1. IntroductionOn 12 October 2011 the

European Commission pre-sented a set of proposals forthe Common AgriculturalPolicy (CAP) for the period2014-2020. In particular,with proposal COM (2011)625 which includes rulesfor direct payments to farm-ers, it introduced a new pay-ment model replacing thecurrent single payment sche-me. The proposal suppliesnew instruments for reach-ing CAP objectives, whichnow give greater emphasisto the role of farmers in pro-tecting the environment.The single payment is di-vided into several compo-nents, the main ones are thebasic payment and the“green” payment. The“green” component, finan -ced through 30% of total di-rect payments, remuneratesenvironmental services andis based on three require-ments: crop diversification,maintenance of permanentgrassland and establishmentof an ecological focus area.The proposal includes re-gionalisation and a conver-gence of direct payments,with the objective of reducing income disparities betweenfarmers within Member States.

In Trilogue discussions, proposals for amendment havebeen put forward by the European Parliament and the

Council of the EU, whichattenuated the greeningrequirements, triggering aheated debate. Thechanges in the supportsystem could impact onfarmer behaviour and fi-nancial resources avail-able to the agriculturalsystem and, in particular,the processing tomatosector, where CAP pay-ments currently accountfor a big share of produc-er income. Regionalisa-tion and greening require-ments could thus nega-tively affect the economicperformance of processedtomato farms. This mightlead farmers to modify or-ganization of output andimpact on availability ofraw material for the entiresupply chain.

The objective of this pa-per is to evaluate the ef-fect of the Trilogue pro-posals for the CAP Post-2013 on Italian farmswith particular emphasison the processing tomatosector. It focuses on theeffect of “convergence”and regionalisation of di-rect payments as well asgreening. The three pro-

posals are assessed by a quantitative model based on Posi-tive Mathematical Programming (PMP) (Howitt, 1995;Paris and Howitt, 1998). This methodology captures the e-conomic information considered by farmers in taking pro-duction plan decisions, and makes it possible to predicttheir behaviour by varying the policy and market scenarios.The model is applied to farms in the Italian Farm Account-

A PMP model for the impact assessmentof the Common Agricultural Policy reform 2014-2020

on the Italian tomato sectorRoberto SOLAZZO*, Michele DONATI**, Filippo ARFINI**, Gaetana Petriccione*

AbstractThe recent reform of the Common Agricultural Policy (CAP) establishes a newpayment model mainly divided into a basic component and a greening component.This paper focuses on the effect of the convergence of direct payments and the threegreening requirements: crop diversification, maintenance of permanent grasslandand establishment of the ecological focus areas. The aim is to evaluate the effect ofdifferent proposals for the CAP Post-2013 on Italian farms, particularly on theprocessing tomato sector. Positive Mathematical Programming (PMP) is used tosimulate different hypotheses of convergence and greening as proposed by the Eu-ropean Commission, the European Parliament and the Council of the EU. Com-mission proposals are shown to have different impacts compared to the other two.Commission proposals would significantly influence the regional production plan,leading to big reductions in cereal production and farm income. Parliament andCouncil two proposals would have lower impact on arable crop dynamics. In termsof land use, the tomato sector is relatively unaffected by the reform, but the pay-ment convergence process significantly reduces tomato farm income.

Keywords: Cap reform, Greening, Positive mathematical programming, Process-ing tomato, Farmer behaviour.

RésuméLa récente réforme de la politique agricole commune (PAC) propose un nouveau mo-

dèle de paiement articulé autour d’une composante de base et d’une composante éco-

logique (verdissement). Cet article propose une analyse des effets de la convergence

des aides directes ainsi que des trois mesures de verdissement : diversification des cul-

tures, maintien des prairies permanentes et création des surfaces d’intérêt écologique.

L’objectif est d’évaluer l’effet des différentes propositions pour la PAC post-2013 sur

les exploitations italiennes, avec une attention particulière pour le secteur de la toma-

te industrielle. A l’aide d’un modèle basé sur la programmation mathématique positi-

ve (PMP), différentes hypothèses de convergence et de verdissement sont simulées,

compte tenu des propositions avancées par la Commission, le Parlement et le Conseil

de l’UE. Les résultats montrent que la proposition de la Commission aurait des effets

différents par rapport à celles du Parlement et du Conseil de l’UE, car elle influerait

d’une manière significative sur le plan de production régional, avec une réduction

considérable de la production de céréales et du revenu agricole. Les deux autres pro-

positions auraient, en revanche, un impact plus faible sur la dynamique des cultures

arables. En termes de changement de l’affectation des sols, dans tous les scénarios en-

visagés, le secteur de la tomate s’avère être relativement peu touché par la réforme,

mais le processus de convergence des aides réduit significativement le revenu des ex-

ploitations spécialisées dans cette culture.

