Economic Policy Review ISSN 1313 - 0544

CAP - The Effects of the Implementation of Direct Payments per Acre in Bulgaria

02.07.2013
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In the long term (after 2020), the removal of direct payments should be a priority both for Bulgaria and for the EU as a whole, as only this way would the proper market-oriented development of the sector and the free competition between farmers from different member states be ensured.

 

Nikolay Valkanov, IME

 

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In spite of Bulgaria’s accession to the EU and the resultant financial aid inflows in the form of direct payments per acreage, the GVA of the agriculture sector continued to exhibit a persistent decrease in the period 2008 – 2011. Overall, The Gross Value Added (GVA) generated by the agricultural sector, as measured in 2005 basis prices, has fallen by an amount of nearly 19% for the period 2000-2012.

With the ending of the first seven-year period of the implementation of the direct payments system in 2013 and the announcing of the parameters of the new financial aid framework for the period 2014 – 2020, it is ever more urgent that a comprehensive overview of the effect of direct payments upon the Bulgarian agricultural sector be made. One of the most obvious and undisputed effects from the implementation of direct payments per acreage is the increase in farmed land. Rising demand for land, combined with the still high fragmentation in land property, has lead to an increase in both the number of land leases and land rents. The increase in land rent, on its own behalf, has attracted considerable attention towards the agricultural land market, as, in the period 2006 – 2012, the average annual growth rate in the price per acre amounts to 15.6%, while the cumulative increase for the period amounts to approximately 175%.

The process of land usage concentration and consolidation, which has been observed after the completion of the land reform, has gained further momentum after 2007. The relative proportion of large land properties (>100ha) have witnessed a spectacular rise, as in 2010 over 82 % of arable land has been administered by such, and their average size amounts to 671,7 hectares compared to 538.5 hectares in 2005. In comparison, the average size of large land properties in the EU is 264 hectares and has not witnessed major fluctuations during the last five years.

In spite of the increase in arable land and the relative increase in the size of land properties, the gross value added per hectare has been falling. On the basis of the available data, it can be inferred that the current aid scheme (subsidizing per a unit of land) has ignited a trend of restructuring of the sector towards greater optimization and simplification of the production process. That is, transition from relatively labour- and capital-intensive sub-sectors, such as cattle breeding and vegetable growing, towards less intensive branches, such as grain production, has been extensively taking place.

Revenues in the country’s agriculture sector have been growing fast during the last three years and, on average, these have been 15% higher in the period after Bulgaria acceded to the EU than in the 2000-2006 period. Most of this difference, however, goes to land owners in the form of rental payments.

Another tendency that can be observed in the 2007-2011 data is that the statistical relationship between the amount of direct payments and the gross capital formation has been negative. While investment in machinery and equipment has been growing since 2007, investment in cattle has been deteriorating, reaching even negative values in 2008-2009.

If the proposals for the new 2014-2020 CAP are to be kept in their current format, the main problems related to the absorption of direct payments are likely to be further exacerbated. Hence, one pillar conclusion that emerges is that there is a pressing need for reconsidering state policy in the field of agriculture and revising Bulgaria’s overall position towards CAP. Evidently, the existence of the per-acre payment scheme does not bring any benefit to the development of the agricultural sector in Bulgaria. Therefore, it is vital that it be replaced with a more neutral mechanism such as the scheme for unified payment, already implemented in old member states. Subsidies and payments should be more closely tied to specific expenses and added value, created by each branch of the agriculture sector. In this line of thought, it is clear that Bulgaria should direct its efforts towards the equalization of direct payments between EU member states, regardless of whether or not these payments exceed the amount currently received by Bulgarian farmers.

In the long term (after 2020), the removal of direct payments should be a priority both for Bulgaria and for the EU as a whole, as only this way would the proper market-oriented development of the sector and the free competition between farmers from different member states be ensured. The aid scheme should have its focus shifted towards the so-called ІІ pillar (the EU Rural Development Programme), through which investment and innovation in all sub-sectors of the agricultural sector can be financed regardless of the size of land property. Thus, producers will face broadened opportunities to adequately respond to market conditions and incentives, taking advantage of their own comparative advantage in the most optimal of ways.