Theocharopoulos

93rd seminar of the EAAEImpacts of Decoupling and Cross Compliance on Agriculture in the Enlarged EU: 

93rd seminar of the EAAE Impacts of Decoupling and Cross Compliance on Agriculture in the Enlarged EU Impacts of decoupling on sheep/goat sector in Greece Theocharopoulos, A., Papanagiotou, E., Melfou, K.

Agricultural sector and sheep/goat farming in Greece: 

Agricultural sector and sheep/goat farming in Greece The agricultural sector in Greece has a relatively high contribution to the GDP (6.7%) and to the employment rates (16%) Sheep/goat farming is the largest livestock sector in Greece with a share of: 43% in the total value of livestock output and 13% in the total value of agricultural production In 2000 – 2002, sheep/goat milk production was around 1,110,000 tonnes and meat production was around 123,000 tonnes, annually. In the same period, there were more than 150,000 sheep/goat farms, with varying degrees of specialisation, most of which were located in less-favoured and mountain areas where employment opportunities outside farming are limited. The major production system is characterised as semi-extensive and the production is labour intensive.

Aim of the paper : 

Aim of the paper This paper, taking into account the significance of the sheep/goat sector for the whole of the Greek economy, examines the impact of changes, introduced by new CAP, on the sector. The 2003 CAP reform constitutes a fundamental change in the agricultural policy of the EU, introducing SFP which is decoupled from production and it is based on fixed historical returns of farmers for the period 2000-2002. In the sheep/goat sector, the EU-members could choose either partial (50-99%) or full (100%) decoupling. The implementation of the new CAP starts in Greece at the current year and the final decision of Greek government is the full decoupling. The main purpose of this paper is to explore the impacts of decoupling on the sector, by examining the profitability, economic viability and efficiency of sheep/goat farms in Greece.

Methodology: 

Methodology Family Farm Income (FFI) per Family Work Unit (FWU) was the index for the classification of farms in 4 levels and for the examination of economic viability and competitiveness. A farm is: viable, competitive if FFI/FWU ≥ 11740 € without the SFP, viable, non competitive if FFI/FWU ≥ 11740 € including the SFP, potentially viable farm if FFI/FWU ≥ 5870 € without the SFP, non viable farm if FFI/FWU < 5870 € without the SFP.

Methodology: 

Methodology Data Envelopment Analysis (DEA) was used for determining the efficiency of sheep/goat farms. It is a linear programming method that calculates the frontier production function of a set of decision-making units and evaluates the relative technical efficiency of each unit. In this study, the Input Oriented (I-O) DEA model is used, as in the agricultural sector a farmer has more control over inputs rather than output levels, which may often be exogenously determined. Technical efficiency (TE) represents the ability of a farm to produce the same output with the maximum feasible reductions in inputs given the technology set (I-O model).

Methodology: 

Methodology In the I-O model, TE under Constant Returns to Scale (CRS), also called the “Overall” Technical Efficiency (OTE), is obtained by solving the following DEA model: Min θiCRS θi CRS, subject to: X  θi CRS xi → θi CRS xi - X  0 Y  yi → - yi + Y  0   0

Methodology: 

Methodology The “Overall” Technical Efficiency (OTE or θCRS) was decomposed into “Pure” Technical Efficiency (PTE or θVRS) and Scale Efficiency (SE) by solving a Variable Returns to Scale (VRS) DEA model. A separate linear programming problem is solved to obtain the TE (θ) score for each of farms in the sample. θ is a scalar with boundaries of one and zero. If θi = 1, the farm is on the frontier and is technically efficient. If θi < 1, then it is technically inefficient. The relationship between OTE and PTE is used to obtain a measure of Scale Efficiency of each farm: SEi = OTEi / PTEi , where SEi = 1 indicates scale efficiency or CRS and SEi < 1 indicates scale inefficiency.

Data and variables used in the Input – Oriented DEA model: 

Data and variables used in the Input – Oriented DEA model The data used for the present study are taken from the Greek Farm Accounting Data Network (FADN) for the period 2000 – 2002. The FADN database is a very detailed one. It includes technical, economic and some other data for each farm.

The sample: 

The sample

Empirical Results: 

Empirical Results

Production expenses of sheep/goat farming: 

Production expenses of sheep/goat farming

Economic outputs of sheep/goat sector in the previous policy support scheme : 

Economic outputs of sheep/goat sector in the previous policy support scheme

Economic outputs of sheep/goat sector in the case of partial decoupling (50%): 

Economic outputs of sheep/goat sector in the case of partial decoupling (50%)

Economic outputs of sheep/goat sector in the case of full decoupling: 

Economic outputs of sheep/goat sector in the case of full decoupling

Economic viability after the introduction of decoupled payments: 

Economic viability after the introduction of decoupled payments The average sheep/goat farm is neither competitive nor viable. But, it is a potential viable farm after decoupling; this means that it could turn in a viable farm if some essential changes take place in its production process.

