve their goal of halting and reversing this process; not only farmland abandonment is a process prone to self-enforcing socio-ecological regime shifts (Figueiredo & Pereira, 2011), incentive payments can never fully compensate the direct benefits that people received from the environment in traditional farming communities (Fischer et al., 2012). Ruben and Ing. Jana Lososová, Department of Finance and Accounting, Faculty of Economic, University of South Bohemia in České Budějovice, Studentská 13, České Budějovice, Czech Republic lososova@ef.jcu.cz Ing. Daniel Kopta, Ph.D., Department of Finance and Accounting, Faculty of Economic, University of South Bohemia in České Budějovice, Studentská 13, České Budějovice, Czech Republic kopta@ef.jcu.cz Ing. Radek Zdeněk, Ph.D. Department of Finance and Accounting, Faculty of Economic, University of South Bohemia in České Budějovice, Studentská 13, České Budějovice, Czech Republic zdenek@ef.jcu.cz

2 Jana Lososová, Daniel Kopta, Radek Zdeněk 96 Pender (2004) say that policies for poverty alleviation and sustainable development in LFAs should take the existing diversity among farmers and the heterogeneity in resources as a useful starting point. Attention should be focused on the implications of this diversity for household decisions regarding land use, labour intensity, market exchange and social organisation. Criteria for LFA classification are covered in studies of Dax (2005); Štolbová et al. (2007); Eliasson et al. (2010); Štolbová, Hlavsa & Lekešová (2010). The analysis by Jones et al. (2013) shows that in spite of an increased focus on livestock activities at the expense of mixed farming stocking rates decreased and the share of permanent pastures increased. Livestock payments in particular for cattle seem to have encouraged high expenditures on external inputs, whereas rural development payments seem to have encouraged more sustainable strategies such as the improvement of yields of mixed farming systems. The evaluation of Czech agricultural enterprises shows that the highest losses after the subsidies are deducted from profits will appear in the mountain LFAs. The impact on economic indicators in the mountain LFAs seems to be significant. Enterprises which operate in mountain areas depend on the subsidies most of all. On the other hand they cope best with effects of unfavourable conditions (Lososová & Zdeněk 2013). 2 Methods The data necessary to the research were based on original sample prepared at the University of South Bohemia in České Budějovice since The sample consists of about 100 farms all over the Czech Republic. The crucial data are collected from financial and production statements Balance sheet, Profit loss statement, Annual statement on harvest and Statement on sowing areas. The data are completed by an original questionnaire with additional information on economy and production. The results are calculated as an average per farm or hectare of land or one worker. The paper used sorting of enterprises into groups according to the share of agricultural land in the LFA to the total utilized agricultural area (UAA), as well as the type of production and the size. According to the relation to the less favoured areas, the enterprises are classified according to the methodology of FADN (2012): Mountain areas (LFA M) more than 50% of UAA in mountain LFA; Other LFA (LFA O) more than 50% of UAA in LFA and LFA M less than 50%; NON LFA more than 50% of UAA outside the LFA. Classification by type of farming was based on the prevailing share of revenues from crop and animal production, with the fact that businesses with sales of crop production or livestock production higher than 2/3 were belonging to the appropriate group and the other belongs to a group of mixed agricultural production. To sort the size of the company the rules of the European Union (Annex I of Commission Regulation (EC) No 800/2008) were used. Given that there were only 0-5 micro-enterprises and large enterprises in the sample for each year, only the group of small and medium-sized enterprises was assessed. For the evaluation of the development of subsidies the so called index of dependence on subsidies (IDS), which represents the cost rate adjusted for subsidies, where the value over 100% express what share of company costs is needed to be covered by subsidies (CZSO 2010), IDS Costs / Revenues Subsidies (1) In order to quantify the relationship between the volume of subsidies and the profit/loss, a simple linear regression based on annual time series was used, in the form of y β β x ε (2) where y is the dependent variable, β 0 ; β 1 are parameters of the regression equation, x is an independent variable, and ε is a residual. To determine the suitability of the model, a coefficient of determination (R 2 ) is used, which determines how many percent of the total variability of data is explicable by the regression model. Bojnec & Latruffe (2013) find that regarding subsidies, they have a negative influence on technical efficiency, by contrast, they have a positive influence on allocative efficiency, but the influence on the overall economic efficiency is negative. As for profitability, subsidies have a positive relationship with it.

