Public goods versus the farm price-cost squeeze: shaping the sustainability of the EU’s common agricultural policy
Abstract
There is a consensus that farmers are subject to farm price-cost squeeze (PCS) when commodity prices fall and costs of production rise long-term. Willard Cochrane was the first to examine this phenomenon, introducing the notion that farmers are on a market treadmill. PCS is still a principle economic problem in agriculture touching farms in all over the world. It results from flexible prices but also from monopsony structures where recipients of commodities seize the opportunity of suboptimal pricing. Many studies indicate increasing retail farm price spreads but this lacks empirical studies on the effects of different types of subsidies on PCS. This work attempted to model EU Common Agricultural Policy (CAP) impact on PCS using the Constant Elasticity of Substitution (CES) production function, specified as in most CGE models. However, the authors tested the assumption of flexible prices reacting to changes in productivity. This approach is novel, while supported with an input-output analysis used to precisely decompose price and volume (productivity) effects at the level of a FADN representative farm. The results help to shape CAP shedding light on the present treadmill mechanism and showing that provision of public goods may be a remedy for market imperfections, whereas decoupled payments have the opposite influence.
Keyword : sustainable development, environmental public goods, agricultural policy, CES function, productivity
How to Cite
Czyżewski, B., Matuszczak, A., & Miśkiewicz, R. (2019). Public goods versus the farm price-cost squeeze: shaping the sustainability of the EU’s common agricultural policy. Technological and Economic Development of Economy, 25(1), 82-102. https://doi.org/10.3846/tede.2019.7449
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Arellano, M. (1987). Computing robust standard errors for within group estimators. Oxford Bulletin of Economics and Statistics, 49, 431-434.
Asane-Otoo, E. (2016). Competition policies and environmental quality: an empirical analysis of the electricity sector in OECD countries. Energy Policy, 95, 121-223. https://doi.org/10.1016/j.enpol.2016.05.001
Bell, A., & Jones, K. (2015). Explaining fixed effects: random effects modeling of time-series crosssectional and panel data. Political Science Research and Methods, 3(1), 133-153. https://doi.org/10.1017/psrm.2014.7
Boháčková, I. (2014). Some notes to income disparity problems of agriculture. Agris on-line Papers in Economics and Informatics, 5(4), 2-11.
Barath, L., & Ferto, I. (2017). Productivity and convergence in European agriculture. Journal of Agricultural Economics, 68(1), 228-248. https://doi.org/10.1111/1477-9552.12157
Campiche, J. L., Bryan, H. L., Richardson, J. W., & Outlaw, J. L. (2006). Investigation of the cost-price squeeze for ındividual agricultural commodities. Paper prepared at Western Agricultural Economics Association Annual Meetings. Anchorage, Alaska. Retrieved 13 December 2018 from http://ageconsearch.umn.edu/bitstream/35357/1/sp06ca01.pdf
Chen, Z., Lent, R. (1992). Supply analysis in an Oligopsony model. American Journal of Agricultural Economics, 74(4), 973-979. https://doi.org/10.2307/1243195
Chen, Z., Huffman, W. E., & Rozelle, S. (2011). Inverse relationship between productivity and farm size: the case of China. Contemporary Economic Policy, 29(4): 580-592. https://doi.org/10.1111/j.1465-7287.2010.00236.x
Chodakowska, E., & Nazarko, J. (2017). Environmental DEA method for assessing productivity of European countries. Technological and Economic Development of Economy, 23(4), 589-607. https://doi.org/10.3846/20294913.2016.1272069
Ciaian, P., Kancs, d’A., & Espinosa, M. (2017). The impact of the 2013 CAP reform on the decoupled payments’ capitalisation into land values. Journal of Agricultural Economics, 69(2), 306-337. https://doi.org/10.1111/1477-9552.12253
Cochrane, W. (1958). Farm prices: Myth and reality. Minneapolis: University of Minnesota Press.