Minimum competitive and viable size of sheep/goat farms after CAP reform: 

Minimum competitive and viable size of sheep/goat farms after CAP reform Farm size is a fundamental factor for meeting the viability and competitiveness criteria. The minimum viable size is 228 ewes and 319 goats; while for competitiveness the minimum size is higher for both sheep and goat farms.

Slide17: 

Most of the sheep farms (37%) are potentially viable (level 3). 30% of the farms are already viable (level 1 and 2). Only a few farms (level 1) are competitive in the internal and external market. One third of the farms will not survive (level 4) in the new conditions.

Average technical and scale efficiency measures of sheep/goat farms : 

Average technical and scale efficiency measures of sheep/goat farms On average, sheep farms could reduce their inputs by 33.7% without size adjustments and by 45.6% when size adjustments are made, maintaining in both cases the same output level. On average, goat farms could reduce their inputs by 23.1% and 39.3%, respectively, producing the same output level. The comparison of the PTE and SE measures indicates that the former has a greater impact on farm efficiency level, especially in the case of sheep farms.

Scale Efficiency: 

Scale Efficiency The majority of the farms are scale – inefficient (94.7% and 90.1% of sheep/goat farms, respectively) and only few farms are scale – efficient, operating under constant returns to scale (5.3% and 9.9%). Most of the farms (66.2% of the sheep farms and 79.3% of the goat farms) are operating under increasing returns to scale. These farms need to increase their size, in order to succeed in cost saving.

Profitability in the current efficiency level and after the restructuring of inputs: 

Profitability in the current efficiency level and after the restructuring of inputs

Conclusions: 

Conclusions There was a profit in the sector before the policy reform, that is eliminated in the case of partial decoupling and becomes a loss in the case of full decoupling. With the existing technology, one third of the farms is viable, one third is potentially viable and the rest is non viable in the new CAP environment. Only a few farms are competitive in the market. The average sheep/goat farm is a potentially viable farm; it can successfully face the new conditions, if it makes adjustments in its farm size and in its production process. The farms, on average, need to increase their size in order to achieve lower production costs, due to the existence of increasing returns to scale.

Conclusions: 

Conclusions The mean technical efficiency of sheep/goat farms is 66% and 77%, respectively, when the size factor is not included in the model. If it is included, the efficiency scores are lower, as most of the farms operate in a smaller size than the optimal. Inefficiency derives mainly from not optimal management of inputs and secondly from not optimal scale operations. Given the existing technology, most of the farms exhibit important technical inefficiency in the new CAP and can reduce inputs by more than 25% in the short run and by more than 40% in the long run, maintaining the same output level. Technical efficiency and herd size are the main factors of sheep/goat farming profitability after the introduction of decoupled payments. If technical inefficiencies are eliminated and farms size adjustments occur, then the sector will be profitable.

Future research : 

Future research Additional research is required to generalise the evidence provided in this study. This research can easily be expanded in other agricultural sectors and new studies are expected with the existence of data from the application of decoupling. Nevertheless, some interesting insights regarding the impacts of decoupling on profitability, viability and efficiency of the sheep/goat sector are provided and can help the policy-makers in the decision-making process.

Remarks on the distributions: 

Remarks on the distributions There is considerable variation in the performance of sheep/goat farms Some farms are technical efficient under the VRS model, but only half of them, are still efficient when the factor size is taken into account (CRS) There are some other farms that operate very close to the frontier (90%<TE≤99.9%), but the majority of the farms exhibit “pure” and “overall” technical inefficiency greater than 25% and 40%, respectively. (Two fifth of the farms exhibits “overall” technical inefficiency greater than 50%, but only around half of them have such big inefficiency in the VRS model. This means that many of these very inefficient farms in the CRS model exhibit essential scale inefficiency.)

Scale Efficiency of sheep/goat farms: 

Scale Efficiency of sheep/goat farms The majority of the farms are scale – inefficient and only few farms are scale – efficient, operating under constant returns to scale. An important number of farms exhibit scale efficiency greater than 90%, but the majority of farms have scale inefficiency greater than 10%. One third of the farms have scale inefficiency greater than 25%; these farms have an important problem of either overproducing or underproducing, given their size. Most of the sheep/goat farms are operating under increasing returns to scale. These farms need to increase their size, in order to succeed in cost saving.