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Is direct subsidy really the best support for Young Farmers?

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In the community of agricultural policy makers, assistance to young farmers is considered not only an innocent and highly desirable type of farm support but an absolute must. It has been a firm element of the CAP for a number of years and national agricultural policies of EU member states contain all sorts of measures to assist the establishment of young farmers.

The European Commission’s recent Communication on ‘The Future of Food and Farming’, issued in November 2017 to kick off the process of decision making on the CAP for the post-2020 period, has an entire section on ‘Attracting new farmers’ and suggests that “generational renewal should become a priority in a new policy framework”.

The age structure of farmers in the EU is such that more than half of all active farmers are 55 years of age or older. While ageing is a general phenomenon in Europe's demography, farmers are older than people in other parts of society. In the EU population overall, the share of people aged 55 years or older is about one third, considerably less than among farmers.

 

Why are farmers generally older?

The bias towards older farmers is a general phenomenon in the agricultural communities of most industrialized countries. In the US, for example, the share of farmers above 55 years of age tends to be even higher than in the EU.

There are a number of reasons why farmers tend to be older than people in other sectors of society. The most important reason probably is that the farm is also the home in many cases. As self-employed operators, farmers can continue to work on the farm beyond usual retirement age, and, given they live on the farm, there is a tendency for many of them to do so. 

Depending on the social security system in place, it can also be the case that an old age pension for farmers is less than their income on the farm, or that farmers can combine a pension with income from farming. Moreover, many farmers lack a successor in the family and feel an obligation to stick to their farm.

In addition to such demographic characteristics there is a structural factor at work. The number of farms, and hence the number of farmers, is shrinking, again a fact observed in nearly all parts of the world.

While farming can, in principle, be given up at any age, voluntarily or because of financial reasons, most farms that disappear are abandoned when the operator reaches the end of working life.

The shrinking number of farmers is by and large a result of productivity growth in agriculture that allows a farm’s output to grow with progressively less labour input. It also has to do with rising income expectations among farmers, in parallel with improved incomes in the rest of the economy. A given sectoral income of agriculture can yield income growth for individual farmers only if the number of farmers sharing in that sector income declines over time.

In other words, the bias towards older ages among farmers is a quasi-natural phenomenon rooted in both specific demographic characteristics in the farming community and in the secular structural evolution of agriculture.

A new generation of farmers is needed

Generational renewal in agriculture is a desirable process. Young farmers are needed to continue agricultural activity. Nobody wants to see agriculture disappearing altogether.

We need the production of food and agricultural raw materials, while at the same time seeing the countryside and cultural heritage maintained.

Farmers can make an important contribution to preserving the environment and enhancing biodiversity. Agriculture is an indispensible part of our society and economy, and without generational renewal in the sector, agriculture would go down the drain.

Young farmers have always injected a desirable stimulus of dynamics into the farming industry. A new generation of farmers has typically benefitted from better education and training than their predecessors.

Young farmers promote the spreading of new technology and the use of modern modes of management, improving the competitiveness of agriculture. The new generation often has an excellent sense of responsibility vis-à-vis the demands of society for a sustainable approach to farming, for environmental awareness and the need to enhance animal welfare.

In short, young farmers guarantee a viable future of agriculture. But does that mean that financial support needs to be granted to them?

Entry barriers can be high

The main argument advanced for government assistance to young farmers is that barriers to entry into agriculture tend to be high. A number of such obstacles is typically cited.

Land prices in many parts of EU agriculture are high. Young farmers that are intent on purchasing or renting a farm need to find the money required to establish themselves in agriculture.

The larger the farm they want to operate, and hence the more viable it is hoped to be for the years to come, the larger the capital requirements. At the same time, though, young farmers may face serious difficulties in securing access to the financial means they need to set up a farm.

Sometimes, it is also suggested that limited availability of land or lack of tenancies act as barriers to entry into the farming industry. Older farmers, even if they are no longer as active, are said to hold on to their land while retaining subsidies.

There can also be social barriers. Farming is often perceived as an old fashioned type of activity, frequently performed in remote areas lacking access to all sorts of social infrastructure and services, far from opportunities for cultural activities and other features of modern social life.

Leading a satisfactory family life on a farm can be a real issue. In the early 1980s, a Swiss TV programme titled “Bauer sucht Bäuerin” was considered emblematic, followed later by the reality television series “Farmer Wants a Wife” in the UK and the similar series “Bauer sucht Frau” in German TV.

A lack of opportunities for education and training is also frequently cited as a barrier to entry into the farming industry.

Again this is not a set of issues found exclusively in Europe. In most industrialized countries there is a debate about the need for generational renewal in agriculture, and the apparent nature of barriers to entry into the farming business is universally the same.