Coelli, T. J., Prasada Rao, D. S., Donnell, Ch. J., & Battese, G. E. (2005). An introduction to efficiency and productivity analysis. Armidale: Springer.
Czajanow, A. (1931). The socio-economic nature of peasant farm economy. In P. A. Sorokin, C. C. Zim mer man, C. J. Galpin (Eds). A systematic source book in rural sociology, (Vol. 2). Minneapolis.
Czajanow, A. (1966). The theory of peasant economy. New York: The University of Wisconsin Press.
Czajanow, A. (1991). The theory of peasant co-operatives. London: I. B. Tauris.
Czyzewski, B., Guth, M., & Matuszczak, A. (2018a). The impact of the CAP green programmes on farm productivity and its social contribution. Problemy Ekorozwoju – Problems of Sustainable Development, 13(1), 173-183.
Czyżewski, B., & Majchrzak, A. (2018). Market versus agriculture in Poland–macroeconomic relations of incomes, prices and productivity in terms of the sustainable development paradigm. Technological and Economic Development of Economy, 24(2), 318-334. https://doi.org/10.3846/20294913.2016.1212743
Czyżewski, B., Matuszczak, A., & Muntean, A. (2018b). Influence of agricultural policy on the environmental sustainability of European farming, Journal of Environmental Protection and Ecology, 19(1), 426-434.
Dudu, H., & Krsitkova, Z. S. (2017). Impact of CAP Pillar II Payments on Agricultural Productivity. JRC Technical Report. Luxembourg: Publications Office of the European Union. https://doi.org/10.2760/802100
Dürr, J. 2016. The political economy of agriculture for development today: the “small versus large” scale debate revisited. Agricultural Economics, 47(6), 671-681. https://doi.org/10.1111/agec.12264
EU Farm Accountancy Data Network [EUFADN]. (2017). Retrieved 10 October 2017 from http://ec.europa.eu/agriculture/rica/database/database_en.cfm
Freebairn, J. (2017). Effects of supermarket monopsony pricing on agriculture. Paper presented at 61st AARES Annual Conference, 7-10 February, University of Melbourne Brisbane, Australia.
Gabre-Madhin, E., Barrett, Ch. B., & Dorosh, P. (2002). Technological Change and Price Effects in Agriculture: Conceptual and Comparative Perspectives, (pp. 8-10). Washington, DC: International Food Policy Research Institute (IFPRI).
Galbraith, J. K. (1993). American capitalism, the concept of countervailing power. Rotledge: Taylor & Francis Group.
Gardner, B. L. (1992). Changing economic perspectives on the farm problem. Journal of Economic Literature, 30(1), 62-101.
Hayami, Y., & Herdt, R. W. (1977). Market price effects of technological change on ıncome distribution in semi subsistence agriculture. American Journal of Agricultural Economics, 59(2), 245-256. https://doi.org/10.2307/1240014
Heberton Evans Jr., G. (1967). The law of demand – the roles of Gregory King and Charles Davenant. The Quarterly Journal of Economics, 81(3), 483-492. https://doi.org/10.2307/1884813
Heinrichsmayer, W., & Witzke, H. P. (1991). Agrarpolitik Band 1: Agrarökonomische grundlagen. Stuttgart: UTB
Hertel, T. W., & Tsigas, M. E. (1997). Structure of GTAP. In T. W. Hertel (Ed.), Global Trade Analysis. Modeling and Applications. Cambridge: Cambridge University Press.
Hertel, T. W., Tsigas, M. E., & Narayanan, B. G. (2008). Primary factor shares. GTAP 7 Data Base Documentation, 12.A. Retrieved from https://www.gtap.agecon.purdue.edu/resources/download/4182.Pdf
Johnson, D. G. (2000). Reducing the urban-rural income disparity (Paper No. 00–07). Chicago IL: University of Chicago.
