Alexandre Gohin
email: alexandre.gohin@rennes.inra.fr

Assessing the impacts of the 2003 CA P Mid Term Review: How sensitive are they to the assumed production responsiveness to Agenda 2000 direct payments ?

Keywords: Common Agricultural Policy, Decoupling, Com putable General Equilibri um, European Union. JEL Classifications: D57, Ql7, Q18

ou non, émanant des établissements d'enseignement et de recherche français ou étrangers, des laboratoires publics ou privés.

The author would like to thank K. Walsh and J.C. Bureau for pointing out many remarks on previous versions. The usual disclaimer applies. five main elements, namely i) the reduction of market price support, ii) the introduction of mandatory crosscompliance rules, iii) the strengthening of rural development by the modulation of direct payments, iv) a new mechanism to reduce direct payments in case of budget pressure, and v) the decoupling of direct support by the creation of a Single Farm Payment (SFP). This SFP will replace most of the present direct payments and will not be tied to current production of any commodity. Moreover agricultural production is no longer required to receive the benefits of the payment. On the other hand, farmers will be subjected to cross-compliance conditions, in particular the obligation to keep their land in good agricultural and environmental conditions. Many economic analyses have been performed to measure the market and welfare impacts ofthis last reform. By and large, these analyses mostly focus on the effects of the redesign of direct support instruments. Table I below reports some results from seven available studies conducted at the EU 15 level. We exclude from this table those studies which consider MTR proposais or report national/regional results only. In a general way, these results ail go in the same direction. Arable crop productions decrease mainly through a reduction of land allocated to these activities ; yields per hectare marginally increases. Milk production is virtually unchanged due to binding milk quotas. Non ruminant production are only indirectly affected by the reform and thus the impacts are very limited.

Finally beef production also contracts, despite increases of fodder and pasture areas. This reduction mainly results from the development of more extensive production techniques. Another empirical regularity across ail studies is the higher effects observed on the beef market compared to those obtained on the arable crop markets.

On the average (last column of table 1 ), the wheat production will decrease by 1.8% compared to 3.2% for the beef production, despite greater increases of the domestic price fo r the latter (5.5% compared to 1.6%).

[Insert Table I] lf the general direction of effects is quite similar across studies, the magnitude of these effects widely diverges.

For instance, the reduction of wheat production ranges from nearly nothing (5 studies) to as much as 6% (2 studies). The reduction of beef production is more evenly spread in the bracket zero -7%. These differences are not unexpected because underlying models rely on various specifications. But it is highly critical to understand them because policy implications of these results may be dramatically far apart. 1f one believes that this CAP MTR and its SFP does not really change production, then he might question the very likely classification of the SFP in the green box at the World Trade Organization (WTO). More generally these results might raise some doubts about the relevance of the distinction between the blue and green boxes. On the other hand, if one believes that this reform effectively reduces production incentives, then the European Union (EU) may be in a better position in the current WTO multilateral negotiations.

Sorne studies have already engaged some sensitivity analysis in order to test the robustness of these impacts and understand these differences. [START_REF] Balkhausen | Modelling the Effects of Partial Decoupling on Crop and Fodder area as well as ruminant supply in the EU: Current state and outlook[END_REF] examine the sensitivity of impacts to elasticity parameters using the ESI.Jvl mode!. As expected, they find strong influences of these parameters on some impacts, the most significant one being the effect of the land mobility parameters on arable crop areas. If they assume a huge mobi lity of land, arable crop areas (and production) decrease by as much as 18%, compared to 7% in their central case.1 They do not report the symmetric case with low mobility of land but it is very likely that they will obtain more limited decreases ofthese areas. The OECD (2004) focuses on the assumed production effects of the new SFP instrument. Ali models, be they econometric or synthetic, must adopt some assumptions regarding the effects of the SFP on production. ln the standard version of the Aglink model, the production effects of the SFP are assumed to be 6% of the impact of market price support for arable crop and beef productions2 . The sensitivity analysis applies parameters of 0.02 and 0.10 for the SFP instead of the initial 0.06. On the maximum decoupling scenario, they find that the impacts are rather sensitive to this parameter. The reduction of soft wheat area varies between 1 % and 0.3% (0.5% in the central case) and the reduction of beef production between 1 % and 0.1 % (0.6% in the central case). ln relative terms, these differences appear to be substantial (reaching as muchas 100%) but in absolute terms they are finally very modest (Jess than 0.5%).

These two sensitivity analyses, that we are aware of, help to partly understand the differences between published figures on the impacts of the CAP MTR. ln any case do they reverse the general messages of ail studies: the CAP MTR and its decoupling with the SFP will lead to a more extensive beef (and milk) production to the detriment of the level of arable crop activities ; impacts on the beef markets are larger than those on arable crop markets.

The main objective of this paper is to test whether these results are robust to the specifications of Agenda 2000 CAP direct payments. These results are derived from models which generally assume that Agenda 2000 arable crop direct payments were already partially decoupled and Agenda 2000 beef direct payments are much more coupled to the production. However some statistics and studies raise some doubts about the decoupled nature of Agenda 2000 arable crop direct payments. Moreover Agenda 2000 beef premiums were granted to farmers but subject to many eligibility rules which reduce their degree of coupling. Hence an examination of the sensitivity of CAP MTR impacts on the modeling of Agenda 2000 direct payments is legitimate. In that respect, we use a detai led Computable General Equilibrium (CGE) model focused on the EU 15 agriculture and food sectors, which allows to consider various modeling of direct payments. This paper is organized as fo llows. ln the first section, we provide a review and discussion of the modeling of Agenda 2000 direct payments in simulation models. We <livide this section in two separate sub sections, one devoted to the arable crop direct payments and the other to the beef direct payments. ln the second section, we present our modeling framework. We obviously focus on the representation of Agenda 2000 direct payments.

Section three is devoted to the definitions of the baseline and simulations of the CAP MTR. Section four offers some methodological and political conclusions and suggests directions of research.

l. The modeling of Agenda 2000 direct payments: Review and discussion Many models are currently operatio nal to simulate the effects of the CAP instruments in general, of its direct payments in particular. It is beyond the scope of this paper to review ail these models. 3 We voluntary limit our discussion to the models, mentioned in table 1, which have been employed in order to assess the legal CAP MTR. As far as possible, our discussion is based on elements given in the publications supporting these results because different versions of same models may lead to different results (see footnote I on the ESIM mode!).

The modeling of Agenda 2000 arable crop direct payments.

The production impacts of any input subsidy depends, among other things, on the production technology of the targeted sector as well as the functioning of the input market. lt is thus helpful to mention these specifications developed in simulation models, in conjunction to the modeling of direct payments.

With the exception of the GTAP CGE mode!, ail models (which are of Partial Equilibrium (PE) nature) specify the production technology of arable crop sectors as the product of a yield fonction and an area fonction. Let's start with these PE models. Yields per hectare are generally assumed to be independent of direct payments.