Mots-clés: Réforme de la PAC, Greening, Programmation mathématique positive,

Tomate industrielle, Comportement des agriculteurs.

9

* National Institute of Agricultural Economics (INEA), Roma (Italy).** University of Parma, Department of Economics, Parma (Italy).

Jel Classification: C61, Q12, Q18

NEW MEDIT N. 2/2014

ancy Data Network (FADN) database which are located inthe plain of Emilia Romagna, one of the main productionareas of processing tomatoes in Italy. The assessment wascarried out at farm level using the FADN weighting systemin order to make the simulation results more consistent withthe production structure of the area. The mathematical pro-gramming model yields results differentiated according tothe various reform proposals in terms of changes in landuse, variation in farm production and the effect on the mainfarm economic variables (gross saleable production, totalvariable costs, CAP payments and gross margin). It is alsopossible to compare the impact of the reform on tomatofarms with the impact on other sectors.

This paper is organized as follows. Section 2 provides anoverview of the processing tomato sector in Italy and trendsduring recent years. Section 3 presents the main contents ofCAP reform 2014-2020, focusing on the new direct pay-ment pattern: internal convergence and greening require-ments as in the Trilogue proposals. Section 4 describes thePMP model used to assess the impact of the new CAP sce-narios. Section 5 applies the model in order to evaluate theimpacts of different policy scenarios resulting from the Tri-logue proposals. Section 6 puts forward some conclusions.

2. The processing tomato sectorIn Italy processing tomato is one of the most important

products in the fruit and vegetable sector and agriculture as awhole. In 2011 it covered almost 85,000 hectares and the out-put reached over 5 million tons. Italy is the leading Europeanproducer of processing tomato and the third largest in theworld, after California, which accounts for about one-third ofworld production, and China, which accounts for 18%. Italianprocessing tomato has a world share over 13%, and accountsfor one third of the entire Mediterranean area production.

In Italy, processing tomato accounts for more than onefifth of the entire fruit and vegetable production, and coversmore than 20% of the horticultural area (in open fields) andabout 7% of the Italian fruit and vegetable area.

Over the years, processing tomato production has showna fluctuating trend reflecting European and Italian agricul-tural policy, as well as climate and economic factors. In thelast decade in particular, there was a significant drop in pro-duction in 2002 due to adverse weather conditions, whichwas followed by a two-year period of big increments re-sulting from an increase in the tomato area and an im-provement of yields. The result was a peak of more than 5.8million tons in 2004 and a steady increase in stocks. To-gether with fluctuations in world prices, this explains theconsequent decrease in tomato production (Figure 1). Afterfurther increases recorded in 2007-2009, output in Italy in2011 returned to the level recorded in 2006.

The most recent CMO reform in fruit and vegetables in-troduced by Regulation (EC) No. 1182/2007 has integratedthe sector into the simple payment scheme since 1st Janu-ary 2008. For processing tomato, Italy opted for the three-year transition period (2008-2010) maintaining coupledpayments at 50% of the national ceiling until the end of2010. Fully decoupled payments, implemented since 2011,may partly explain the decline in tomato production. Nev-ertheless, thanks to the prices agreed with the processing in-dustry, which were higher than those in the period beforethe reform1, the reduction in output was not so large as itcould have been.

The processing tomato is cultivated in almost all regionsof Italy, but shows a high territorial concentration. Overall,nearly half of the processing tomato is produced in theSouth, another 44% is concentrated in the North, and onlythe residual 8% in the central regions. There are thus es-sentially two processing tomato basins accounting for over80% of production. The southern basin comprises mainlyPuglia, Campania and Basilicata and the northern basincomprises Emilia-Romagna, Lombardia, Piemonte andVeneto. Within these basins, two regions, Puglia and Emil-ia-Romagna, concentrate two-thirds of production. Al-though output has fallen over the past few years, Pugliaholds top position with nearly 1.8 million tons of process-

ing tomato produced in 2011, orone third of the Italian output.The province of Foggia in Pugliahas become the top productionarea in Europe, with more than1.6 million tons of processingtomato produced in 2011 and al-most twenty thousand hectarescultivated. This means that al-

Figure 1 - Trend of surface and production - processing tomato - Italy, 2001-2011.

Source: National Unions of Italian Producer Organisations, SIAN, SOP - Pomodoro Italia website(https://sites.google.com/site/pomodoroitalia)

1 For example, in northern Italy theprice negotiated within the frame-work contract, drawn up by the rep-resentative branches of producer or-ganizations and processing indus-tries, was EUR 88 per ton in 2011, a-gainst EUR 49 per ton (plus a quotaof EU support amounting to EUR27.76 per ton) in 2007.