3 Development and Structure of Subsidies in Agriculture 97 Adamišin & Kotulič (2013) say that slow structural change and high subsidization of agriculture calls for studies on whether such conditions could explain the low performance of the agricultural sector, and, if so, what is the effect of the implementation of the high subsidizing CAP on farms behaviour and survival possibilities. As summarised by Gorton & Davidova (2004), the question of farms productivity and efficiency in post-socialist countries is crucial to understand whether the countries could compete within the enlarged EU after their accession and how farm structures in these countries would evolve. In particular, farms survival is an important issue, as it is decisive for land use and sustainable rural development, the presence of farms avoiding land abandonment and providing employment and green amenities in rural areas. Land abandonment has been relatively high in post-socialist countries after the transition, due to political and economic changes. 3 Research results In 2016, the sample consisted of 95 entities, 44.2% of which operated outside LFA, 38.9% in LFA O and 16.8% in mountain LFA. In terms of the legal form of business, the agricultural holdings are divided according to the following proportion where 45% represent cooperatives, 41% joint-stock companies, 13% limited liability companies and 1% belongs to physical entities. The average business size is illustrated by assets amounting to CZK 160m, CZK 156m in LFA M, CZK 163m in LFA O and CZK 159m in NON LFA. The average total revenues of the holding amount to CZK 87.5m. In terms of LFA, the smallest revenue is produced in LFA M (CZK 70.2m), followed by LFA O (CZK 91.9m) and NON LFA (CZK 90.1m). The average number of employees per business is 49: the lowest number of employees is in LFA M (47.5 workers), followed by LFA O (51 employees) and NON LFA (48.4 employees). According to the prevailing production orientation, 25.3% of the enterprises are engaged in plant production, 33.7% enterprises are focused on livestock production and 41% are enterprises engaged in mixed agricultural production. The average size of the enterprise, expressed in terms of the assets, is CZK 152m for plant production, for the company with a predominant livestock production it is CZK 168m and for the mixed production CZK 158m. There are no significant differences in the area of the cultivated land (crop production 1646 ha, livestock production 1562 ha and mixed 1588 ha). According to the EU classification, 67.4% of farms are classified as small businesses and 32.6% medium-sized businesses. Small businesses manage in the average on 1194 ha and a medium-sized on 2421 ha of agricultural land. Total revenues are CZK 61.8m for average small enterprises and CZK 140.4m for medium-sized. The number of workers is 31 in the average small enterprise and 86 in the medium-sized. For reasons of comparability, we monitor the development of subsidies in proportion to the size of the enterprise, in this case to the area of utilized land. The average growth rate of subsidies during the monitored period is 10% per year, with the largest increase in subsidies per hectare of agricultural land as a result of the accession of the Czech Republic to the EU, with the most dynamic growth being the first three years after accession (figure 1). Figure 1 Development of subsidies in the LFA groups

4 Jana Lososová, Daniel Kopta, Radek Zdeněk 98 In 2016, the subsidies in the average enterprise were CZK per ha. The highest amount of the subsidies were provided to farms operating in the LFA M, where the average growth rate is 10.2%. The fastest growth of subsidies is in the farms focused to livestock production, with the growth rate 11%, the slowest increase of the subsidies is in the farms specialized on crop production (9.9%, see figure 2). Figure 2 Development of subsidies according to the production orientation In the case of enterprises broken down by size, the amounts of subsidies per hectare of utilised land are very similar, with a significant fluctuation in 2010, when a medium-sized enterprise has received the subsidy by 12.5% lesser than a small enterprise (Figure 3). Figure 3 Development of subsidies according to size of the farm Besides the size of the enterprise, the development of subsidies can be compared with the economic indicators of the company, e.g. in relation to revenues from own products and services (Table 1). In 2016, the average company obtained CZK 293 of subsidies per CZK 1000 of revenues from own products and services. As can be seen from Table 1, the highest subsidies in relation to sales were obtained by the average enterprise in mountain LFA, 67% more than the average of the whole sample. By 13% more than average was acquired by a livestock-producing enterprise; on the contrary, the least subsidies in relation to revenues were obtained by an enterprise with predominantly plant production. The small business earned 8% more than the average, and the medium-sized business, by contrast, was 7% less than the average.