Kiryluk-Dryjska, E., & Beba, P. (2018). Region-specific budgeting of rural development funds – an application study. Land Use Policy, 77, 126-134. https://doi.org/10.1016/j.landusepol.2018.05.029
Latruffe, L., Bravo-Ureta, B., Moreira, V., Desjeux, Y., & Dupraz, P. (2011). Productivity and subsidies in European Union countries: An analysis for dairy farms using input distance frontiers. Paper presented at EAAE 2011 Congress Change and Uncertainty. Zürich, Switzerland.
Levins, R. A. & Cochrane, W. W. (1996). The treadmill revisited. Land Economics, 72(4), 550-553. https://doi.org/10.2307/3146915
Majiwa, E., Leeb, B. L. & Wilsonb, C. (2018). Increasing agricultural productivity while reducing greenhouse gas emissions in sub-Saharan Africa: myth or reality? Agricultural Economics, 49, 183-192. https://doi.org/10.1111/agec.12407
Mary, S. (2013). Assessing the impacts of pillar 1 and 2 subsidies on TFP in French crop farms. Journal of Agricultural Economics, 64(1): 133-144. https://doi.org/10.1111/j.1477-9552.2012.00365.x
Milczarek-Andrzejewska, D., Zawalińska, K., & Czarnecki, A. (2018). Land-use conflicts and the common agricultural policy: evidence from Poland. Land Use Policy, 73, 423-433. https://doi.org/10.1016/j.landusepol.2018.02.016
Millard, S., & O’Grady, T. (2012). What do sticky and flexible prices tell us? (Working Paper No. 457). London: Publications Group, Bank of England, 1-28.
Minviel, J. J., & Latruffe, L. (2014). Meta-regression analysis of the impact of agricultural subsidies on farm technical efficiency. In EAAE 2014 Congress ‘Agri-Food and Rural Innovations for Healthier Societies’ (Vol. 26). August.
Moss, C. B. (1992). The cost-price squeeze in agriculture: An application of cointegration. Review of Agricultural Economics, 14(2), 205-13. https://doi.org/10.2307/1349500
Mundlak, Y. (1978). On pooling time series and cross section data. Econometrica, 46(1), 69-85. https://doi.org/10.2307/1913646
The Organisation for Economic Co-operation and Development [OECD]. (2000). A Matrix Approach to Evaluating Policy: Preliminary Findings from PEM Pilot Studies of Crop Policy In the EU, the US, Canada and Mexico. OECD Directorate for Food, Agriculture and Fisheries Trade Directorate, Paris.
The Organisation for Economic Co-operation and Development [OECD]. (2017). Retrieved 12 October 2017 from https://data.oecd.org/gdp/gdp-long-term-forecast.htm#indicator-chart
Pawlak, K. (2018). Agricultural productivity, trade and food self-sufficiency: Evidence from Poland. The EE And The US. In Proceedings of the 27th International Scientific Conference ‘Agrarian Perspectives XXVII. Food Safety – Food Security’ (pp. 215-235). 20 September 2013, Prague, Czech Republic.
Rizov, M., Pokrivcak, J., & Ciaian, P. (2013). CAP subsidies and productivity of the EU farms. Journal of Agricultural Economics, 64(3), 537-557. https://doi.org/10.1111/1477-9552.12030
Schunck, R. (2013). Within and between estimates in random-effects models: Advantages and drawbacks of correlated random effects and hybrid models. The Stata Journal, 13(1), 65-76. https://doi.org/10.1177/1536867X1301300105
Shields, D. A. (2010). The farm price-cost squeeze and U.S. Farm policy. CRS Report for Congress: Congressional Research Service. Retrieved 13 December 2018 from http://nationalaglawcenter.org/wp-content/uploads/assets/crs/R40761.pdf
Staniszewski, J. (2018) Attempting to measure sustainable intensification of agriculture in countries of the European Union. Journal of Environmental Protection and Ecology 19(2), 949-957.