Appendix I shows analytically the theoretical restrictions imposed by such specifications, independently of any assumptions on the functioning of land market. In these PE models, Agenda 2000 arable crop direct payments only enter area allocation fonctions (like prices) weighted by a coupling factor. This factor, which varies between O and 1, is sometimes referred as a highly synthetic representation of ail known theoretical effects of direct payments (risk related effects, dynamic effects, ... ) but which are not explicitly specified in the models because they are extremely difficult to capture (see, for instance, [START_REF] Chantreuil | The Luxembourg Agreement Reform of the CAP: An analysis using the AG-MEMOD composite mode![END_REF]. A value of zero implies that Agenda 2000 direct payments have no effects on area allocations and more generally no effects at ail, because yields are independent of direct payments. To the contrary, a value of one implies that the effects of these direct payments are similar to those of prices of arable crops, corrected by appropriate yields.

Last row of table 1 reports the coupling factors used in available studies. lt is worthy to remark that the only PE study which obtains significant decrease of cereal production assumes a high coupling factor and the opposite for the other PE studies. This tends to suggest that these coupling factors have substantial bearings on impacts and hence it is useful to argue the choice of a particular (or a range of) coupling factor. Nevertheless, this does not provide formai evidence and, as mentioned before, the modeling of policy instruments alone does not determine their impacts, this also depends on the modeling assumptions of the input markets (mainly land in the present case).

In the context of PE models, where ail primary factor markets are not explicitly represented, the zero value seems to us a very extreme option because it does not recognize that producers must cultivate their land in order to receive the direct payments. Of course they are allowed with the Agenda 2000 to set aside part of their land but not their full farm, so that they must keep producing (at least partially). In fact this zero value makes implicitly the assumption that direct payments are fully capitalized in land rents.

At the other hand of the spectrum, the one value implies that producers must engage in production in order to receive payments, that these payments influence the factor allocation across activities. As stated earlier, this influence depends on the factor mobility as well as relative payments across activities. For instance, if ail activities receive the same per unit direct payment and the factor is perfectly mobile, then direct payments have finally no production impacts. This ends up like the zero value. As far as we understand the CAPRI results, the reduction of cereal production is mainly governed by a harmonization of direct payments across ail activities while direct support is fully capitalized in land values (information extracted from the dual values of land).

To our knowledge, only the OECD does justify the 0.14 coupling factor by relying on the PEM model. This figure suggests quite limited production impacts of Agenda 2000 arable crop direct payments and that there are highly capitalized on land rents. Unfortunately, this figure is obtained with a PEM mode! which does not take into account that the total land eligible to Agenda 2000 arable crop direct payments is limited, nor the set aside requirements, nor the existence of other policy instruments of the CAP. Now it is clear that the impact of one instrument depends on its interactions with other instruments. This coupling factor is, as recognized by the OECD, flimsy butjustified.

In CGE models in general, in GTAP in particular, production technologies and costs are explicitly represented.

Production technologies are represented by more or less flexible functional forms, mainly depending on the distinction of products (inputs and outputs) and factors. If substitution possibilities between land and other inputs are assumed to be zero, then this implies that yields per hectare are only indirectly dependent of prices and this is finally very similar to previous PE specifications. If, one the other hand, land can easily substitute with other factors (labor, chemicals, ... ), then yield effects may be huge. In the precise application of GTAP to the CAP MTR, this information on production technologies and yield effects is not available. Agenda 2000 arable crop direct payments are represented by a direct land subsidy and accordingly this suggest that these payments are fully capitalized in land rents. Again, as far as we understand the GTAP results, the reduction of cereal production is mainly explained by a harmonization of direct payments across all activities.

In addition to the specific issues raised so far, our main concem with ail these studics is that they assume, more or less explicitly, that Agenda 2000 arable crop direct payments are nearly fully capitalized in land values. While this may be correct in the long run with land markets working perfectly, we believe that this may be not the case when the full effects of CAP MTR will realize. This opinion is based on the following grounds. Recent statistics from Eurostat show that rents for agricultural land are still much lower than per hectare direct payments. Table 2 reports these statistics for France, Germany and the United Kingdom. It appears that rents represent between one third to two third of per hectare direct payments. According to these figures, the full capitalization assumption is irrelevant for recent years for those Member States and one might not exclude that this is the same thing at the end of the present decade. As far as we understand them, ail models already assume that Agenda 2000 direct payments are nowadays fully capitalized in land rents/values and logically they do not consider partial capitalization in the future. 4 Of course not ail land are rented but figures from farm accounting data (in particular the Farm Accounting Data Network) also suggest that, on own land use farms, Agenda 2000 arable crop direct payments are not fully capitalized in land.

[Insert Table 2)

Our opinion is also based on studies which try to evaluate the degree of capitalization of direct payments into lands. To our knowledge, there are no published studies applied to the EU agriculture. We are only aware of a

French unpublished study (Meze, 2003) which does not find that 1992 CAP arable crop direct payments did capitalize in land rents. On the other hand, there are many published studies on the capitalization of direct payments in the USA. ln particular [START_REF] Roberts | The incidence of government program payments on agricultural land rents: the challenge of identification[END_REF] and subsequently [START_REF] Kirwan | The Incidence of U.S. Agricultural Subsidies on Farmland Rentai Rates[END_REF] find that the marginal degree of capitalization of US direct payments into land lies around 0.3-0.4 in 1997. Without providing formai evidence for the EU case, these studies tends to challenge the full capitalization usually assumed in simulation models.

If one is willing to accept the idea that CAP arable direct payments might not be fully capitalized in land rents/values, then it remains to explain why and to suggest where the non-capitalized part indeed goes. The reasons we put forward here are that there might exist some rigidities/imperfections on agricultural factor markets and that capitalization takes time. CAP arable crop direct payments were initially introduced as compensatory payments for price decreases in order to support farm revenues. It might be the case that farmers perceive these new direct payments as a reward for their tabor and thus resist to fully transmit these payments to landowners. This assumption makes sense given the strong opposition of farmers in some EU member states with the CAP MTR and its SFP because this new instrument further breaks the link between support and production (farmers are no longer required to produce in order to receive the direct support). In addition, land leasing arrangements heavily depends on Member States but it is not uncommon to see very long contracts, with small possibilities to renegotiate it. T his may explain a slow capitalization of direct payments in land values.

Finally, there exist some national regulation laws on farrn land uses which also prevent full arbitrage and thus full capitalization. According to these arguments, it is not unlikely that the non capitalization part may be perceived as a tabor/capital subsidy by farmers and that it prevents major tabor outflows from agriculture after the 1992 and 1999 CAP reforms.

ln the empirical part of our paper, we w ill consider this capitalization issue and the possibility that part of Agenda 2000 arab le crop direct payments is perceived as a tabor/capital subsidy. We w ill able to do that because we make use of a detailed CGE mode[ where production costs, including tabor and land costs, are fully documented.

The modeling of Agenda 2000 beef direct payments.

ln a general way, the modeling of the beef sector/policy is less well documented than other sectors. One must recognize that this sector is very complex and it is understandable that modelers have taken different routes (if not shortcut) to represent it. With the Agenda 2000 CAP reform, there are three main beef direct payments in terms of budgetary expenditures (table 3). Below we present them and simultaneously how they are represented in simulatio n models.