5 Development and Structure of Subsidies in Agriculture 99 Table 1 Subsidies per CZK 1000 of revenues from own products and services Mountain LFA Other LFA Non LFA Crop prod Mixed p Livestock p Small farms Middle farms Total The other problem solved was the structure of individual subsidies calculated per hectare of agricultural land. For comparison, the years 2004 and 2016 are shown in figures 4 and 5. The amount of total operating subsidies is almost doubled in 2016 against The most significant increase was in SAPS, which is due to gradual levelling of direct payments with the states of EU-15. Subsidies on crop production show a decreasing trend. Till 2012, these payments are falling year-on-year, but have grown slightly since Nevertheless, the decrease compared to 2004 is on average 14%. A more pronounced increase was seen in the past two years for livestock production due to national payments, where in response to price cuts and drops in heads of dairy cattle in particular, the subsidies increased by 156% compared to Other types of subsidies can be considered relatively unchanged. Due to the increase in total subsidies, their share declines (except for other subsidies not allocated elsewhere). The compensatory allowance in the LFAs is slightly decreasing, while a slight increase is observed for agri-environment measures. Figure 4 Structure of subsidies in 2004 Figure 5 Structure of subsidies in 2016

6 Jana Lososová, Daniel Kopta, Radek Zdeněk 100 The cost rate adjusted for subsidies is labelled as an index of dependence on subsidies, where the value above 100% specifies what proportion of the company's cost is to be covered by subsidies (Table 2). In individual years this value fluctuates significantly. In all the years under observation, the highest dependency on subsidies is shown in the enterprise operating in the LFA M. On the other hand, the lowest dependence on subsidies is shown in the non-lfa company and for a plant-specialized farm. The enterprise focusing on plant production shows a decline in this indicator over the monitored years. Depending on the size of the enterprise, in all the observed years, there is a higher dependency on subsidies for a small enterprise, but over time the differences are diminishing. In 2016, the small business needed subsidies to cover 15.8% of the costs, and the medium-sized enterprise covered 15.1% of the costs by the subsidies. According to the production specialization of the company, the highest dependence on subsidies is reflected for the livestockoriented enterprise in most of the years under review; only in 2015 the highest dependence on subsidies was manifested in the mixed-production enterprise, 17% of the costs being covered by the subsidies. The livestock producers in 2016 covered 19.5% and the plant producers covered 5% of the cost by the subsidies. Table 2 Index of dependence on subsidies Mountain LFA Other LFA Non LFA Crop prod Mixed p Livestock p Small farms Midle farms Total Despite the fact that subsidies should have a neutral impact on the size of the profits, research suggests that weak influence is evident. The effect on profit is apparently from subsidies on production. The highest dependence of profit on the subsidies is evident for the enterprises operating in mountain LFA, where 33.6% of the variability of the profit can be explained by the variability of the subsidies, however by increasing the subsidies by CZK 1, the profit will increase by CZK 0.50; without the subsidies the loss would be CZK 2.5m (Table 3). The correlation coefficient of impact of subsidies on profit ranges from 0.33 to 0.58, which is a low to medium degree of dependence. The least dependent on subsidies are mixed-production and LFA O farms. The share of subsidies that make up the profit is highest in the NON LFA (72%) and in the crop production (65%). In enterprises broken down by size, the differences in the dependence of profit on subsidies are not significant. Table 3 Dependence of the profit before tax on subsidies in Regression parameter β 1 Regression parameter β 0 Coefficient of correlation (r) Coefficient of determination (R 2 ) Mountain LFA Other LFA Non LFA Crop prod Mixed p Livestock p Small farms Midle farms Total