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most two-thirds of the tomato produced in the southernbasin, and 30% of the Italian output, come from theprovince of Foggia (Figure 2).

Output in Emilia-Romagna is only slightly lower and ex-ceeded 1.7 million tons in 2011, a national share of 32%. Theprovince of Piacenza in Emilia-Romagna is the second area inItaly, with an output of 700,000 tons cultivated on nearly10,000 hectares. The output of Piacenza along with theprovinces of Ferrara and Parma accounts for one fifth of Ital-ian national output. Moreover, despite similar figures in termsof production and grown area, Emilia-Romagna exhibits avery high degree of specialisation, with almost half of the en-tire horticultural area covered by processing tomato. This per-centage reaches 90% in the province of Parma. In Puglia thepercentage does not exceed 20%; even in the province of Fog-gia the percentage, although higher, is only 41%.

Puglia and Emilia-Romagna, and in general the two pro-cessing tomato basins, display different characteristics asregards farm structure, production and supply chain organ-isation, the functioning of contractual relationships, the ty-pology of processing tomato, etc..The northern basin ischaracterized by larger farms and a higher level of mecha-nization than the national average, while the southern basinis composed of smaller farms. A further difference is foundin industrial processing: the northern area is characterizedby the presence of large self-processing cooperatives, whilethe southern area is characterized by a high number ofmostly small private companies. These differences could bedue to the fact that the Northern provinces boast a long tra-dition in tomato production and processing, and set up the“processing tomato district”, recently converted into a “re-gional inter-branch organisation”.

3. Direct payments and greening in the CAPReform Post-2013

The main strategic aims of the new CAP are sustainablefood production, balanced territorial development, and en-hancement of differentiation of agriculture and rural areas,the sustainable management of resources, ensuring the sup-ply of public goods and managing the effects of climate

change. Most of the CAP Post-2013 budget will be allocatedthrough direct payments whichwill continue to be the main in-strument of support for EUfarms. In order to make the dis-tribution of funds equitable notonly between Member States butalso between regions and farms,the Commission opted for the re-gionalisation and internal conver-gence of direct payments (Euro-

pean Commission, 2011a, b). In Italy, the redistributive effectsof these measures will depend on the criteria used to define“regions”. Administrative decentralization in the agriculturalsector and the management of financial resources in Italy forpast rural development programmes would suggest that exist-ing administrative regions will probably be used. It is clearhowever that there are other possible criteria for regionalisa-tion including division of the country according to aspectssuch as altitude, agricultural potential areas, intensive/exten-sive areas (De Vivo et al., 2012)2.

According to proposal COM (2011) 625, direct paymentswill be divided into several components. The two maincomponents are the basic payment, providing direct supportto farmer income, and the green payment, equal to 30% ofdirect payments. The green component is linked to the pro-duction of public goods that the beneficiaries of direct pay-ments are required to provide (“greening”). The EuropeanCommission has in fact emphasized the growing need for a‘greener’ farming which guarantees the conservation ofbiodiversity, soil fertility and water resources and whichcan act as a buffering agent against climate change.

The three mandatory requirements to be met in order toreceive the green payment are: crop diversification, mainte-nance of permanent grassland and allocation of 7% land asecological focus areas (EFA).

Crop diversification, according to the Commission pro-posal, concerns arable land that covers more than threehectares, excluding land not entirely used for grass produc-tion, left fallow or cultivated with crops under water (rice).In this respect, farmers are required to grow at least threecrops, each of them covering less than 70% and more than5%. Parliament and Council proposals raise the applicationthreshold to ten hectares. Where the arable land covers lessthan 30 hectares, the possibility of two crops has also beenintroduced, increasing the area allocable to the main crop to75-80%. The exclusion criterion with reference to the sur-face for grass production, left fallow or for crops under wa-ter has been amended and has been reduced to 75% of theeligible area. The main criticism of this measure is that thesimultaneous presence of three crops does not necessarilymean crop rotation. The requirement is in fact a complete-ly inadequate approximation of crop rotation, and does notensure agronomic and environmental improvement (De Fil-ippis and Frascarelli, 2012).

Figure 2 - Distribution of production of processing tomatoes by Region.

Source: Istat

2 For further information see the following website: PAC 2014-2020. Gli impatti regionali. Valutazioni dell’INEA (http://www. ri-ca.inea.it/PAC_2014_2020).

