Consequences of a progressive reduction of direct payments in Germany: paving the way for post-2013?

Due to Germany's specific farm structure, the progressive modulation of direct payments decided within the Health Check of the Common Agricultural Policy (CAP) is of particular relevance for German agriculture. In this paper we apply the agent-based model AgriPoliS to shed some light on the structural effects of a progressive modulation as evoked in the Health Check (HC) proposal and the final agreement made in November 2008 for two German regions. Furthermore, we analyse whether a progressive modulation will allow for a continuous policy in the case of a reduced hypothetical single area payment of 150 €/ha starting in 2013. Results show that although we could observe substantial income effects in the short and long run, structural effects of the progressive modulation scheme are small but preservative. In contrast, the introduction of a reduced single area payment in 2013 would sharply increase structural change. In case the initial HC proposal is followed by a single area payment the previously observed policy effects would diminish for very large (above € 300,000 premium) and small farms (below € 100,000 premium). Still, although these effects are much less pronounced with the final HC agreement, the progressive modulation would provide farmers with wrong signals, as it is most likely that future reforms will be characterized by less support and thus require a stronger market orientation of farms.