Modelling the Impact of Decoupling on Structural Change in Farming: Integrating Econometric Estimation and Optimisation

Implementation of the Mid Term Review of the Common Agricultural Policy on farming in Europe is expected, and intended, to initiate structural changes in European agriculture. This impact of the agricultural policy reform will be triggered at the farm level with both up- and down-stream effects for agriculture in Europe. Modelling such a phenomenon is challenging. An integrated modelling approach, involving farm level optimisation models and exogenously estimated econometric models of farmer behaviour, is developed for Ireland; this framework is a general one and is applicable elsewhere. Entry and exit from farming, postulated as the main consequences of the policy reform, are estimated exogenously to determine their role in the allocation of farm labour. The results for Ireland show that farm numbers will decline more rapidly under decoupling relative to a baseline situation. Further, decoupling is likely to favour beef farming but, an increasing number of beef farmers will have to rely on outside income to sustain that system of farming. Dairy farmers will face a price cost squeeze and structural change in this sector will be accelerated.