Support for young farmers comes in many forms

Public assistance to young farmers as an element of the CAP and of national farming policies in member states has a long history. Traditionally these policy measures came under the heading of rural development. In the CAP, the age limit for a 'young farmer' is 40 years.

Until 2013, the most direct type of assistance under the CAP was support for the initial establishment of a farm or for investments to adjust the farm structure. Assistance was granted either through an investment subsidy (a “premium”) or in the form of a subsidy on interest paid. 

While the maximum value of such assistance was originally limited to €55,000, the 2009 Health Check reform of the CAP lifted that ceiling to €70,000.

The rural development provisions under the CAP also provide for higher support rates for investments in physical assets. Another option available is extra support for farm advisory services specifically addressing the needs of young farmers.

While such measures under Pillar 2 of the CAP have been around for some time, the CAP for the 2014-2020 period now also provides additional support for young farmers as an element of the direct payments regime under Pillar 1.

Member states are expected to set aside up to 2% of their total direct payments' envelope for this provision (see chart below). On that basis, young farmers under the age of 40 years receive a 25% top-up of their area-based direct payments for five years, up to a given maximum number of hectares.

The doubtful logic of young farmer support

A report published last year by the European Court of Auditors found that “EU support for young farmers is too often poorly defined, with no results or impact specified” and called “for the support to be better targeted in order to foster effective generational renewal”.

More importantly, though, the very logic of financial support for young farmers is doubtful.

At the most fundamental level one has to ask whether there is a point in trying to attract more farmers into the sector than what would be the case in the absence of government support. One of the most crucial factors undermining competitiveness of EU agriculture, in relation both to the farming industries in other parts of the world and to non-agricultural sectors in the EU economy, is the small scale structure of farms in many member states.

In its CAP Communication, the European Commission speaks of the challenges of low profitability in the EU farm sector and attributes it to, among others, “the fragmented structure of the primary sector”.

The only way of creating larger farms is, unfortunately one may say, to allow for a further decline in the number of farms, and hence in the number of farm operators. Attracting an additional number of new farmers through policy support works in exactly the opposite direction.

Competitiveness is further undermined if government support, provided while a farmer is 'young', attracts operators into the sector who establish farms that would not have been established in the absence of that public money.

Where a farm promises to be profitable it does not need government support and would have been established in any case.

If the farm is profitable only with subsidies paid while the farmer is young it is likely to fail after the support runs out when the operator farming it is no longer young. In other words, government support for young farmers is either a windfall gain, or else it generates the problems of tomorrow.

Barriers are policy-made

The most frequently cited barrier to entry into agriculture is the high level of land prices.

Of course, land prices do not fall from heaven. In the EU, the direct payments granted under the CAP contribute to raising the price of land. Subsidizing young farmers so they can afford to buy or rent land at such inflated prices means to fight a fire that has, at least in part, been set by the CAP itself.

In this context it can only be called absurd to extend top-ups of area-based direct payments to young farmers so they can overcome the hurdle of high land prices to which direct payments being paid to their colleague farmers have contributed. Raising land prices even further is the unavoidable result. Fighting fire with fire simply cannot work in this case.

But in regard to land prices, there is also an issue with the basic logic of this argument for supporting young farmers. Where land prices are high is an indication of the fact that there is high demand for land. And that can only be the case if there are farmers who are interested in farming this land. There is, hence, no lack of drive in the farming industry, no reason to fear an insufficient number of farmers or an idling of land.

The social barriers to entry into agriculture can be real, though they are sometimes overemphasized. However, financial support for young farmers can do little to overcome that hurdle unless one were to believe that money can solve the ‘Farmer Wants a Wife’ problem.

Better policies can help

All this is not to say that there is no role whatsoever for public policy in the process of generational renewal. Better education is the best conceivable assistance that governments can provide to all young people, including potential newcomers in agriculture.

Advisory and information services are particularly important for operators starting their business. Technology development will be welcomed in particular by young farmers.

A most effective way of enhancing the attractiveness of living in rural areas, including work on the farm, is the provision of appropriate infrastructure, preferably even better infrastructure than is available in cities.

Broadband internet access is an absolutely crucial element of that. For the most active and entrepreneurial young people this is most likely more important and attractive than throwing money at them.

Stefan Tangermann is an internationally renowned agricultural economist who writes for IEG Policy on a range of policy-related issues. He is a former Director for Trade and Agriculture at the Organisation for Economic Co-operation and Development (OECD), and is a retired professor at the Department of Agricultural Economics and Rural Development at the University of Göttingen, Germany.

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