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In Germany, hardly any SFP are purely based on the national reserve; more frequently, the face value of the SFP was upgraded. The farmer is required to apply for an upgrade of his SFP by means of the national reserve at the regional office of the agricultural administration. Afterwards, in every Federal State, the application is handled by a central clearing agency.

Granting SFP to new entrants after 2005 is irrelevant. For instance in 2006 and 2007, in Bavaria just 10 farms applied for SFP from the national reserve but only 2 applications were accepted.

10.1 SFP trade in Germany In principle, it is possible to transfer premium entitlements by sale or any other final assignment (e.g. a donation) with or without land. However, there are some restrictions in the transfer of


An SFP can only be activated within the trading region it originates from; there are 13 trading regions (federal states and adjacent city states).

Transfer of an entitlement for the first time is only possible after the vending farm activated at least 80 % of its SFP within one fiscal year or if the vending farm activated below 80 % of its entitlements within one year. A transfer is only possible if the vending farm returns the un-activated entitlements to the national reserve.

Entitlements from the national reserve or entitlements whose face value consists of more than 20 % of the national reserve must not be traded within the first 5 years after endowment. Entitlements transferred through succession are excluded from that rule.

A transfer of premium entitlements through a rental agreement is only possible with the relevant amount of eligible land. This means that the renter has to be owner of the land as well as the premium entitlements.

Every transfer of an entitlement has to be registered and documented in a centrally administered database. In the frame of the integrated administration and control system (IACS) this task is

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Source: RÖDER and KILIAN, 2008.

Based on the above nomenclature, we derive the number of market transfers as the sum of all final transfers minus categories A) and B). If we want to narrow the group of market transactions to those where the motivation for the transfer lies in the financial value of an entitlement, we furthermore subtract the categories C) to E), resulting in the category "Potential real trade".

Accordingly, the trade volumes in 2006 and 2007 are displayed in Figure 13. On the regional level,

Impact of the introduction of decoupled payments on functioning of the German land market 41

the highest potential for "real trade" can be found in the northern regions SH & HH, NS & HB and MVP. In these regions the share of "real trade" is almost twice as high as in the other regions.

Obviously the number of market transactions decreased in 2007. One explanation for the decline in market transfers is the reduced incentive that results from set-aside obligations and OGS being abandoned in 2008.

Regarding the flow of trade, one can state that it takes place predominantly on a local level.

Analysis of the distance between receiving and delivering farms shows that only in roughly 8 % of all transferred entitlement the two parties are located more than 10 km apart. Consequently, no significant change of the average face value could be observed on the level of municipalities.

Regarding the type of entitlements, the analysis shows that the share of trade of set-aside entitlements is higher than that of normal entitlements. In the regions BY, BE & BB the transfer of set-aside entitlements was twice as high as that of normal entitlements. On the regional level, a change in the amount of activated set-aside entitlements could be observed in only eight counties26. The biggest change took place in Vecta County (vending) which is the county with the highest livestock density in Germany and Oldenburg (receiving). Both are located adjacent to each other and are characterized by the highest (Vechta) or very high (Oldenburg) stocking densities. One explanation for the low exchange of set-aside entitlements could be that in regions with very high stocking densities like Lower Saxony this holds for the whole country so there is no complementary region which could gather the set-aside entitlements.

Figure 13: Trade volume of entitlements and motivation of trade 1,600,000

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1,000,000 17.93 % 41.21 %* 800,000 38.41 %* 600,000

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Source: Based on RÖDER and KILIAN (2008) and own calculations.

In the ZID the market price of transferred entitlements is not recorded, i.e., there is no central institution which records the market prices of entitlements. We therefore have to rely on survey results. Kilian and Salhofer (2008) show that the degree to which entitlements are capitalised into land values is highly dependent on the implemented decoupling scheme, as well as the ratio of the number of entitlements and the amount of eligible area. In the case of an excess supply of entitlements, payments are not, or are only to a very low extent, capitalised into land values, and the reservation price is zero or reflects the transaction costs. In the case of excess demand, prices go up to the net present value of an entitlement. As shown above, we assume an excess of entitlements for Germany, which would result in a market price much below the net present value of an entitlement. However, according to KILIAN and SAALHOFER (2008), in the case of a historical or hybrid decoupling scheme (as in Germany) it is likely there is an exchange of This means that the share of set aside entitlements changed more than 0.25% (see RÖDER and KILIAN, 2008).

Lioudmila Möller et al.

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10.2 Redistribution of payments till 2013 At the beginning of the reform, the redistribution of payments between different farm types was very low because of the way the hybrid model was implemented. Starting from 2010, the hybrid model will be stepwise transferred into a pure regional model. Thus, for 2009 a regional target value is calculated (c.f. Table 1). Furthermore, in 2009 the difference from the regional target value is calculated for every premium entitlement. This difference could be either positive or negative and is then stepwise reduced according to the scheme displayed in Table 6 until it reaches the regional target value.

