Cap Reform And The Effects Of Direct Payments On Heterogeneous Farm Structures In East Germany

In this article we explore the hypothesis that recent reforms of the Common Agricultural Policy’s (CAP) direct payment regime affect farms of different size differently. Contrary to the view of a structure conserving effect of direct payments, these will have a distinct impact on structural change in agriculture if farms are heterogeneous. In the context of East Germany, we postulate that large farms benefit more from increases in direct payments than small farms if they are more tightly liquidity constrained. Their competitiveness on the land market hence relatively improved during recent reforms. Furthermore, the recently introduced degressive modulation for bigger farms provides incentives for strategic farm creation. Econometric evidence in favor of these propositions is presented. We estimate a dynamic model of structural adjustment in agriculture, based on a unique regional panel dataset of three East German Bundesländer for the period 1995 to 2007. We give results for the impact of direct payments on the total number of farms for two groups of different size classes. Our results suggest that large farms benefit most from CAP first pillar payments at the cost of smaller farms. Furthermore, we find evidence for strategic farm creation in connection with the 2003 reform of the CAP.