[lnsert Table 3] i) The Scukler Cow Premium

This first one in terms of expenditure (more than 2 billion €) is the Suckler Cow Premi um (SCP) introduced in 1980 whose level reaches 200 € per an imal from 2002 onwards. This premium is granted to every farrne r who owns these animais (hence coupled to the an imais). However total SCP claims are subject to individual quotas and are also conditional on a maximum stocking density (1.8) of subsidized animais per forage hectare.

Moreover, from 2002 onwards, farmers must allocated at least 15% and up to 40% of their SCP individual quotas to heifers. Before 2002, there were allowed a maximum of 20%. From available statistics (second part of table 3), it appears that EU 15 suckler cow herds always overcome EU 15 SCP quotas, by nearly one million suckler cows or 9% of the quotas. If we add the requirements to allocate at least 15% of these premiums to heifers, it appears that the number of suckler cows non eligible to SCP reaches around 2.6 millions. ln other words, nearly 22% of suckler cows are not subsidized. This figure is far from negligible and raises some specific issues in terms of modeling.

As far as we understand them, suckler cow herds are generally explicitly included in PE models and are expressed using dynamic functions with beef prices and premiums as explanatory variables. We report in the bottom of table l their baseline levels. Tt appears that the suckler cow herd is always projected to overcome SCP quotas. ln order to take into account these quotas, it seems that these studies reduce unit SCP or specify again coupling factors between O and 1. By this manner, they implicit assume that producers take into account an average SCP for ail their animais. This assumption may be reasonable but others as well. ln particular, given the huge number of suckler cows not receiving SCP, one might assume that last suckler cows are simply determined by the standard price marginal cost equalization condition. ln such cases, SCP may have indeed very limited production effects and simply gives some rents to quota holders. These two interpretations are both plausible and in fact depends on the true production costs. Unfortunately they are generally absent from PE models.

As far as the GTAP CGE mode! is concerned, production costs are by definition explicit but with the GTAP sectoral coverage, the suckler cow herd is not explicitly represented. lnstead the bovine cattle sector is assumed to produce bovine cattle using mainly feed ingredients, labor, land and capital. The latter is very heterogeneous and theoretically includes the suckler cow herd. Accordingly the SCP is modeled as a capital subsidy. How mobile across activities are the services of capital is the crux of the matter but is not documented.

ii) The Special Beef Premium

The second premium in terms of expenditures is the Special Beef Premium (SBP) scheme which was first introduced in 1987. Main characteristics of this premium are that it is paid to adult male animais only (hence coupled to these animais) but again subject to two major restrictions. One is the same maximum stocking density rule (1.8) and the second is that claims within a member state are subject to national ceilings. This is a significant difference with the SCP where quotas are individuals. If SBP claims exceed the ceiling in any year, then ail claims by individual producers are scaled back accordingly (the unit SBP is reduced). From available statistics, it appears that in recent years claims are roughly equal to production and are always higher than ceilings (by nearly 2 million heads or 20% overshooting). A gain this rai ses some specific issues in terms of modeling.

lt seems that ail models explicitly consider the SBP and adopts, like the SCP, an average subsidy approach to the production of male animais when modeled, to the production of bovine cattle otherwise. This assumption makes sense because, to date, farmers effectively receive ex post an average SBP. Again other assumptions may be relevant because the previous one implicitly supposes that farmers are able to correctly anticipate the true production level at their member state level. It seems to us not unreasonable to formulate other SBP expectations. For instance, when deciding to produce male animais, farmers may expect that their historie production level will benefit from the full SBP and do not really expect SBP for additional males. ln this case, over quota male animais are simply determined by the price-marginal cost eq ual ization condition.

iii) The slaughter premium

The third premium is the slaughter premium introduced with the Agenda 2000 CAP reform. ln fact there are two slaughter premiums, one for bovine cattle and one for calf. Like the SBP, claims within a member state are subject to national ceilings and any breach of these ceilings will result in a scaling back of claims in the member state concemed. To date, these ceilings have not been overcome and ail models represent it as a perfectly coupled subsidy to bovine production (to the two kinds of animais when distinguished).

iv) Other beef premiums

In addition to the three beef premiums mentioned so far, there exists many others whose application differs by Member States. Two of them provides subsequent support. The first one is the extensification premium.

Basically, an additional premium payment is made on top of the SCP and SBP if the real stocking density on a holding is within certain set limits. These limits are allowed to vary by Member States. This extensification premium is notified in the green box measure at the WTO white ail other beef premiums are in the blue box.

Many modeling of this premium are possible, leading to rather extreme conclusions. One possibility may be to consider it as a coupled subsidy which is in addition to the SCP and SBP. One another possibility is to assume no effects because it is notified as belonging to the green box. One additional view consists in assuming that this subsidy is in fact a land subsidy which may reduce beef production. ln fact some farm simulation models find that the removal of this extensification subsidy leads to an intensification of cattle production [START_REF] Lherm | Impacts possibles de la réforme de la PAC de juin 2003 et de ses différentes options d'application sur des exploitations d'élevages bovins allaitants[END_REF]. The second one is the so-called national envelopes. Each member state has the possibility to grant fixed additional payments on top of ail other beef premiums or to make permanent pasture area payments. Accordingly many modeling of this last beef premium are again possible. Unfortunately we have not been able to find any information on the modeling ofthese two other beefpremiums.

Our main concern with the modeling of the three main beef premiums ( eventually the others when information will be available) is that usually they are assumed to operate at the margin: last production units are determined by a condition stating that marginal costs equal price plus a (possibly weighted) subsidy. Eligibility rules for these direct payments are only implicitly taken into account while we underline above that they may have significant impacts on their coupling degree. Again our detailed CGE model, where production costs are explicitly acknowledged, allows us to better incorporate these specific rules and hence to test the robustness of the CAP MTR impacts to the modeling of the intricate Agenda 2000 CAP direct payments.

Modeling framework

We first give general characteristics of our modeling framework and then give full details of the modeling of Agenda 2000 direct payments for arable crop and bovine activities. The second original feature of our mode! is the specification of price and income elasticities. The mode! uses globally regular-flexible functional forms for the specification of production technologies and consumers'

General Characteristics

preferences. The flexible form developed by [START_REF] Perroni | Regular Flexibility of Nested CES Functions[END_REF], i.e. the Lower Triangular Leontief

Nonseparable N Stage Constant Elasticity of Substitution, is used. This form combines the notion of latent separability and a nested CES structure. This approach allows introducing any regular matrix of price and income elasticities. ln order to calibrate the pararneters of these regular-flexible functional form, published econometric estimates of price and in corne elasticities were used.

The third original feature of the mode! is the modeling of primary factor markets. The mode! distinguishes three production factors, land, labor and capital, which are in fixed supply. We assume imperfect mobility of labor and capital across sectors (through a CET function). Imperfect mobility of land between agricultural sectors is also represented by nested CET fonctions and our mobility structure was derived from the French agricultural supply mode! (Matthieu et Ramanantsoa, 1995). lt subsequently appears that this is very similar to the ones presently developed in the GT AP mode!. In order to represent the multiproduct nature of agricultural firms and to avoid allocating labor and capital to each farm enterprise, a revenue fonction is used. We thus assume that farm capital, labor and overhead expenses are first combined as a composite service (hereafter labeled labor/capital bundle), which is then combined to land and intermediate inputs allocated to each farm enterprise (coefficients on the inputs allocated to each enterprise corne Eurostat's SPEL database). This representation of the agricultural technology draws on [START_REF] Peterson | A General Equilibrium Framework for the Food Marketing System[END_REF].

