The impact of direct subsidies in Spain before and after the CAP'92 reform

Abstract

This paper focuses on the changes in farm efficiency as a tool for policy analysis. The methodology is applied to the introduction of direct payments (DP) and the price support reduction affecting large samples of individual farms with joint animal and vegetal production (comparing before and after CAP’92). The case study is justified for their relevance for Mediterranean forest and grazing land preservation in Spain. Using a non parametric method (DEA) we do not specify the production function of the farms, and can explain the impact of the direct payments on environmental adaptation and efficiency for animal orientated farms before and after the (DP) introduction in 1992 (CAP’92 reform). Even though the direct payments increased sharply after the CAP’92 reform, in general, the new direct payment system turns out to be insufficient to offset the fact that less environmentally friendly farms remain much more “efficient,” i.e. profitable for the farmer. The paper also studies the relationship of efficiency with other policy relevant factors such as economic size. The results show that after the CAP’92 reform, the subsidy schedule was even more correlated with farm size than before, which we find to be counterproductive.