Tezcur, G. (2016). Ordinary people, extraordinary risks: participation in an ethnic rebellion. American Political Science Review, 110(2), 247-264. https://doi.org/10.1017/S0003055416000150
Tomek, W. G., & Robinson, K. L. (1981). Agricultural product prices. Ithaca, London: Cornell University Press.
Tweeten, L., & Zulauf, C. (2008). Farm price and income policy: lessons from history. Agribusiness, 24(2), 145-160. https://doi.org/10.1002/agr.20153
Vergopoulos, K. (1978). Capitalism and peasant productivity. The Journal of Peasant Studies, 5(4), 446-465. https://doi.org/10.1080/03066157808438057
Wooldrige, J. (2013). Introductory econometrics: A modern approach. South-Western: Cengage Learning.
Asane-Otoo, E. (2016). Competition policies and environmental quality: an empirical analysis of the electricity sector in OECD countries. Energy Policy, 95, 121-223. https://doi.org/10.1016/j.enpol.2016.05.001
Bell, A., & Jones, K. (2015). Explaining fixed effects: random effects modeling of time-series crosssectional and panel data. Political Science Research and Methods, 3(1), 133-153. https://doi.org/10.1017/psrm.2014.7
Boháčková, I. (2014). Some notes to income disparity problems of agriculture. Agris on-line Papers in Economics and Informatics, 5(4), 2-11.
Barath, L., & Ferto, I. (2017). Productivity and convergence in European agriculture. Journal of Agricultural Economics, 68(1), 228-248. https://doi.org/10.1111/1477-9552.12157
Campiche, J. L., Bryan, H. L., Richardson, J. W., & Outlaw, J. L. (2006). Investigation of the cost-price squeeze for ındividual agricultural commodities. Paper prepared at Western Agricultural Economics Association Annual Meetings. Anchorage, Alaska. Retrieved 13 December 2018 from http://ageconsearch.umn.edu/bitstream/35357/1/sp06ca01.pdf
Chen, Z., Lent, R. (1992). Supply analysis in an Oligopsony model. American Journal of Agricultural Economics, 74(4), 973-979. https://doi.org/10.2307/1243195
Chen, Z., Huffman, W. E., & Rozelle, S. (2011). Inverse relationship between productivity and farm size: the case of China. Contemporary Economic Policy, 29(4): 580-592. https://doi.org/10.1111/j.1465-7287.2010.00236.x
Chodakowska, E., & Nazarko, J. (2017). Environmental DEA method for assessing productivity of European countries. Technological and Economic Development of Economy, 23(4), 589-607. https://doi.org/10.3846/20294913.2016.1272069
Ciaian, P., Kancs, d’A., & Espinosa, M. (2017). The impact of the 2013 CAP reform on the decoupled payments’ capitalisation into land values. Journal of Agricultural Economics, 69(2), 306-337. https://doi.org/10.1111/1477-9552.12253
Cochrane, W. (1958). Farm prices: Myth and reality. Minneapolis: University of Minnesota Press.
Coelli, T. J., Prasada Rao, D. S., Donnell, Ch. J., & Battese, G. E. (2005). An introduction to efficiency and productivity analysis. Armidale: Springer.
Czajanow, A. (1931). The socio-economic nature of peasant farm economy. In P. A. Sorokin, C. C. Zim mer man, C. J. Galpin (Eds). A systematic source book in rural sociology, (Vol. 2). Minneapolis.
Czajanow, A. (1966). The theory of peasant economy. New York: The University of Wisconsin Press.
Czajanow, A. (1991). The theory of peasant co-operatives. London: I. B. Tauris.
Czyzewski, B., Guth, M., & Matuszczak, A. (2018a). The impact of the CAP green programmes on farm productivity and its social contribution. Problemy Ekorozwoju – Problems of Sustainable Development, 13(1), 173-183.