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The second requirement concerns the maintenance of per-manent grassland, and a limit (5%) on the conversion ofgrassland to arable crops. The main difference proposed bythe European Parliament in Trilogue discussions concernsthe maintenance of the land ratio under permanent grass-land and permanent pasture compared to the total agricul-tural area at national, regional or sub-regional level. TheCouncil proposal confirms the application at farm level, butproposes exceptions based on the ratio of permanent pas-ture to total agricultural area, and the presence of a moni-toring system of permanent grassland at national, regionalor appropriate sub-regional level. There are no significantchanges from the previous cross-compliance requirement,which concerned the maintenance of meadows and pasturesat national level (Povellato, 2012). This is thus the least re-strictive of the three measures for Italian farms, and com-pliance should not be particularly onerous.

The third requirement proposed by the European Com-mission is related to the allocation of 7% of land as ecolog-ical areas, excluding areas under permanent grassland. Thisis the most onerous obligation for Italy, especially in spe-cific farm contexts specialized in arable land. One of thecriticisms of the measure concerns the increase of land tak-en out of production. Since the 2007-08 price spike and thegrowing realization of the fragility of global food supplies,more emphasis has been placed on the need for Europe toincrease food production in the name of ‘food security’.This argument is used against the EFA proposal (Matthews,2013). Both the European Parliament and Council proposelowering the EFA percentage to 5% (7% possibly as a resultof the Commission’s evaluation report), and activationthresholds related to farm size. The Parliament and Councilalso suggest that the requirement needs not be applied if themajority of surface area is permanent grassland, used forthe production of herbaceous forage or cultivated withcrops under water. They also suggest the possibility ofmeasuring EFA at regional level in order to obtain adjacentecological areas. Unlike the Commission proposal, the Par-liament suggests that permanent crops are not used to cal-culate the area earmarked for the EFA. According to theCouncil proposal permanent crops are part of the referencearea and, in cases where the limits of trees per hectare arerespected, these are considered as EFA (See Appendix).

There are also clear differences between the Commis-sion’s proposal and Parliament and Council proposals re-garding exclusion criteria. The European Commission pro-posed that organic farms be excluded from the greening re-quirements and entitled ipso facto to the green payment. Inthe amendments proposed by European Parliament (2013)and Council (2013) farms that are beneficiaries of agri-en-vironment-climatic payments, with national or regional en-vironmental certifications or localized in “Natura 2000” ar-eas (only for the European Parliament) could be excludedfrom the greening measures.

The Assessment by the European Commission, based on

the original proposal, found that the impact of greeningmeasures on the income of European farms is relativelylow, on average € 43 per hectare of potential eligible area(European Commission, 2011b). It is, however, recognizedthat the cost may vary widely according to regions andfarming systems, given the differences in land use and prof-itability as well as the specific situation of each farm(Cardillo et al., 2012).

4. The PMP modelThe analysis of the economic impact of the greening mea-

sures is based on a sample of 453 farms, of which 36 areprocessing tomato farms located in the plain of Emilia Ro-magna region. Data is from the Italian FADN 2011and des-cribes land use, yield, output prices and specific costs peractivity at farm level. Data on CAP payments as well asother descriptive variables on farm status (organic orconventional) was also used in order to identify greeningrequirements and exclusions.

The evaluation of the effect of CAP Reform Post-2013 onprocessing tomato growing is carried out using a modelbased on Positive Mathematical Programming (PMP)(Howitt, 1995; Paris and Howitt, 1998; Paris and Arfini,2000). In the original formula put forward by Paris andArfini (2000), PMP was based on a three-phase procedure,summarised below:

1. Estimation of marginal costs of observed farm activi-ties. The aim of this phase is to identify information on spe-cific production costs which the farmer uses to formulatehis production plan.

2. Estimation of a non-linear cost function. PMP esti-mates a quadratic cost function which represents produc-tion costs, coherent with economic theory. The method ofestimation used in this phase is based on maximum entropy(Paris and Howitt, 1998).

3. Calibration of the model versus the year of observation.The observed economic production situation is reproducedusing only the information on production costs establishedduring the previous phase.

The model is thus able to simulate the effects of the mainchanges in agricultural policy.

An important element of innovation of the model used inthis paper is the introduction of latent information into theoptimization process at farm level. One of the most debat-ed issues regarding PMP models is their supposed inabilityto capture farmer behavior given that certain productionprocesses are absent in the observed situation (Röhm andDabbert, 2003; Blanco et al., 2008). Latent information isthus introduced into our model as “latent processes”. Theseare processes present in the sample, because at least onefarm production plan includes them. But even on the farmswhere they are not activated, these processes can be con-sidered as components of the production possibilities. Allthese elements can be captured by the model on the basis oflatent cost information (Donati and Arfini, 2013). So duringthe simulation phase, modifications can be made to the ini-

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NEW MEDIT N. 2/2014

tial production organization by including latent processeswhose economic return is greater than that of other process-es (Arfini and Donati, 2013).