Mode/ing of the arable crop sector and po/iy

The arable crop Common Market Organisation (CMO) directly concems the following sectors of our mode!: three cereal activities (soft wheat, barley and corn), three oilseeds (rapeseed, sunflower and soya), one protein crop (field peas), and finally one "aggregated" fodder crop on arable land which includes silage maize. Ali these sectors have the same mono-product technological structure ; they only differ in terms of data. As a consequence, we focus our presentation on the soft wheat sector.

Table 4a) presents the initial data (year 1995) used to calibrate the technological and political parameters of this sector. Data on physical characteristics, receipts and expenditures ail corne from Eurostat sources (mainly SPEL database). The main issue is to allocate the remaining value added to primary factors of production. As stated earlier, we do not separate tabor and capital for each farm enterprise but rather assume that they use a bundle of tabor and capital. Thus, for the soft wheat sector, we only need to split the value added into two components, i.e.

rents for the land and the tabor/capital bundle.

lt is at this stage that the issue of direct payment capitalization does appear. Ifthese data represent an equilibrium (in fact a maintained assumption in CGE models), the land rent must not be lower than the land direct payment.

Let's assume for a white that we fully allocate direct payments to land (full capitalization assumption). ln that case, the unit land rent must be at least equal to 318€/ha which is much higher than those observed. One additional issue with this assumption is that the remaining labor/capital rent may be low. This issue is not very significant for soft wheat because the market price ofthis cereal was high in 1995. On the other hand, it is highly problematic for oilseeds (not shown in table 4a) where this remaining tabor/capital rent is negative (for instance, in the case of rapeseed, the SPEL database reports a negative value (-42€/ha) for the value added without direct payments). Nonetheless ail simulation models assume more or less explicitly this full capitalization of direct payments into land. We depart from this assumption for the calibration of our mode! and assumes instead a 30% capitalization. ln the same time, we assume that the land unit rent equals observed land rents (roughly 170€/ha).

Initial values for the tabor/capital bundle are calibrated as residuals.

The 30% figure is derived from [START_REF] Roberts | The incidence of government program payments on agricultural land rents: the challenge of identification[END_REF] in the case of the US. We easily recognize that it is highly heroic to assume the same percentage in the EU and thus one may ask a sensitivity analysis to this initial figure.

We prefer to test different values of this degree of capitalization when building our baseline because it is not very useful to examine the sensitivity of CAP MTR impacts for 1995.

The impacts of any input subsidy also depends on the production technology of the subsidized sector. Table 4b) reports the initial price elasticities of hicksian input derived demands for the soft wheat production. In order to detennine these elasticities, we conduct a literature review and adopt substitution elasticities from Gohin et al.

(2003) and from Jensen et al. (2002). We obviously apply our cost shares to these substitution elasticities and implement the result matrix using a latent separability approach (see above). As stated earlier, many simulation models assume that yields per hectare are fixed . In our case, they are endogenous and depends on ail prices, including land prices. Jt appears for example that, at the initial point, soft wheat yields per hectare increase by 0.09% when land prices increase by 1 %, ail other prices and soft wheat production remaining constant. This results from a substitution with ail other inputs (fertilisers, pesticides and the tabor/capital bundle).

[lnsert Tables 4)

We finally mention here that our mode! also includes other policy instruments of the arable crop CMO. ln particular, trade measures include export subsidies, tariff quotas, in-quota tariffs, out-of-quota tariffs, ad valorem and specific tariffs, and the tariffs from the safeguard clause. The modeling of these price support instruments basically follows other CGE approaches (see for instance Fol mer et al., l 995; [START_REF] Bach | Agricultural and Economy-Wide Effects of European Enlargement: Modelling the Common Agricu ltural Policy[END_REF]van Meij i and van Tongeren, 2002). On the other hand, we depart from CGE representations of the set aside requirements which generally capture them with a factor neutral supply shock. We specify a new derived demand in the land market which is determined as a fraction (the set aside rate) of land derived demands of ail arable crop activities.

3. Modeling of the bovine cattle sec/or and policy

The EU beef CMO is very complex, w ith different premiums on bovine animais. Fortunately we have been able

to define most of them using again the SPEL database. Our mode) details the following cattle activities: Dairy cows, Suckler cows, Beef calf, Calf rearing, Heifers and Bulls and Steers. They are ail multi-product activities (producing bovine cattle, organic fertilizers, eventually milk, calfs, ... ) where we generally assume fixed relationships between the different outputs. One particular exception is the heifer activity where heifers may enter the dairy cow herd o r the suckler cow herd or may be slaughtered. We model this arbitrage with a CET fonction and calibrate it in o rder to target a bovine cattle supply price elasticity. Ail these activities use feed ingredients (both concentrated and fodders), a labor/capital bundle as well as animais. Again all these activities are modeled in the same way and we now focus on the suckler cow activity.

The suckler cow activity offers four type of products (bovine cattle, calves, suckler cows and organic fertilizers) using feed ingredients, labor/capital, other inputs (veterinary) and the initial suckler cow herd. We assume some substitution possibilities between feed ingredients (Mahé and Munk, 1987) and again use a latent separability approach. Ail other inputs (including the suckler cow herd) are used in fixed proportions.

Regarding the beef premiums, this activity was only eligible to the SCP and the extensification premium in the year 1995. We mode) both as a subsidy to the use of suckler cow herd at the initial point. In this initial year, the suckler cow herd is lower than the quota and thus we assume a fully coupled input subsidy. However it is important to allow our mode) to endogenously define some non-subsidized suckler cows. ln that respect we implement a complementary approach which can be explained as follows. The program of the representative producer of the suckler cow activity is given by:

Max P.(SCI + SC2 )-(PSC -SCP ).SC! -PSC.SC2 -C(SCI + SC2; W) SCl,SC2 slt SCI $ QSCP
where SC! stands for subsidized suckler cows, SC2 non subsidized or over quotas suckler cows, P an appropriately weighted output price, PSC the market price of suckler cows, SCP the unit SCP, C( ) the cost fonction which includes ail input costs except the cost of acquiring suckler cows and which depends on prices of inputs W , QSCP the quota level. ln the initial situation, SC2 is null but it may become positive in the baseline depending on the evolutions of output prices and costs. First order conditions ofthis program are:

P -(PSC-SCP) -Cm(SCl + SC2;W) -À$ 0 ..L SCl~O P -PSC -Cm(SCI + SC2;W) $ 0 ..L SC2 ~ 0 SC! -QSCP $ O ..L À ~ 0
where Â. is the dual value attached to the quota constraint. These conditions, implemented in our mode), imply that if non subsidized suckler cows are positive, then the SCP simply gives a rent to SCP quota owner. On the other hand, if the suckler cow herd is lower than the quota, then the SCP is folly coupled to the input use and to production. Current modeling of the SCP does not take into account of the SCP quota in this manner but only implicitly by reducing the unit SCP. They implicitly assume that the suckler cow herd is determined by the fo llowing condition:

P-(PSC-ASCP) -cm(SC;W)= 0

where ASCP is the average unit SCP. This condition implicitly states that ail suckler cows are subsidized and obviously removing (or reducing) the SCP will necessarily have some production effects. ln the simulation below, we will contemplate the two specifications where the second may be viewed a special case of the former with an infinite SCP quota level.

