Agriculture, together with other land-intensive industries such as forestry, has played a crucial role in the rural development of developed countries over the years. Subsistence and above-subsistence agriculture is still an activity on which the livelihoods of people living in developing countries strongly depend.

Despite the fact that agriculture’s contribution to national income and employment has tended to decline in line with efficiencies attained in the sector, agricultural activity continues to play a key role in the preservation of traditional countryside lifestyle and the management of natural resources, particularly land, countryside environmental amenities and water. These linkages are what make agricultural economics the intricate, interesting and important area of practice that it is and have far-reaching implications on the design of rural policies and the evaluations of their effectiveness.

Agricultural households’ contribution to the economy is not limited to their agricultural output as the concept of rurality has evolved way beyond agriculture, as traditionally defined. Therefore, while policies that are strictly agricultural in nature are still vital to those eking out a living from agriculture, the contribution of such policies to the rural economy, which is sometimes heterogeneous even within the same country thereby presenting additional challenges for policy makers, is declining.

This shift in the perceived role of agriculture from one of production to that of provider and guardian of environmental services as well as the producer of relaxation-related leisure activities (such as agritourism, gastronomic tourism and wine tourism) has resulted in a re-orientation of rural policy towards the attainment of economic, social and environmental sustainability and the concomitant use of a broader range of policy instruments to achieve this wider array of interweaved objectives.

Policies can influence the incidence of both positive and negative “non-commodity” outputs (externalities) by agricultural activity. Advertency is called for in endeavouring to shun negative externalities and unintended policy consequences that can detract from the merit of the sector and to fully capitalise on the opportunities brought about by this sector to incentivise the creation of public goods. It is worth noting, here, that policy issues needing to be addressed often vary by geographical location. As a corollary, location-targeted policies are more likely to be effective in realizing policy objectives than those which are not.

Different trading blocs, regions and countries have developed their own agricultural and rural development policies. In the European Union (EU), such policies fall under the remit of the Directorate-General for Agriculture and Rural Development (DG Agri) and the whole set of policies comes together under a unified Common Agricultural Policy.

The Common Agricultural Policy (CAP) was established with a view to lay the foundations for a common market in agricultural goods which required a common agricultural policy. The CAP was supposed to enable the member states to achieve the five objectives for agriculture that they had enunciated in Article 39 of the same treaty.

These were:

  1. to increase agricultural productivity by promoting technical progress and the optimum use of production factors;
  2. to ensure a fair standard of living to the agricultural community by increasing its per capita income;
  3. to stabilize markets;
  4. to assure the availability of supplies; and
  5. to ensure reasonable consumer prices.

The CAP agreed on by the EEC-6 in 1962 was essentially a price support scheme, in which target prices would be set for each supported commodity that were the same across the entire Community. If the target price was met in each country then there was no impediment to letting the commodity be traded freely among the partner countries.

The CAP actually uses three types of market interventions:

  1. support prices, which cover about two-thirds of all CAP products.
  2. external protection which covers about a quarter of all products
  3. a special or flat-rate aid for certain products that keeps domestic prices low but supplements farmers’ incomes.

Today, direct aid to producers “decouples” aid payments to farmers from any direct connection to market variables. Moreover, because they are justified for diverse reasons by the member countries (such as protecting the environment from nitrate runoffs, afforestation, the upkeep of rural attractions, compensating for less favoured areas, retraining for alternative occupations, and taking early retirement, just to name some of the current categories of aid), member countries are allowed to complement EU expenditures up to certain limits.

The European Commission has argued that it is necessary to reduce, and gradually eliminate, the target levels for price supports. But political resistance by the farmers in all countries, justifiably fearful of the effect of falling prices on their ability to service the debt incurred to mechanise and modernise their operations, has repeatedly stalled efforts to reduce, much less eliminate, price supports and the export subsidies that finance them.

The response of the Commission has been to maintain subsidies at constant levels, while gradually redirecting them away from the large, highly productive farms to smaller, less productive farmers deserving of support for reasons other than achieving self-sufficiency or maintaining an export surplus, but by “recoupling” subsidies to favour larger farms, such as making subsidies depend on the area that had been under cultivation, or the size of the herd in the case of livestock, this has not been achieved. In an effort to close off these obvious loopholes, the Commission has set limits on the size of herds, areas of cultivation, and amount of inputs that it would subsidise for any given farm through “modulation”.

A new CAP deal is currently being negotiated at the EU level to determine the structure and budget of the CAP for the new 2014-2020 financial programming period.

Our Agriculture and Rural Development services encompass data integrity checks, data collection, data analysis, rural policy and incentive-compatible programme design, rural policy and programme evaluations, as well as quantifications of non-market benefits.

Equinox can also help you in the transition to higher value added rural services such as agri-tourism, gastronomic tourism and viticulture tourism by combining its experience in the agricultural sector with its other complementary portfolio of services.

For more information about our Agricultural & Rural Development Economics services, please contact us here.