Czyżewski, B., & Majchrzak, A. (2018). Market versus agriculture in Poland–macroeconomic relations of incomes, prices and productivity in terms of the sustainable development paradigm. Technological and Economic Development of Economy, 24(2), 318-334. https://doi.org/10.3846/20294913.2016.1212743
Czyżewski, B., Matuszczak, A., & Muntean, A. (2018b). Influence of agricultural policy on the environmental sustainability of European farming, Journal of Environmental Protection and Ecology, 19(1), 426-434.
Dudu, H., & Krsitkova, Z. S. (2017). Impact of CAP Pillar II Payments on Agricultural Productivity. JRC Technical Report. Luxembourg: Publications Office of the European Union. https://doi.org/10.2760/802100
Dürr, J. 2016. The political economy of agriculture for development today: the “small versus large” scale debate revisited. Agricultural Economics, 47(6), 671-681. https://doi.org/10.1111/agec.12264
EU Farm Accountancy Data Network [EUFADN]. (2017). Retrieved 10 October 2017 from http://ec.europa.eu/agriculture/rica/database/database_en.cfm
Freebairn, J. (2017). Effects of supermarket monopsony pricing on agriculture. Paper presented at 61st AARES Annual Conference, 7-10 February, University of Melbourne Brisbane, Australia.
Gabre-Madhin, E., Barrett, Ch. B., & Dorosh, P. (2002). Technological Change and Price Effects in Agriculture: Conceptual and Comparative Perspectives, (pp. 8-10). Washington, DC: International Food Policy Research Institute (IFPRI).
Galbraith, J. K. (1993). American capitalism, the concept of countervailing power. Rotledge: Taylor & Francis Group.
Gardner, B. L. (1992). Changing economic perspectives on the farm problem. Journal of Economic Literature, 30(1), 62-101.
Hayami, Y., & Herdt, R. W. (1977). Market price effects of technological change on ıncome distribution in semi subsistence agriculture. American Journal of Agricultural Economics, 59(2), 245-256. https://doi.org/10.2307/1240014
Heberton Evans Jr., G. (1967). The law of demand – the roles of Gregory King and Charles Davenant. The Quarterly Journal of Economics, 81(3), 483-492. https://doi.org/10.2307/1884813
Heinrichsmayer, W., & Witzke, H. P. (1991). Agrarpolitik Band 1: Agrarökonomische grundlagen. Stuttgart: UTB
Hertel, T. W., & Tsigas, M. E. (1997). Structure of GTAP. In T. W. Hertel (Ed.), Global Trade Analysis. Modeling and Applications. Cambridge: Cambridge University Press.
Hertel, T. W., Tsigas, M. E., & Narayanan, B. G. (2008). Primary factor shares. GTAP 7 Data Base Documentation, 12.A. Retrieved from https://www.gtap.agecon.purdue.edu/resources/download/4182.Pdf
Johnson, D. G. (2000). Reducing the urban-rural income disparity (Paper No. 00–07). Chicago IL: University of Chicago.
Kiryluk-Dryjska, E., & Beba, P. (2018). Region-specific budgeting of rural development funds – an application study. Land Use Policy, 77, 126-134. https://doi.org/10.1016/j.landusepol.2018.05.029
Latruffe, L., Bravo-Ureta, B., Moreira, V., Desjeux, Y., & Dupraz, P. (2011). Productivity and subsidies in European Union countries: An analysis for dairy farms using input distance frontiers. Paper presented at EAAE 2011 Congress Change and Uncertainty. Zürich, Switzerland.