Basically we develop the same modeling for the bull and steer activity and the SBP and again will explore in the simulation section the two alternative specifications. As far as the slaughter premium is concerned, it has been introduced with the Agenda 2000 and necessarily is null in our initial database. When defining the baseline, we will assume that this subsidy is coupled to the production of bovine cattle. Like the two other premiums, there are some cei lings. They are much more difficult to implement in our modeling framework because many activities benefit from this new premium. We only check after simulations whether aggregate quota levels are overcome or not. Finally given the lack of details regarding the extensification premium and the national envelopes, we assume that they supplement the SCP and SBP using 1995 percentages. Again our mode! includes the price support instruments. We just underline here that they are defined both at the animal and meat levels.

Experiment design and results

Definitions

Our main objective in this paper is to examine the sensitivity of CAP MTR impacts to the modeling of Agenda 2000 direct payments. The modeling of these payments are one element which allows to define our baseline. So our sensitivity analysis requires the building of different baselines. We will consider in this paper two baselines which nevertheless share some common assumptions on the evolution of non policy exogenous variables and non direct payments policy variables.

ln both cases, our assumptions are designed with the intent of representing the EU economy in 2008. The most crucial ones in the context of this paper are the followings. We always assume that the marginal productivity of ail inputs of arable crop activities increases by 1.5% per year. This implies for instance that, ail other things being equal, yields per hectare increase by 1.5% per year. We also assume a 1.5% increase of milk cow yields and the marginal productivity of ail feed ingredients in ail animal activities increase by 1 % annually. On the macro-economic side, the euro is assumed to stabilize around 1.05 against the US dollar. As far as changes in dietary patterns are concerned, we assume a 2% annual decline in beef consumption, compensated by a 1 % increase of white meat consumption. As regard world market conditions, we rely on F APRI 2004 projections of world market prices in order to scale the intercept parameters of our export demand and import suppl y functions.

lt must be clear at this stage that the baseline levels ofyields per hectare, domestic and world prices, productions and demands, ... , depends on ail these exogenous factors.

Last important exogenous variables for the definition of the baselines are agricultural policy parameters. We implement the Agenda 2000 CAP reform white maintaining international trade rules (for instance possibilities of export subsidies). This implies in particular that cereal interventions decrease by 15%, that the set aside rate is fixed at 10% and that unitary arable crop direct payments are increased by 16.7% in case of cereals (from 54 to 63€/ton of reference yields) and decreased by 33% in case of oilseeds (from 94 to 63€/ton of reference yields).

On the dairy markets, we implement a 2.4% increase of milk quotas, a 15% reduction of the intervention prices of butter and skimmed milk powder, the introduction of a coupled dairy payment of 35.5€/ton of milk. On the beef markets, we implement a 20% reduction of the beef intervention price, an increase of the SCP from 145 to 200€ per suckler cow, an increase of the SBP from 109€ to 210€ per animal, the introduction of a 80€ per adult bovine cattle slaughtered and 50€ in case of calf. Finally, we assume that the extensification premium and the national envelopes will translate in a top up of the SCP by 110€ per suckler cow.

We now explicit the differences between the two baselines. ln the first one, we adopta standard approach for the modeling of the Agenda 2000 direct payments where we assume firstly that the arable crop direct payments will be fully capitalized in land values at the 2008 horizon (the 30% become 100%), secondly that beef premiums are not constrained by individual or aggregate ceilings. Hereafter we will cati it the standard modeling which tends to represent current modeling of Agenda 2000 direct payments. In the second one, hereafter labeled an alternative modeling, we assume firstly that the arable crop direct payments are partly capitalized in land (50%)

and secondly that beef premiums are granted to a reduced number of animais ( 10824 thousands suckler cows in case of the SCP, 8453 thousands male animais in case of the SBP).

At this stage several comments are in order. The 50% figure assumed in the alternative modeling may be highly debated and we try now to motivate this choice. Our purpose in this paper is to test the sensitivity of CAP MTR to the modeling of Agenda 2000 direct payments. Our opinion is that a particular sensitivity analysis is useful when one considers significant differences between different options. This suggests a quite low degree of capitalization. On the other hand, the sensitivity analysis must still be relevant in the sense that the varying parameters must still be consistent with other modeling assumptions. We explain before that the capitalization of arable crop direct payments into land may take time for a variety of reasons ; hence the baseline value can not be lower than the initial value (30%). The 50% figure seems to us a tradeoff between these two arguments. The alternative modeling of the beef premiums may be also highly debated. For instance, the quotas on premiums may be introduced in many different manners, with the possibility of a cross-subsidy between in-quota and outof quota animais. Again our objective is to test in a rather radical but still plausible way the modeling of these beefpremiums and it seems tous that the two modeling alternatives are a priori attractive.

Up to now, we only present the assumptions which define our baselines. lt remains to describe the CAP MTR scenarios. Like many other CAP MTR analysis, we will focus on the measures of market price support and the decoupling and will ignore the issues regarding mandatory cross-compliance, modulation and financial disciplines. We always assume a 10% decrease of the butter intervention prices. Regarding decoupling, we face one significant issue with our EU 15 mode] because the CAP MTR allows Member States to maintain part of their Agenda 2000 direct payments. Choices differ by Member States and consequently the EU 15 levels of remaining Agenda 2000 direct payment are endogenous. ln our simulations, we assume that Agenda 2000 arable crop direct payments are reduced by 90%, that the slaughter premium on adult animais by 80%, the SCP by 50% and the SBP by 90%. Furthennore we assume that the new SFP has no market effects, a highly questionable but common assumption. We apply these percentage reductions equally in our two baselines.

Results

By nature ail CGE results are interrelated but in order to simplify the analysis we will focus first on the impacts on arable crop markets and activities and then turn on those on the beef markets and activities. Table Sa) reports our results on the soft wheat market and activity using the standard approach white table Sb) reports the same results with the alternative modeling of Agenda 2000 direct payments. In bath cases, the implementation of the CAP MTR induces a decrease of soft wheat production, by 1.6% with the standard specification, by as much as 7.3% with the alternative one. Our standard result is rather simi lar to the average of available results ( 1.8% reduction, cf. Table 1). By contrast our alternative result is quite stronger than the largest available result (6.0%

with the GT AP mode!). These results suggest that the modeling of Agenda 2000 direct payments has a significant influence on the CAP MTR impact on soft wheat production.

