Full Decoupling (policy is fully decoupled if it does not influence production decisions of farmers and if it permits free determination of market prices. Importantly, both the shape and the position of the supply and demand curves should not be changed).
Effective full decoupling (Where policy results in a level of production and trade equal to that which would have occurred if the policy were not in place. Example would be a coupled payment combined with a quantitative restriction equal to the old production level).
Distinction may not have importance for equilibrium level for will affect response and adjustment path to future shocks.
Policies can be ranked according to their trade-distorting effects. From a producer perspective, defined as 1 minus the ratio of the production effect of the policy package over the production effect of the equivalent (in PSE terms) price increase.
In an uncertain world, where farmers are risk averse:
Wealth effects: Change in farmer's total wealth can affect his attitude to risk
Insurance effects: If policy reduces the total risk faced by the farmer (e.g. price stabilisation scheme) it will have positive effect on output
In a dynamic world:
Where there are capital market imperfections, any kind of income support – even decoupled – will be partially reinvested in agriculture.
Where there are expectations of a future policy change and farmer can hope to influence this (e.g. change in base acreage for a payments scheme) decoupled scheme can affect production.
Many of these ideas come together in the proposal for a bond scheme originally put forward by Stefan Tangermann. The bond scheme would convert existing direct payments into decoupled and transitory payments by allocating transferable bonds to the present generation of farm operators, with annual payments made to the bond owner.
The Commission CAP reform strategy was partly motivated by the belief that the Single Farm Payment would fall into the Green Box and thus be exempt from disciplines requiring further reductions in these payments. Whether this will be the case or not depends on a careful comparison of the criteria for measures to fall in the Green Box (as set out in Annex 2 of the WTO Agreement on Agriculture and interpreted by WTO dispute panels and the Appellate Body, particularly in the Brazilian challenge to US cotton subsidies). Swinbank and Tranter have raised some doubts about whether this will be the case or not. Clearly, at least some direct payments will continue to be partially coupled (and thus at least will be classified in the Blue Box - but would decoupled payments on the same land then be assumed to be Green Box compatible?). Other issues are that payments are linked to the number of hectares which a farmer 'farms' (even if no production is required) and that there remain some restrictions on the use to which land receiving payments can be put (permanent pasture cannot be ploughed and fruits, vegetables and permanent crops cannot be grown). Under the WTO cotton case, this was interpreted to mean that payments in the US which had a similar restriction were deemed not to fall into the Green Box because they still have an influence on farmers' production decisions.
To be added.
Decoupling
OECD, 2001. Decoupling: A Conceptual Overview, Paris.
Swinbank, A. and Tranter, R., 2005. Decoupling EU farm support: Does the new single payment scheme fit within the Green Box, The Estey Centre Journal of International Law and Trade Policy, 6, 1, 47-61.
Output and trade effects of the Mid Term Review
FAPRI, 2003. Analysis of the 2003 CAP Reform Agreement, Staff Report 2-03, Missouri (16 pp).
FAPRI-Ireland partnership, 2003, The Luxembourg CAP Reform Agreement: Analysis of the Impact on EU and Irish Agriculture, Teagasc Rural Economy Research Centre. There is an executive summary. Another summary can be found here. The conclusions were also presented at a meeting of the American Agricultural Economics Association under the title 'CAP Reform and the WTO: Potential Impacts on EU Agriculture' in 2004.
Dixon, J.and Matthews, A. 2006, Impact of the 2003 Mid-Term Review of the Common Agricultural Policy, ESRI Quarterly Economic Commentary Spring 2006, pp. 36-53.
The bond scheme
For information on the bond scheme, read
Swinbank, A. and Tranter, R., 2004. A Bond Scheme for Common Agricultural Policy Reform, CABI Publishing.
Beard, N. and Swinbank, A., 2001. Decoupled payments to facilitate CAP reform, Food Policy 26, 121-145 (full text copy can be downloaded from Trinity Library Local site)
(first half of paper is a review of direct payment compensation scheme proposals in the CAP including the MacSharry and Agenda 2000 reforms; second part of paper reviews the bond scheme proposal and some implementation issues)
Hennessy, T., 2004, Farm Level Adjustment in Ireland Following Decoupling, Paper to the Agricultural Economics Society Conference, 2004.
Breen, J., Hennessy, T. and Thorne, F., 2005, The effect of decoupling on the decision to produce: An Irish case study, Food Policy 30 (2005) 129–144 (can be accessed electronically through the Trinity Library eJournals)
Baffes, J., 2004, Experience with Decoupling Agricultural Support, University of Georgia Rod Ziemer lecture, April 14 2004.
(much of the paper reviews decoupling attempts in the US, EU, Mexico and Turkey, but also discusses the economics of decoupling)
Web resources
Implementation in Ireland. See Department of Agriculture and Food Agri Payments web page.
See Commission's CAP Reform website for summary and links to Commission Regulations. In addition to the documents and press releases mentioned above, it also contains contains links to six impact studies commissioned to determine the effect of decoupling on EU farm production and incomes. Read the press release summarising the results of these studies.
The OECD has a decoupling web site devoted to resources and studies it has carried out on the subject.