4.1. Greening requirements in the PMP modelAll the greening measures have been inserted into the

PMP model through specific mathematical constraints. Theoptimization process can thus take account of this impor-tant component of farm choice. Below, the main greeningconstraints are specified.

4.1.1. Crop diversificationThe three different proposals regarding crop diversifica-

tion constraints are replicated in mathematical terms as fol-lows.

European Commission

(1)

(2)

European Parliament

Council of the EU

Where:n: farm index;s: arable crop index, that is a sub-index of the index j re-

lated to the whole set of activities;hn,s: arable crop acreage at farm level;orgn: farm parameter, 1 for organic farms and 0 otherwise;ecdn: farm parameter, 1 if the arable land is entirely used

for grass production, left fallow or cultivated with crops un-der water, and 0 otherwise.

envn: farm parameter, 1 for beneficiary of agri-environ-ment-climatic payments and 0 otherwise;

natn: farm parameter, 1 if farm situated in a Natura 2000area and 0 otherwise;

epdn: farm parameter, 1 where more than 75% of the el-igible agricultural area is permanent grassland, permanentpasture, used for the production of grass or other forage orcultivated with crops under water, and the remaining eligi-ble agricultural land < 50 hectares.

cod1n: farm parameter, 1 if more than 75% of the eligibleagricultural area is grassland or cultivated with crops underwater or a combination of these;

cod2n: farm parameter, 1 if more than 75% of arable land

is entirely used for production of grass or other herbaceousforage, land lying fallow, entirely cultivated with legumi-nous crops, or a combination of these uses.

4.1.2. Maintenance of permanent grasslandConstraints are formulated in a different way only for the

exclusion of the farms entitled ipso facto to the greeningcomponent of direct payments.

For example, to model the European Parliament propos-al, the maintenance of permanent grassland is expressed asfollows:

(6)

Where:g: permanent grassland index, a sub-index of the index j

related to the whole set of activities;h–n,g: permanent grassland acreage at farm level in refer-

ence scenario (see Section 5.1).The other symbols are used as above.

4.1.3. Ecological Focus Area (EFA)To model the share of total farm area allocated to EFA,

the land constraint is defined as follows:

(7)

The total area of the farm is thus equal to the sum of utilizedagricultural area (UAA) in the farm production system and

the EFA as required by the greening actions (greenn).

The EFA requirement is represented in the model as fol-lows:European Commission

Where:r: eligible crop index, that is a sub-index of the index j re-

lated to the whole set of activities.f: land left fallow index, that is a sub-index of the index j

related to the whole set of activities.p: permanent crop index, that is a sub-index of the index

j related to the whole set of activities.The other symbols are used as above.

4.2. Direct payments in the PMP modelAs well as the impact of greening, the model also evalu-

ates the impact of variation in direct payments. Direct pay-ments were calculated taking into account the lower ceilingfor Italy, regionalisation and the process of internal conver-

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NEW MEDIT N. 2/2014

, , ,0.05 3 1 1n s n s n s ns s

h h h org ecd� �� � � � � � ��

�� �

, , ,0.7 3 1 1n s n s n s ns s

h h h org ecd� � � � � � � ��

�� �

, , ,0.8 10 30 1 1 1 1n s n s n s n n ns s

h h h org env nat epd� �� � � � � � � � � � � �

� �� �

, , ,0.75 30 1 1 1 1n s n s n s n n ns s

h h h org env nat epd� �� � � � � � � � � �

� �� �

(3)

(4)

, , ,0.75 10 1 1 1 1n s n s n s n n ns s

h h h org env cod1 cod2� �� � � � � � � � � � ��

�� � (5)

� �, , (1 0.05) 1 1 1n g n g n n nh h org env nat� � � � � � � �

,n j n nj

h green b� ��

m (,n j

jh� )

, , ,0.07 1n n r n g n f nr g f

green h h h org� �� �� �� �� �� � �� �� � �� �� �� �

� � � (8)

European Parliament

, , , , ,0.05 10 1 1 1 1n n r n g n p n f n s n n n nr g p f s

green h h h h h org env nat epd� �� �� � � �� �� � � � � � � � � �� � � � �� �

� �� � �� �� �� �� � � � � (9)

Council of the EU

, ,

, , , ,

150.05

1 1 1 1

n r n gr gn n r n g n p n f

r g p f

n n n

h hgreen h h h h

org env cod1 cod2

� �� �� �� � �� � � � � �� �� �� � � � � � �� � � � � �� � � � �� � � �� �� � � � � � � � � �� �

� �� � � � (10)

(8)

(9)

European Parliament

Council of the EU

(10)

gence (COM (2011) 625). This paper considers Italian ad-ministrative regions as units of regionalisation. It is as-sumed that the redistribution will take into account the lev-el of payments received in the past, so the lowering of theceiling for Emilia Romagna follows the lowering for Italyas a whole: -2.6% in 2014 and -10.3% in 2019 compared tothe baseline (INEA, 2013). In the model, the ceiling is di-vided into two components (basic payment scheme -70% andgreen payment -30%). Nowadays it is not possible to identi-fy other minor components at national or regional level.