In fact it appears in our analysis that the soft wheat area decreases by similar percentages following the CAP MTR (by 9% and 7.4% respectively). ln bath cases, soft wheat land rent decreases significantly due to the strong reduction of arable crop direct payments. In fact arable land shifts from the cereals and oilseeds activities to the sugar beet activity and the fodder crop on arable land activity (again due to a leveling of unitary direct payment across activities) This acreage reduction is significantly compensated by an increase of yields in our standard approach (8.1 %), which is an original result of our analysis and may be explained as follows. In this standard modeling of Agenda 2000 direct payments, we assume full capitalization of arable crop direct payments into land in the baseline. The net price of land for the soft wheat activity is very low and farrners have no incentives to intensify in this baseline. When the CAP MTR is implemented, this net price increases because the absolute reduction of land rent is lower than the absolute reduction of unit direct payment (due to the reallocation of land). Hence we observe an intensification with respect to land in the soft wheat activity because we allow some substitution between land and other inputs. This is apparent for example in the marginal effects of the CAP MTR on the use of pesticides or fertilizers.

By contrast the CAP MTR leads to very marginal yield effects (0.1%) when we adopt the alternative modeling of Agenda 2000 direct payments. This may be explained as follows. The net price of land for the soft wheat activity also increases in that case but the net price of the labor/capital bundle does so simultaneously because we strongly reduce that part of Agenda 2000 direct payments which was perceived as a labor/capital subsidy. These two effects compensate each other. Ail inputs mainly decrease through a contraction effect (for instance, the use of pesticides decreases by 6.9%).

Ali results mentioned so far are equilibrium resu lts which capture many impacts. ln particular, when the domestic production significantly decreases following the CAP MTR "decoupling", this puts some pressure on domestic prices and/or on trade. As expected, with the standard approach, the market impacts are quite limited ;

for instance, the domestic and world prices increase by 0.3%. They are much pronounced with the alternative approach: these prices increases by 6% (6€/ton) and EU experts decreases by 22.9% (4.5 MT).

[Insert Tables 5)

Let's turn to the impacts on beef markets and sectors (Tables 6a and6b). Again, with our standard modeling of Agenda 2000 direct payments, our simulated impact of the CAP MTR on beef production (3.6% reduction) nearly equals the average of avai lable estimated impacts (3.2%). More generally most of our standard results are in line with average ones: our baseline level of the suckler cow herd is 12974 thousands cows (compared to 12433) and our reduction ofthis herd following the CAP MTR is 7.4% (compared to 7.7%). The main exception is the price effect where we obtain larger figures (10% increase compared to 5.5%) because we assume more inelastic demand fonctions. Like ail other studies, we obtain a more extensive bovine production. Green fodder areas increase by 6.7% (not reported in table 6a), mostly on arable land.

Once we depart from this standard approach where ail animais are subsidized, impacts are much more different.

One must first note that the baseline suckler cow herd is now much lower (11361 thousands cows) and out-ofquota suckler cows represent 4.7% of the total herd. In that case, the SCP only gives some rent to the owner of the SCP quotas. In the economic account, these rents are included in other costs. This is the same case for the SBP (not reported in Table 6b). On the other hand, total claims of the slaughter premium are lower than the aggregate ceilings. This last subsidy is then coupled to the production of both adult bovine animais and calves.

When we implement the CAP MTR on this alternative baseline, notably the reductions of ail these premiums, we find a small decrease of beef production (1.2%). This reduction mainly results from the decrease of the slaughter premium while the reductions of both the SCP and the SBP have no market effects. We still obtain a more extensive bovine production because green fodder areas still increase but this shift is much lower than previously. As expected, this lower production impact goes with smaller market effects. For instance, beef price increases by 3.2% compared to 10% with the standard approach.

[Insert Tables 6)

Concluding comments

The EU adopts once again in June 2003 a new reform of its farm policy with a new step toward the decoupling of farm income support instruments. Available impact studies find that this reform will reduce production incentives, substantially for beef and to a lesser extent for arable crops. Ali these studies assume that the Agenda 2000 arable crop direct payments are already mostly decoupled while beef premiums are much more linked to production. Our main objective in this paper is to test the robustness of these results to this questionable modelling on Agenda 2000 direct payments. ln particular we hypothesize that Agenda 2000 arable crop direct payments may not be fully capitalised in land values ; instead they still support farm labor and capital. We also allow the possibility that some bovine animais are not subsidised, a fact observed for many years now. This sensitivity analysis is performed using a detailed CGE mode! for the EU I 5 economy which allows a precise representation of CAP instruments.

Our analysis reveals that the negative impacts of the CA P MTR on the arable crop and beef productions is robust to the modeling of Agenda 2000 direct payments. Also robust is the positive impact of this reform on the extensification of the beef production. On the other hand, our analysis shows that decoupling effects may be higher on the arable crop markets than in the beef markets. With the alternative modeling of Agenda 2000 direct payments, the CAP MTR induces a 7.3% reduction of soft wheat production (and a 6.0% price increase) and "only" a 1.2% reduction of beef production (and a 3.2% price increase). Our analysis also shows that the arable crop production may become more intensive because the net land prices go up for these activities.

From a political point of view, these results may have some serious implications. Firstly, they suggest that it is high ly critical to correctly represent ail policy instruments when assessing a policy. Depending on the way one models the beef premiums ceilings, the CAP may appear mostly decoupled or highly coupled to this production.

In a more prospective view, this suggests that one must take care of ail cross compliance rules when measuring the consequences of the new single farm payment. More generally, one must carefully consider ail eligibility rules of green box measures and certainly not focus only on their positive production impacts through wealth or dynamic effects. Secondly, if one is ready to accept that Agenda 2000 arable crop direct payments are not fully capitalised in land values, this suggests that the CAP MTR effectively makes a progress towards decoupling for these activities: EU farmers are no longer required to produce in order to receive the SFP, to the contrary of Agenda 2000 direct payments. It seems to us that this is much less evident in the case of the USA (mainly due to the history of the USA farm policy and the expectations of farmers of the possibility to update their base acreages). On the other hand, the fact that the EU allows each Member State to maintain part of Agenda 2000 direct payments softens this shift towards decoupling and thus the EU may still concentrate some criticisms of developing countries.

From an academic point of view, our analysis clearly relies on some modelling assumptions which warrant further investigations (for instance how to mode) the SFP). Our results suggest that understanding the functioning of land markets (and more generally farm labor and capital markets) in the EU must be a top priority. Equally important is to reconsider the econometric estimations of production elasticities because they directly determine the market impacts offarm income support instruments. Results between the two options differ significantly only for beef. We thus provide for these variables the extremes.

f) From [START_REF] Jensen | lmpacts of the Eastern Europe Accession and the Mid-Term CAP Reform[END_REF]. We report results from the partial decoupling simulation.

g) From [START_REF] Chantreuil | The Luxembourg Agreement Reform of the CAP: An analysis using the AG-MEMOD composite mode![END_REF]. 4397 (-2.2%) 4700 (-4.2%) For ail variables, first figure corresponds to 1995 initial point, the second to the baseline (in parentheses the difference with the initial point) and the third to the CAP MTR sim ulation (in parentheses the difference with the baseline)

  the European Council agreed on a new reform of its Common Agricultural Policy (CAP). This reform, decided in the context of a Mid Term Review (MTR) of the Agenda 2000 CAP reform of I 999, contains

