For the non-organic farming option (i.e. no change of current farming practices) the results of the scenario simulations in Czech Republic indicate

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1 EXECUTIVE SUMMARY At the time of shaping a model of sustainable agriculture in the European area, this study brings useful information to policymakers and researchers on the dimensions of agricultural sustainability and determinants of adopting sustainable farming practices. The new Member States (EU-N10) represents a territorial reality which needs be studied in greater depth to better understand the peculiarities of their agricultural sector, distribution and characteristics of existing farming systems. Present and potential developments of farming systems in terms of their sustainability, adoption behaviour relative to production practices, and potential impact of related policy instruments are analysed here in the EU-N10 context, using the Czech Republic and Lithuania as case studies. The unit of analysis, the farming system, is first identified based on a territorial approach methodology. A set of criteria is applied to identify homogeneous regions in both countries. Corresponding to each homogeneous region, five farming systems are identified in the Czech Republic, and six in Lithuania. For each farming system, the economic, social and environmental dimensions of sustainability are investigated, and a synthetic index of sustainability is computed. The results indicate that environmental sustainability is negatively influenced by low livestock density, small area under organic farming, high nitrate pollution, and high land erosion in more specialised farming systems (e.g. Czech Crops-Oriented Sugar Beet, Livestock-Oriented and Crops-Oriented Maize systems), while low crops diversification entails negative environmental impact in marginal systems (e.g. Czech Mixed-Oriented Potatoes and Mixed-Oriented Grassland systems). The same factors affect the environmental sustainability also for the Lithuanian farming systems, where more livestockspecialised systems reach higher environmental sustainability levels compared to cropspecialised ones. Economic sustainability is negatively influenced by low yields and income. In the case of Czech farming systems, low yields are related to Marginal and Livestock-Oriented systems, while low income is linked with crop-oriented systems and Mixed-Oriented Grassland system. Lithuanian Livestock-Oriented and Crops-Oriented farming systems report the highest scores for the economic sustainability dimension, while Crops-Marginal and Livestock-Marginal systems the lowest ones. The Crops-Marginal system ranks the lowest in terms of economic sustainability and is far beyond the rest of the systems. This system is characterised by high shares of Less Favourable Areas (LFAs), high percentage of area

2 concentrated in holdings of less than 10 ha, high share of elderly population (population over 65 years), and low density of population. Social sustainability of most Czech farming systems is negatively influenced by a high share of elderly population, concentration of farming land in holdings of less than ten hectares, and high unemployment rate. The low density of farming population is particularly relevant for the Czech marginal systems. The Crops-Oriented Sugar Beet system is an exception, as its high population density and low concentration of land in small farms ranks it as the highest socially sustainable system among those identified here. In Lithuania, high unemployment rate has negative effects in Crops-Marginal and Livestock-Marginal systems, while low population density and high share of elderly population are hindrances for most systems in reaching high social sustainability scores. Inter-countries comparisons reveal Czech farming systems reaching higher sustainability values than Lithuanian ones in all three dimensions. Low share of organic agriculture, high concentration of elderly population in rural area, high unemployment rate, and high share of small holdings explain the lower sustainability scores of Lithuanian systems. Second, an investigation of the key determinants of adopting sustainable farming practices is carried out using face-to-face interviews with farmers, and supplemented with opinions of local experts. The analysis is limited to one set of farming practices, organic farming. It is not assumed here that sustainable agriculture and organic farming are synonymous, but rather that organic farming is recognised to be part of sustainable practices. The results indicate that the most important determinants of adoption of organic farming for Czech and Lithuanian farmers are related to environmental and food concerns, and to structural characteristics of the farm (i.e. suitable farm size and type of production in the Czech Republic, and suitable farm structure in Lithuania). The main barriers for non-organic farmers to convert to organic farming are inappropriate farm structure (Czech Republic), and lack of accessible market (Lithuania). In the former case, the conversion to organic farming requires too many changes of the current farming practices (different technology, different level of labour input needed, etc). In the latter case, market accessibility implies lack of marketing channels or agents where farmers could sell their organic produce. Moreover, lack of potential consumers ready to pay for organic produce (individual farms), and low profitability (legal entities) are also important factors deterring the shift to organic farming. In the Czech Republic, the determinants of adoption at country and farming system levels coincide, and profitability is a more important factor inducing adoption for organic legal entities than individual farms. In Lithuania, environmental and food concerns are the most important determinants for adoption for Crops-Oriented and Intermediate systems, while