In the European Commission proposal, the unit value ofpayment entitlements is calculated as a flat rate consistingof a basic payment (212.5 €/ha) and a greening component(91.1 €/ha), for a total payment per hectare of 303.6 €/ha.

In order to mitigate the reduction of payment entitlementsproposed by the European Commission, the Parliament andCouncil proposed derogations from uniform distribution perhectare. These scenarios introduce convergence mechanismsfor the basic payment scheme, but assume the same value ofthe green component for all farms in the region (91.1 €/ha).

For the Parliament scenario, the unit value of payment en-titlements in 2014 was calculated by applying a conver-gence process on 10% of the regional ceiling. Then a con-vergence of 2014 value toward the regional unit value in2019 was applied, fixing a maximum decrease of the initialunit value of 30%.

For the Council scenario, the payment per hectare at farmlevel in 2014 was calculated by applying a linear reductionon the 2013 unit value, according to the ceiling reduction ofthe basic payment for 2014. The unit value of payment en-titlements whose 2014 unit value was lower than 90 % ofthe regional unit value in 2019 was increased by one thirdof the difference between their initial unit value and 90 %of the regional unit value in 2019. In order to finance thisconvergence, a reduction of payment entitlements with avalue above the 2019 average was applied.

In all scenarios a progressive reduction(capping) in payments for amounts exceeding€150,000 up to the maximum threshold of€300,000 was applied.

5. Potential impact of the CAP re-form5.1. Policy scenarios

The following scenarios were analyzed:� Reference scenario (SIM_1). This scenario

reproduces the situation observed in 2011,after the Health Check which completes thedirect payments decoupling and updates themodulation.

� CAP Reform - European Commission pro-posals (SIM_EC). This scenario models ECcapping and the greening constraints. Theunit value of payment entitlements is calcu-lated as a flat rate, as described in Section4.2.

� CAP Reform - European Parliament proposals (SIM_EP).This scenario models EP capping and greening con-straints. The unit value of payment entitlements is differ-entiated by farm, and the convergence mechanism de-scribed in Section 4.2 is applied.

� CAP Reform - Council of the EU proposals (SIM_CO).This scenario implements Council of the EU capping andgreening constraints. The unit value of payment entitle-ments is differentiated by farm, and the convergencemechanism described in Section 4.2 is applied.The results of simulations are reported below and show

effects of the proposals on land use and economic out-comes. In order to analyze the impact of the reform on thetomato sector compared to other sectors, results are shownfor processing tomato farms and for farming as a whole.

5.2. Land allocation5.2.1. All farms

The simulations show that greening requirements havequite a significant impact on cereal crops. There is a rele-vant decrease for all cereals except for durum wheat. Thiseffect can also be attributed to the requirement for diversi-fication, which particularly in Commission proposals oblig-es specialized farms to increase (or activate) other crops.These crops are however affected by EFA quotas; in manycases farms opt for cereal area as EFA in order to retain oth-er more profitable crops such as processing tomato. Alfalfaand maize, important crops in the area, also show a signifi-cant reduction with part of their area moving to other crops,in particular protein crops, and to permanent grassland.

In the Parliament and Council scenarios, the impact isclearly much more limited. This is partly due to new maincrop and EFA thresholds, but mainly to the increase in thenumber of farms excluded from greening requirements. Thepercentage of EFA is 6.1% in the Commission scenario andjust 2.9% (Sim_EP) and 2.1% (Sim_CO) in the other two.

Figure 3 - Land use, all farms.

Source: own elaboration.

NEW MEDIT N. 2/2014

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5.2.2. Processing tomato farmsTable 1 shows changes in the production plan of tomato

farms. The overall contraction of the processing tomato sur-face is limited in all three scenarios. It is mainly due to thediversification requirement, activated only for those fewfarms in the sample with a very high production specializa-tion. On many farms, tomato is associated with other crops,mainly maize and wheat. In line with the overall situation,cereal crops and maize reduce their surface for the EFA intomato farms too, as shown by the sharp surface reductionof these crops in all scenarios.

In the Commission scenario, the high share of EFA(6.4%) on tomato processing farms is due to the exclusionof the only organic farms and to permanent crops not con-sidered as EFA (Table 1). In other scenarios (with EFA setat 5%) this quota is reduced to 3.7% (Sim_EP) and under3.2% (Sim_CO). The increaseof the application thresholddoes not produce significantchanges in the tomato sector,where large farms often exceedit. The presence of permanentcrops impacts on the share ofEFA, and consequently on theproduction plan, according tothe different exclusion criteriafor these crops. As in the other

sectors, the Council scenarioshows smaller changes in the pro-duction plan for processing toma-to farms.