  Our model is a static, single-country, multi-sector GE model of the EU 15 economy. lt is neo-classical, assuming perfect competition in ail markets and specifying constant returns to scale technologies. Investment is savings driven and balance of payment equilibrium is ensured by financial flows. Two exchange zones are considered, the first one being represented by the 10 new Member States that joined the EU on May 2004 and the second being the Rest of the World (RoW). The EU is potentially a large country in the world market for agricultural and food products in the sense that trade flows affect other regions' export prices through a series of export demand and import supply functions. ln addition to the modeling of the CAP instruments (see below), this mode! is original on the three following aspects. The first original feature of the model is the disaggregation of the EU economy into activities and commodities. The model identifies 75 products and ail major economic agents operating on the food chain: agriindustrial sectors, agricultural sectors, food processing industries, food retailers, traders, as well as domestic consumers. This huge distinction allows to capture major backward and forward linkages across sectors. For instance, the mode! distinguishes organic fertilizers which are produced by animal activities and used by crop activities. Un like most CGE models which are based on the GTAP database, it relies on origi nal data and a Social Accounting Matrix calibrated for the year 1995. Main sources of this SAM are Eurostat database (SPEL, COMEXT, COSA, ... ) and FEOGA/WTO notifications for policy variables.

( a )

 a : figures obtained by dividing total Agenda 2000 arable crop direct payments by effectively eligible areas. (b): figure for new rents. (c): figure for England.

Table 1 : Selected published impacts of the CAP MTR on EUIS markets (in percentages from the baseline) and modeling assumptions

 1 Wheat does not include durum wheat. The OECD performs two simulations, one with full decoupling and one with minimum decoupling.

	Madel	CAPRI a)	GOLDb)	FAPRI c)	ESIM d)	AGLfNK e)	GT/\Pf)	AGMEMOD	Average
								g)
			Average
	Ycars ofcomparison	2009	2010-20 14	20 10	2010	2008	2013	20 10
	Cereal production	-5.7	Na	Na	-0.6	Na	-6.0	Na
	Wheat production	-4.3	Na	-0.3	-0.2	-0.5	-6.0	na	-1.8**
	Wheat area	-4.6	-1.1	-0.3	-0.9	-0.5	na	-0.1
	Wheat yiclds	0.3	na	0	0.7	0.0	na	na
	Wheat price	6.9	2.0	0.6	0.1	-0.1	na	0.2	1.6
	Beef production	-4.4	-2.2	-1.9	-1.9	-0. 1~-0.6	-7.1	-4.5	-3.2***
	Suckler cow hcrd	-9.5	-10.8	-8.2	-6.8	na~-3 .2	na	na	-7.7***
	Milk cow herd	-0.4	na	-0. 1	1.0	na~-0.9	na	na
	Beefprices	7.8	5.8	4.5	6.0	0.5~2.7	na	6.0	5.5***
	Pork production	-0.2	0.3	0.2	0.5	0.1	0	-0.1
	Poultry production	0.4	0.3	0.4	0.6	0.0	0	-0.1
	Milk production	0.1	0	0	0.1	0. 1	-0.7	0.0
	Milk price	1.1	-1.8	-0.4	-8.8	-2.6	na	na
	Modeling assumptions:
	Coupling factor of Agenda 2000
	arab le crop premiums*	l	0.5	0	na	0.14	NR	na
	Coupling factor of Agenda 2000
	beef premiums*	1	>0.5	na	na	Na	NR	na
	Baseline suckler cow herd (000
	heads)	13979	12120	12895	11758	11414	Na	Na	12433***
	Na: non available, NR: Non relevant
	* : Figures in italics reflect our understanding of the underling modeling framework as described in the mentioned papcrs.
	**: For the GOLD and AGMEMOD bascd results, we assume that production effects are equal to area cffects.

***: For the AGLINK based results, we use minimum decoupling figures.

Table 2 . Land rents and Agenda 2000 arable crop direct payments (€/ha)

 2 Agriculture in the European Union, Statistical and economic information, various years.

	Land rents	Per hectare direct payments (a)

Table 3 . Beef direct payments and production in the EUlS

 3

		2000	2001	2002	2003
	Budget exRenditures (M€)
	Suckler cow premium	1776	1977	2157	2225
	Special beefpremium	1530	1788	1967	1945
	Slaughter premium	494	1184	1710	1718
	Extensification premium	913	891	1018	989
	Additional payments	148	322	483	483
	Production and guota levels (000
	heads)
	Suckler cow quota	10824	10824	10824	10824
	Suckler cow herd	12150	11860	11770	11730
	Delivered premiums	9864	10242	10281	na
	Adult slaughter premium quota	na	23494	23494	23494
	Adult slaughtering	na	18220	19075	na
	Calf slaughter premium quota	na	5984	5984	5984
	Calf slaughtering	na	2578	3084	na
	Male adult premium quota	9378	8453	8453	8453
	Delivered premiums	10837	10550	10689	na
	Male adult slaughtering	10192	10442	10353	10164

Source: www.ofival.fr and European Comm1ss1on, FEOGA expendttures

Table 4 .

 4 Calibration of the soft wheat sector.

	a) Initial data
	Physical characteristics
	Production					80080 MT
	Area					13358 Mha
	Yields					6 MT/ha
	Receipts
	Market					10557 M€
	Direct payment					4248 M€
	Expenditures
	Seeds					723M€
	Fertilizers					2242 M€
	Pesticides					1239 M€
	"Value added"					10601 M€
	Value added and direct payment decomposition
	Land rents					2293
	Land direct payment				1274
	Labor/capital rent					8308
	Labor/caoital direct oavment			2974
	b) Initial Hicksian demand price elasticities
			Organic Organic Organic Minerai Minerai Minerai		Labor/
	Land	nitrogen phosphate potassium nitrogen phosphate potassium Pesticides Capital
	Land	-0.090	0.004	0.003	0.002	0.008	0.003	0.002	0.013	0.054
	Organic nitrogen	0.010	-0.739	0.045	0.036	0.42 1	0.042	0.028	0.101	0.054
	Organic phosphate	0.010	0.064	-0.560	0.036	0.126	0.140	0.028	0.101	0.054
	Organic potassium	0.010	0.064	0.045	-0.766	0.421	0.042	0.028	0.101	0.054
	Minerai nitrogen	0.010	0.213	0.045	0.121	-0.6 14	0.042	0.028	0.10 1	0.054
	Minerai phosphate	0.010	0.064	0.151	0.036	0.126	-0.571	0.028	0.101	0.054
	Minerai potassium	0.010	0.064	0.045	0.036	0.126	0.042	-0.479	0.10 1	0.054
	Pesticides	0.010	0.034	0.024	0.019	0.067	0.022	0.0 15	-0.247	0.054
	Labor/Capital	0.010	0.004	0.003	0.002	0.008	0.003	0.002	0.013	-0.046

Table 6 a

 6 ). Impacts on beef market and suckler cow activity with the STANDARD modeling of Agenda

