The distortive effect of organic payments: An example of policy failure in the case of hazelnut plantation

Organic farming is supported in the European Union (EU), among others, via area-based organic payments, targeting better environmental standards, as well as consumers’ demand for organic products. Despite the wide interest growing on hazelnut production in non-traditional production areas in Italy, supply of organic hazelnuts remains negligible. At the same time, evidences show that Italian farmers can receive organic payments, while plantation is not yielding and then either switch to conventional production or continue organic production with no harvest. We employ the annual annuity approach in order to check whether organic payment initiates investments that otherwise would have been unprofitable; and whether it can be exploited by a farmer who has never had intention to produce organic hazelnuts. Results suggest that organic support indeed might be distortive and does not stimulate stable conversion to organic production of hazelnuts. In this regard, we recommend that the current policy should be substantially changed by imposing additional restrictions on conventional or no production or by implying additional requirements for receiving organic payments, for instance at least two subsequent organic contracts.