3 availability of advisory service and information, together with environmental and food concerns and structure of farm mainly influence the decision to adopt organic farming in Crops-Marginal and Urban Oriented systems. Farmers interviewed in Livestock-Marginal system indicate profitability and accessible market as very important determinants influencing adoption. Moreover, organic farmers situated in Less Favoured Areas are more environmentally-concerned than those outside these areas. Lithuanian farmers also consider consumers' willingness to pay higher price for organic produce as an important factor when deciding whether to shift to organic production. The determinants of adoption differ among farming systems. The structure of the farm (i.e. farm size, farm ownership, main enterprises etc.) is the main obstacle for Czech non-organic farmers to convert to organic farming in the case of Crops-Oriented Maize, Livestock- Oriented and Mixed-Oriented Potatoes systems. Moreover, lower profitability and difficulties to find markets are important barriers for Czech Crops-Oriented Maize system, while Czech Mixed-Oriented Grassland and Crops-Oriented Sugar Beet systems reveal no particular factor influencing non-adoption of organic farming. Finally, a scenario-based assessment of implementing selected Common Agricultural Policy (CAP) instruments investigates their impact on the economic sustainability of identified farming systems. Three policy scenarios are developed, namely: (i) No-Accession (ii) Business as usual (or Baseline) that considers the policy developments until 2005, and the most probable direction agricultural policy will likely follow in the near future, and (iii) Environmental CAP assuming an enhanced policy support to encourage the shift to environmentally friendly practices. The policy instruments taken into account vary depending on the scenario, and include the Single Farm Payment (SFP), organic farming and energy crops payments. The CAP budgetary ceiling for the 2013 horizon are maintained, so that the enhancement of policy support for energy crops triggers the proportional reduction of the SFP amount. The economic variables considered are gross farm income, value of total output, intermediate consumption, and balance of current subsidies and taxes. Based on FADN national databases, a standard holding associated to each farming system is first defined. The scenarios exercise uses then a "what if" approach to evaluate the changes of main economic variables of this standard holding in 2013 should it (a) continued being a non-organic farm, (b) converted to organic farm, or (c) adjusted its structure of enterprises by introducing energy crops in the rotation. These options (options) should be understood as alternative behaviour of the farmer according to possible changes in the agricultural support patterns. Correspondingly, for each farming system there are three alternatives, i.e. a nonorganic farm, an organic farm and a non-organic farm with energy crops.

4 For the non-organic farming option (i.e. no change of current farming practices) the results of the scenario simulations in Czech Republic indicate that introduction of energy crops in the enterprises structure ( Environmental Scenario ) is the most sustainable from the economic perspective as the gross farm income significantly increases with the bring into cultivation with energy crops of the set-aside land. It is worth mentioning that even without CAP subsidies ( No-accession" Scenario) these farms would be economically viable as they reach high gross farm income due to better yields obtained and/or technology used. Moreover, non-organic farms in specialised systems (Crops-Oriented Sugar Beet, Crops- Oriented Maize and Livestock-Oriented) obtain higher gross farm income than standard holdings located in marginal areas (mainly Mixed-Oriented Grassland and Mixed-Oriented Potatoes). In Lithuania, the gross farm income under the non-organic farming option doubles with the introduction of CAP payments ( Baseline Scenario ) since the contribution of the pre-accession payments in gross farm income is minimal. There are not particularly high income differences among farming systems. However, standard holdings located in marginal areas (Crops-Marginal and Livestock Marginal systems) have the lowest levels, while specialised systems in areas with high quality soils (Livestock-Oriented and Crops oriented systems) report the highest gross farming income in all scenarios. The organic farming option in Czech Republic increases the gross farm income of all farming systems compared to the pre-accession period ( No-Accession ). Still, this option is not economically sustainable in the long-term given the high share of subsidies in the gross farm income (above 70% in all farming systems). In Lithuania, the introduction of the CAP payments induces a four times increase of the gross farm income compared to the pre- Accession situation (when low organic yields, price of organic produce and organic subsidies lead to a low gross farm income). In this country differences appear also among farming systems. The gross farm income of organic farms in marginal area (Crops-Marginal and Livestock-Marginal systems) is lower by about EURO 150 per hectare compared to those systems located in areas with good quality soils (Livestock-Oriented and Crops-Oriented system). Such difference is mainly explained by the different share of cereals receiving higher subsidies in the structure of farm enterprises. On the other hand, the non-organic farm with energy crops option in Czech Republic appears being the most economically sustainable in terms of high gross farm income reached consequence of the assumed use of set-aside land for energy crops cultivation ( Environmental CAP ). Specialised farming systems (Crops-Oriented Sugar Beet and Livestock-Oriented systems) under the current policy framework (Baseline scenario) reach the highest gross farm income levels, above EURO 500 per hectare. In Lithuania, the gross farm income of non-organic farms with energy crops is higher under the Non-Accession scenario compared to the other two options (non-organic and organic ones). The gross farm

5 income increases under implementation of the CAP ( Baseline and Environmental CAP scenarios) although the effect is not large, mainly because the increase of energy crops payments does not compensate the income loss induced by a reduced SFP ( Environmental CAP Scenario). Overall inter-countries comparisons indicate a positive effect at the level of gross farm income induced by the implementation of the current common agricultural policy regardless the option farmers would take (continue farming, change to organic or introduce energy crops in the enterprises structure). According to the results of scenario simulations for the 2013 time horizon, introduction of energy crops (Czech Republic) and conversion to organic farming (Lithuania) trigger the best economic results in terms of gross farm income. Compared to Lithuania, Czech Republic had higher pre-accession levels of agricultural subsidies, especially for non-organic farms. Moreover, Czech farmers received subsidies for cultivating energy crops, which was not the case in Lithuania. The organic farming subsidies, although act as an important incentive for changing production techniques, is not a sustainable option in the long-run given the high share of organic payments in the gross farm income. However, is not possible to draw common conclusions suitable for all farming systems as each presents agricultural, environmental or social peculiarities. Moreover, structural characteristics of the farm (in terms of size, production structure and technology) are essential when adopting new farming practices and call a more in-depth analysis. The identified crucial advantages and challenges of three sustainability dimensions for each farming system identified here may suggest which path (maintaining non-organic farming, converting to organic farm or to partially grow energy crops) could be the most suitable for improving farming sustainability. Implementation of a territorially differentiated approach policy in these countries can support to achieve sustainability goals.