	2000 direct oavments
	Market		Technology			Econ account
	Production	7300	Suckler	cow	109[2	Market receipts	12556
		6704 (-8.2%)	herd		12794 (17.2%)			16108 (28.3%)
		6463 (-3.6%)			11846 (-7.4%)			15935 (-1.1%)
	Imports	177	Fodder on arable	544	SCP		1975
		160 (-9.4%)	land		743 (36.5%)			3636 (129.8%)
		166 (3.2%)			78 1 (5.2%)			1683 (-53.7%)
	Consumption	6738	Fodder on non	1211	Slaughter		0
		6809 (1.1%)	arable land		1292 (6.7%)	premium		190
		6578 (-3.4%)			1196(-7.5%)			35 (-8 l.5%)
	Experts	707 0 (-100%)	Labor/capital bundle	431 8 5063 ( 17.2%)	Fodder costs	1755 2296 (30.8%)
		0 (--)			4687 (-7.4%)			1721 (-25.1%)
	Domestic prices	3500				Other	input	8458
		3126 (-1 0.7%)				costs		10707 (26.6%)
		3437 (10.0%)						10313 (-3.7%)
	World prices	1393				Laber/capital	431 8
		1915 (37.4%)				rent		6931 (60.5%)
		1915 (0.0%)						5632 (-18.7%)

Table 6 b

 6 ). Impacts on beef market and suckler cow activity with the ALTERNATIVE modeling of

	AQenda 2000 direct oavments
	Market		Technology			Econ account
	Production	7300	ln quota suckler	109 12	Market receipts	12556
		6398 (-1 2.4%)	COW		10824 (-0.8%)			17127 (36.4%)
		6320 (-1.2%)			10824 (0.0%)			16452 (-3.9%)
	Imports	177 167 (-5.4%)	Out of quota suckler cow	--537	SCP		1975 3076 (94.4%)
		169 (1.1%)			291 (-45.8%)			1538 (-50.0%)
	Consumption	6738 6516 (-3.3%)	Suckler herd	cow	10912 11361 (4.1%) premium Slaughter		0 [60
		6442 (-1. 1%)			1111 5(-2.2%)			32 (-80.0%)
	Experts	707 0 (-100%)	Fodder on arable land	544 746(37. 1%)	Fodder costs	1755 1769 (0.8%)
		0 (--)			753 ( 1.0%)			[587 (-10.3%)
	Domestic prices	3500	Fodder on non	1211	Other	input	8458
		3544 (1.3%)	arable land		1 11 9 (-7.6%) costs		13688 (61.8%)
		3656 (3.2%)			1113 (-0.5%)			11748 (-14.2%)
	World prices	1393	Laber/capital	43 18	Laber/capital	4318
		1915 (37.4%)	bundle		4496 (4.1%)	rent		4906 ( 13.6%)
		1915 (0.0%)

Note that Balkhausen et al. use a modified version of the ESIM model (with new product and country coverage) and that the impacts of the CAP reform in the central case greatly differ from those derived by the European Commission using an older version ofthis model (results reported in table 1).

The 6% assurnption cornes from the PEM model defined on arable crops only[START_REF] Dewbre | The transfer efficiency and trade effects of direct payments[END_REF]. By definition, this figure does not take into account that the eligible area to the SFP is fixed and is not restricted to arable crops.

The interested reader may refer to papers written by INEA researchers (www.inea.it).

In a longer working paper, Jensen and Frandsen (2003) implicitly recognize that there might be some issues by assuming full capitalisation into land of direct payments when they suggest to improve their cost structures, especially the factor cost shares in the land using sectors.

The three input case is general enough for our purposes. Extension to the multi-input case is straightforward.On the other hand, extension to a multi-output framework is more complex but does not alter the conclusions derived from our simplified framework.

To simplify the notations, we normalise the output price to unity.

Appendix 1. Theoretical implications of yield functions independent of direct payments.

Yields per hectare are often specified in PE models as fonctions of own producer price and a trend capturing the impact of technical change. The impacts of area direct payments on production then only occur through the land allocation and they do not appear in yield fonctions. To elicit the economic implications of these specifications, consider the case of a mono-product firm employing three inputs, including land. 5 Production is denoted by y, uses of input one and two by x, and x 2 respectively, and the amount of land by /. Producer prices related to these variables are respectively denoted by p , w, , w 2 and w 1 . These producer prices equal market prices corrected by eventual taxes/subsidies (for instance, output subsidies, input taxes, area direct payments, ... ). We assume that ail these prices are taken as given for the producer. Technological constraints faced by this firm are represented by a production fonction satisfying usual theoretical requirements (positive, non decreasing in input quantities, twice continuously differentiable and concave). As usual in the production theory, this firm chooses the levels of inputs and output in order to maximise its profit. The maximisation program of the firm is then:

First order conditions ofthis program for an interior solution are:

The total differentiation of the first order conditions and the production fonction leads to the following system:

3 ), we obtain the comparative static of input and output optimal quantities 6 :

This denominator is negative due to the concavity of the production function. One can easily check that input derived demand and output supply functions are homogenous of degree zero with respect to input and output producer prices. The supply function is non decreasing in output producer prices. Finally, input derived demands are non increasing in their own producer prices. In particular, land derived demand is non increasing with the producer price ofland and by extension is non decreasing with the area direct payment.

In that simplified framework, yield labelled r is given by the ratio of output supply and land derived demand, so that its comparative static is given by:

Despite the restrictions on the production function, it is not possible to determine unambiguously the impacts of each producer price on y ield. For instance, let consider the output producer price effect to explain this ambiguity.

An increase of th is price would lead to an increase of production and simultaneously of land use if we assume that land is a normal factor. The total impact on yield depends of the relative strength of these two effects. If land derived demand is more output price responsive than other input derived demands, then it is likely that yield is decreasing in output producer price. Equation (A.8) also shows that yield depends on the land producer price, which includes the area direct payment. The expression ofthis effect is given by: :;, = ~/ ( (1, -; )1x1x/t2 X 2 -fx~x2 )+ f,1 (J,1x2 f <2l -fx ,J,,x, )+ f,2 (fx 1 x, f, 1 1 -fxi1fx,x 1 ))

= ~l ( / , -n ! , . J,, v . . ,,J •• , -J,,, 1,,,,). J,, V,,., J,,, -J,,,J,, ,,)J (A.9) Equation (A.9) shows that assuming that area direct payments do not influence yield requires the nullity of the right hand side. lt definitely occurs if there are no substitution between land and other input ( f x,I = 0, fx,, = 0)

and if the marginal productivity of land is constant and equal to the average productivity ( f, = y , or l equivalently, f, 1 = 0 ). These assumptions contradict previous empirical findings of these technological relationships (for instance, see Hertel et al., 1996). Moreover, we must note that, with such restrictions on the production technology, the denominator D is null and the system can only be resolved in terms of dx 1 ,dx 2 ,dy.

To sum-up, specifications used by PE models that assume no direct payments effects in yield fonctions implicitly impose strong restrictions on the production technology: no substitution between land and other inputs and constant marginal productivity of land. With these specifications, the potential impacts of area direct payments are not fully taken into account.


Michel Chevalier

Emilie Perrochon

Marie Tellier

Gérard Barbeau

Use of DMACA to visualise flavan-3-ols in grape berry skins (Vitis vinifera L., cv Cabernet Franc)

ou non, émanant des établissements d'enseignement et de recherche français ou étrangers, des laboratoires publics ou privés.