5.3. Economic outcomesThe effects of the different CAP

proposals on the incomes of Emil-ia-Romagna producers were eval-uated with reference to the farmgross margin calculated at two d-ifferent levels. The first levelgross margin (GM I) is the differ-ence between the gross saleableproduction and specific costs ofproduction. The second levelgross margin (GM II) also in-cludes direct payments (basic +green payments). The first levelshows more clearly the net effectof greening measures on farms,while the second shows the over-all economic impact.

5.3.1. All farmsGreening applied as in Commis-

sion proposals would lower GM Iby 5%, with a reduction of grosssaleable production (GSP) andvariable costs (VC) of around 6%

(Table 2). The average value of the GM I is 1,396 €/ha, sothis proposal would lead to an average loss of about 70€/ha. This reduction is significant partly because permanentcrops with high profitability would be affected by the EFArequirement. For arable farms, the impact of greening ongross margin is an average loss of about 55 €/ha.

The attenuation of greening requirements proposed byParliament and Council, with a big increase in the numberof exempted farms, considerably reduces their impact. GMI reductions are 1.7% (SIM_EP) and 1.2% (SIM_CO). As-suming a payment per hectare of around € 90, it would ap-pear that green payments compensate for lower profits inthe Emilia Romagna plain.

The reduction of direct payments leads however to a fur-ther decrease in farm profitability. In the Commission sce-nario, the reduction of GM II is 8.1% but in the Parliament

Table 1 - Changes in land use, processing tomato farms.

Source: own elaboration.

Table 2 - Dynamics in the main economic variables, all farms.

Source: own elaboration.

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and Council scenarios (SIM_EP and SIM_CO), which in-clude limitations on payment reductions, the decrease ingross margin is below 5%. So for direct payments, likegreening requirements, Council proposals (-14.4% of pay-ments) are less harsh than Parliament proposals.

5.3.2. The processing tomato sectorThe impact of greening on processing tomato farms is

lower than the impact on agriculture as a whole, but in linewith the impact observed on other arable farms. Profit lev-els are currently significantly higher than for the otherarable farms, and would fall by 3.9%, or 47 €/ha, as a con-sequence of greening in GM I in the Commission scenario.In the Parliament and Council scenarios, new environmen-tal constraints would lead to a reduction in profits of about25 €/ha (Table 3). In all three scenarios, green payments ap-pear to compensate for lower profits.

The impact of the direct payment convergence is higherin processing tomato than in agriculture as a whole. Histor-ically, tomato farms have received average higher paymentsthan other sectors. In fact in the sample, the average pay-ment per hectare is about 775 €/ha, more than twice the av-erage of other farms, and the GM II exceeds 2,000 €/ha,compared to 1,773 €/ha in other sectors. The flat rate re-duction proposed by the Commission (Sim_EC) would re-duce payments by more than 60%, leading to an overallcontraction of 26% for the tomato farm income. In Parlia-ment and Council scenarios there is still a large reduction,although it is slightly less harsh. The average payments re-duce to 465-490 €/ha, corresponding to a decrease of morethan 35%. The overall average profit levels of processingtomato farms would thus decrease by 15-17% compared tothe reference scenario, which means a reduction four timeshigher than other farms.

5.4. Discussion of results The PMP model results show that the processing tomato

sector will be affected in terms of farm economic perform-ance rather than in production plans. There are two distincteffects, one produced by greening measures, and one gen-erated by the process of payment convergence introducedby the regionalisation objective.

With regard to greening measures, the model shows thatboth diversification and EFA could substantially affect farm

income. The impact ofthese requirements onprocessing tomato farmsdoes not appear to differgreatly from other arablefarms. The Commissionproposal for greeningwould lead to an averagegross margin reductionof about 50 €/ha both inthe tomato sector and onother arable farms. For

tomato farms, the EFA requirement has a bigger impact onthe gross margin than crop diversification. Most of thetomato farms in the sample already have a diversified pro-duction plan, where other crops (mainly maize and wheat)can be converted to EFA. So the new greening requirementshave a small impact on land use in processing tomato areas,lowering it by an average of 2%. The attenuation of thegreening requirements proposed by the Parliament and theCouncil mitigate changes in production plan mainly be-cause a higher number of farms are excluded from the newconstraints.