Levins, R. A. & Cochrane, W. W. (1996). The treadmill revisited. Land Economics, 72(4), 550-553. https://doi.org/10.2307/3146915
Majiwa, E., Leeb, B. L. & Wilsonb, C. (2018). Increasing agricultural productivity while reducing greenhouse gas emissions in sub-Saharan Africa: myth or reality? Agricultural Economics, 49, 183-192. https://doi.org/10.1111/agec.12407
Mary, S. (2013). Assessing the impacts of pillar 1 and 2 subsidies on TFP in French crop farms. Journal of Agricultural Economics, 64(1): 133-144. https://doi.org/10.1111/j.1477-9552.2012.00365.x
Milczarek-Andrzejewska, D., Zawalińska, K., & Czarnecki, A. (2018). Land-use conflicts and the common agricultural policy: evidence from Poland. Land Use Policy, 73, 423-433. https://doi.org/10.1016/j.landusepol.2018.02.016
Millard, S., & O’Grady, T. (2012). What do sticky and flexible prices tell us? (Working Paper No. 457). London: Publications Group, Bank of England, 1-28.
Minviel, J. J., & Latruffe, L. (2014). Meta-regression analysis of the impact of agricultural subsidies on farm technical efficiency. In EAAE 2014 Congress ‘Agri-Food and Rural Innovations for Healthier Societies’ (Vol. 26). August.
Moss, C. B. (1992). The cost-price squeeze in agriculture: An application of cointegration. Review of Agricultural Economics, 14(2), 205-13. https://doi.org/10.2307/1349500
Mundlak, Y. (1978). On pooling time series and cross section data. Econometrica, 46(1), 69-85. https://doi.org/10.2307/1913646
The Organisation for Economic Co-operation and Development [OECD]. (2000). A Matrix Approach to Evaluating Policy: Preliminary Findings from PEM Pilot Studies of Crop Policy In the EU, the US, Canada and Mexico. OECD Directorate for Food, Agriculture and Fisheries Trade Directorate, Paris.
The Organisation for Economic Co-operation and Development [OECD]. (2017). Retrieved 12 October 2017 from https://data.oecd.org/gdp/gdp-long-term-forecast.htm#indicator-chart
Pawlak, K. (2018). Agricultural productivity, trade and food self-sufficiency: Evidence from Poland. The EE And The US. In Proceedings of the 27th International Scientific Conference ‘Agrarian Perspectives XXVII. Food Safety – Food Security’ (pp. 215-235). 20 September 2013, Prague, Czech Republic.
Rizov, M., Pokrivcak, J., & Ciaian, P. (2013). CAP subsidies and productivity of the EU farms. Journal of Agricultural Economics, 64(3), 537-557. https://doi.org/10.1111/1477-9552.12030
Schunck, R. (2013). Within and between estimates in random-effects models: Advantages and drawbacks of correlated random effects and hybrid models. The Stata Journal, 13(1), 65-76. https://doi.org/10.1177/1536867X1301300105
Shields, D. A. (2010). The farm price-cost squeeze and U.S. Farm policy. CRS Report for Congress: Congressional Research Service. Retrieved 13 December 2018 from http://nationalaglawcenter.org/wp-content/uploads/assets/crs/R40761.pdf
Staniszewski, J. (2018) Attempting to measure sustainable intensification of agriculture in countries of the European Union. Journal of Environmental Protection and Ecology 19(2), 949-957.
Tezcur, G. (2016). Ordinary people, extraordinary risks: participation in an ethnic rebellion. American Political Science Review, 110(2), 247-264. https://doi.org/10.1017/S0003055416000150
Tomek, W. G., & Robinson, K. L. (1981). Agricultural product prices. Ithaca, London: Cornell University Press.
Tweeten, L., & Zulauf, C. (2008). Farm price and income policy: lessons from history. Agribusiness, 24(2), 145-160. https://doi.org/10.1002/agr.20153
Vergopoulos, K. (1978). Capitalism and peasant productivity. The Journal of Peasant Studies, 5(4), 446-465. https://doi.org/10.1080/03066157808438057
Wooldrige, J. (2013). Introductory econometrics: A modern approach. South-Western: Cengage Learning.