7 Development and Structure of Subsidies in Agriculture Conclusions Subsidies are provided to compensate for lower yields under less favourable conditions, but also to compensate for nonproductive functions and for public utility services provided by farmers. By adjusting economic indicators by subsidies, the average enterprise in all areas is getting into a loss whose trend is growing. The most significant decline in the profit after deduction of subsidies would occur in mountain LFA, where the impact of subsidies on economic indicators is the highest. According to the production specialization, the largest loss would be occurred in livestock-orientated enterprises, a lesser loss would affect the mixed-production enterprises, and the lack of subsidies would affect at least farms focused on crop production. Without significant differences, the loss after deduction of subsidies would have affected small and medium-sized enterprises. An important issue is also the structure of subsidies. The highest share of subsidies represents the single area payment, which was 50% of all operating subsidies in 2016 and represents a change of 16 points compared to Another significant change is the reduction of support for crop commodities from 24% in 2004 to 10% in On the contrary, the increase is evident in the last two years for livestock commodities due to national payments. In response to the reduction in milk prices and the decline in the dairy cattle in particular, the national payments for milk and cattle breeding were increased. The dependence of the agricultural holdings on subsidies is most evident in mountain LFAs, but it means the stability of economic indicators of the enterprise in crisis years. The least dependent on subsidies are enterprises focused on plant production, that are the most affected by the changes in external conditions and the amount of the profit/loss is very sensitive to these changes. Acknowledgement The article is a result of Research Program of Faculty of Economics, University of South Bohemia No. IGS01C1. References Adamišin, P., & Kotulič, R. (2013). Evaluation of the agrarian businesses results according to their legal form. Agricultural Economics (Zemědělská ekonomika), 59(9), Bečvářová, V. (2008). Vývoj českého zemědělství v evropském kontextu. Brno: Mendelova zemědělská a lesnická univerzita v Brně, ISBN Bojnec, Š., & Latruffe, L. (2013). Farm size, agricultural subsidies and farm performance in Slovinsko. Land use Policy, 32, CZSO (2010). Analýza zemědělství na základě souhrnného zemědělského účtu [online]. Available from: (accessed November 2012). Dax, T., (2005). The redefinition of Europe's less favoured areas. In Proceedings of the 3rd Annual Conference Rural Development in Europe, Funding European Rural Development in , London, UK (2005). De Graaff, J., Kessler, A., & Duarte, F. (2011). Financial consequences of cross-compliance and flat-rate-per-ha subsidies: The case of olive farmers on sloping land. Land use Policy, 28(2), Eliasson, Å., Jones, R. J. A., Nachtergaele, F., Rossiter, D. G., Terres, J.., et al. (2010). Common criteria for the redefinition of intermediate less favoured areas in the European Union. Environmental Science and Policy, 13(8), doi: /j.envsci European Commission, (2013). Rural development in the European Union Statistical and economic information Report 2013 [online]. DG for Agriculture and Rural Development (2013). [cit ] Available from: European Commission, (2014). EU budget CAP post-2013: Key graphs & figures CAP expenditure in the total EU expenditure [online]. DG Agriculture and Rural Development (2014). [cit ] Available from: Figueiredo, J., & Pereira, H. M. (2011). Regime shifts in a socio-ecological model of farmland abandonment. Landscape Ecology, 26(5), Fischer, J., Hartel, T., & Kuemmerle, T. (2012). Conservation policy in traditional farming landscapes. Conservation Letters, 5(3), Gorton, M., & Davidova, S. (2004). Farm productivity and efficiency in the CEE applicant countries: a synthesis of results. Agricultural economics, 30(1), Grega, L. (2005). Ekonomická opodstatněnost podpory zemědělství. 1. vyd. Brno: Mendelova zemědělská a lesnická univerzita v Brně, Provozně ekonomická fakulta. ISBN Jones, N., Graaff, J., Duarte, F., Rodrigo, I., & Poortinga, A. (2014). Farming systems in two less favoured areas in Portugal: their development from 1989 to 2009 and the implications for sustainable land management. Land degradation & development, 25(1),

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