Convergence of direct payments on the other hand hasvery different impacts on the processing tomato and theother sectors. Considering all farms in the sample, pay-ments would be reduced by between 19.5% (Commissionscenario) and by 14.4% if the Council convergence mech-anism were applied. This would result in an average re-duction of the gross margin of 8% if a flat rate were ap-plied. There would be a reduction under 5% in the other s-cenarios. The impact is significantly higher for the pro-cessing tomato sector, where farms have historically re-ceived high payments linked to production. For thesefarms, a uniform distribution of payments per hectarewould mean a reduction of over 60% of the entitlement u-nit value. The convergence mechanisms proposed by theParliament, and especially by the Council, partially miti-gate this reduction, but it remains big at -40%. CAP reformthus has a bigger impact on profit levels of processingtomato farms than other sectors. The processing tomatofarms would lose a quarter of their income in the Commis-sion scenario and more than 15% in the other two scenar-ios. Although other convergence mechanisms for directpayment could mitigate the impact of the reform, it is cer-tain that there will be a reduction in their profitability. Inorder to ensure the current production basin maintenance,part of this reduction could be covered by a higher price tobe paid by the processing industries, as it occurred with theintroduction of decoupling.

6. ConclusionsCAP reform introduces two key measures that could sig-

nificantly affect farm profit levels: greening and conver-gence of direct payments. The Commission greening pro-posal includes three requirements linked to green pay-

Table 3 - Dynamics in the main economic variables, processing tomato farms.

Source: own elaboration.

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ments: crop diversification, the maintenance of permanentgrassland and the establishment of ecological focus areas.The payment convergence process implies that individualfarm payments in a given region will progressively ap-proach the same average single payment. Both the greeningmeasures and payment convergence will have a significantimpact on farm decisions and on economic performance.

This study uses a model based on PMP methodology, re-producing specific greening requirements and the new distri-bution of direct payments, in order to compare and evaluateproposals by the European Commission, the European Parlia-ment and the Council of the EU. The analysis is carried out onan FADN sample of farms located in the plain of Emilia Ro-magna and focuses on the processing tomato sector.

The results show that the tomato sector is less sensitive tothe greening measures and much more affected by the re-gionalisation and the convergence process. The EFA meas-ure is the biggest constraint for the tomato farms. In orderto meet this requirement, tomato farms reduce mainly theircereal surface, in particular soft wheat and maize. Tomatoproduction is partially affected by the reduction of cerealsbecause of rotational constraints and the complementaryrelationship captured by the PMP model (Paris andHowitt, 1998). The other greening requirements are allsubstantially met by almost all tomato farms in the sample.Tomato farms are in fact characterized by a diversifiedproduction plan and by a moderate average farm size. Interms of economic performance, greening in all three sce-narios leads to a reduction in the first level of gross mar-gin which is lower than 4%. This reduction is not a causefor concern if compared to dynamics in the second levelgross margin which measures overall impact of the reformtaking into account variation in farm payments. Paymentconvergence measures lead to a big fall in profits in toma-to farms which reach -26%, -17% and -15% in Commis-sion, Parliament and Council scenarios respectively. It iswidely recognized that the tomato sector has been one ofthe sectors that has traditionally received higher subsidiesthan most other agricultural sectors. The new CAP reformcan reduce the profitability of the sector with some fore-seeable concerns for the farmers and for processing toma-to industry. Tomato processing firms should consider pos-sible strategies to face this important economic change inthe sector.

We believe that this study is innovative because, to ourknowledge, it is the first to compare the economic and pro-duction effects of the Trilogue proposals at territorial lev-el. It is nevertheless subject to certain limitations. First ofall, the entire analysis focuses on the three institutionalproposals, neglecting to consider the most likely reformoption, still under discussion at the time of writing, al-though a political agreement has been overtaken. How-ever, this paper aims to assess the differences and the ef-fects of the three proposals discussed in the technical andpolitical process that will lead to the final document of

the 2014-2020 CAP. Secondly, the model assumes thatmarket prices are stable and not affected by modifica-tions. Likely variations in the commodity market pricescan modify the strategies of processing tomato producersand induce different production decisions. Finally, themodel focuses on the agricultural phase without consid-ering the downstream supply chain. A study of strategieswhich processing industries could use to face the newmarket and policy scenarios would be an interesting de-velopment of the model.

AcknowledgmentsThe present work was carried out in the framework of the

INEA project “Strategie nazionali per l’implementazionedelle politiche comunitarie: la riforma dell’OCM ortofrutta”.

The authors wish to thank the anonymous referees and theEditor for their helpful suggestions and constructive com-ments on an earlier version of the paper.

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Appendix. The greening according to the European Commission, the European Parliament and the Council of the EU.

Table A1 – Detail of the greening conditions according to Commission, Parliament and Council of the EU proposals.

Source: own elaboration on Commission proposal (COM 2011 (625)) and amendments proposed by EP (2013) and Council of the EU (2013).