Table 6: Stepwise introduction of regional model Year 2009 2010 2011 2012 2013 Difference between value in 2009 and 100 % 90 % 70 % 40 % 0% regional target value Source: BMELV, 2005.

The way the SFP is already implemented allows us to draw some conclusions on the "winners" and "losers" of the reform, at least in a comparative static sense. With the transfer to regional model intensive dairy farms with a high share of arable forage cropping must accept very high losses regarding the amount of received payments. Because of the milk premium, they receive entitlements with an in tendency high face value, which even increases during the first years of the reform. However, in the long run the farm-specific top-ups are redistributed to all farms with grazing land and even to arable farms. The same argumentation applies for intensive bull fattening farms. Only if the farms have a high share of permanent pasture land the losses regarding the top-ups partly compensated through the strong increase in payments for permanent pasture. In the "winning" group of farms we find mainly crop farms with a broad crop rotation containing sugar beets and potatoes. Furthermore, farms which Impact of the introduction of decoupled payments on functioning of the German land market 43 gain from redistribution are farms which operate on grazing land with a stock of cattle or sheep below the average, very extensive cattle farms, horse farms and extensive hobby farms.

To illustrate the regional redistribution in Figure 14, the differences between the regional target values and the distribution of payment entitlements after implementation of the reform are displayed.

In Figure 14 we show that the rise of the average value of an entitlement is highest in the Alp regions and in the low mountain range (more than €100). The highest losses can be observed in the more favoured areas. These are mainly areas with a mixed production structure characterised by intensive crop production on fertile soils and intensive dairy farms. This confirms the principal thought on the redistribution shown above.

Figure 14: Regional redistribution of payments between 2005 and 2013 Source: RÖDER and KILIAN, 2008.

Lioudmila Möller et al.


In the following section the effect of SPS on some key indicators of structural change are discussed.

In Figure 15 the development of average farms sizes and number of farms is displayed. Since the introduction of SPS no change in the general trend could be observed. This holds in equal measures for the characteristic structures in Eastern and Western Germany. It can be assumed that farm growth and the farm entry/exit rate is not affected from the introduction of the SPS.

This finding is confirmed by the results of the expert survey. Regarding farm growth, interviewed experts state that the average impact of the SPS is small. The same applies for farm entry/exit decisions. Experts state that if there is an effect of SPS on entry rate, the effect is very small. It is conceivable that the introduction of the SPS leads to a higher exit rate in all study regions.

Figure 15: Development of average farm sizes and number of farms

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Source: Own illustration based on STATISTISCHES JAHRBUCH Für E. L. F. (1999-2007).

Regarding the effect of SPS on the legal form of farms we can observe a similar picture. In Figure 16 the development of the area ratios and the percentage change of the number of farms according to the different legal forms are displayed. As an overall trend we can observe an increase of partnerships both in terms of area share and number. This increase is at the expense of individual farms and legal entities. The restructuring between legal entities and individual farms is especially characteristic of Eastern Germany and still plays a role, though to a much lower extent.

Figure 16: Development of area ratio of legal forms and percentage change of number of farms according to legal form Shares of of legal forms (%)

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While the introduction of SPS has minute effects on the legal form, it has more of an impact on the decision of whether a farm is operated full- or part-time. The development of organisational forms and area shares of full-time and part-time farms are displayed in Figure 17. Since 2005 a significant increase in the number of part-time farms can be observed. For an explanation of this increase two groups of farms could be relevant. The first possibility is that small businesses or hobby farms which did not apply for CAP payments before the introduction of SPS began to operate as part-time farms to facilitate applying for SFP. The second group could be full-time farms who extended their land use to the minimum requirements and thus probably switched to part-time farms. Because the area share stays constant or is even decreasing, the first line of reasoning seems to be more likely. This result is confirmed by the expert surveys in the case study regions. Of the 28 experts interviewed, 7 stated that the introduction of SPS has a positive impact on operating part-time farms. This number is larger than the number of experts who have the opposite opinion.

Figure 17: Development of organisational forms and area ratios of organisational forms 250.000 Area ratios of organisational forms (%) 200.000 Number of farms 150.000 100.000 50.000

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Source: Own illustration based on STATISTISCHES JAHRBUCH Für E. L. F. (1999-2007).

In the next paragraph we discuss the effects of SPS on production structure. As we would expect in a comparative static sense, the effect on arable farms is low. The only exceptions are regions with a high share of starch potatoes. This is also confirmed by the expert opinions in all three case study regions. For this reason we subsequently focus on animal production.

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