Evidence from the 2003 CAP reforms
The CAP reform of 2003 launched the policy by which farm subsidies are determined as a fixed set of payments per farm - the Single Payment Scheme (SPS). Under the SPS, the farmer is entitled to a yearly payment depending on the number of payment entitlements and eligible hectares which (s)he possesses. The EU member states could choose among three SPS implementation models: historical, regional and hybrid. Under the historical model, the SPS payment is farm-specific and equals the support which the farm received in the reference period. This is the most common SPS model in the EU15. Under the regional model, an equal per-hectare payment is granted to all farms in the region. The reform of the CAP mostly represents a shift from area payments and livestock payments to the SPS. Therefore, both coupled and decoupled payments need to be considered.
The impact of the pre-reform (before the shift to the SPS) CAP subsidies on land values depends on whether the payment concerned is related to area or to livestock. Area- based payments are partially capitalised into land values and it appears that they have more bearing on land values than livestock-based payments do.
The impact of the SPS depends on the ratio between the eligible area and the total number of entitlements. If the number of entitlements is larger than the total eligible area, then the SPS is capitalised into land values.
The regional (and hybrid) model is expected to lead to greater capitalisation than the historical model because, for a given land base, more entitlements are allocated under the regional model than under the historical one.
A shift from the coupled subsidy system to the SPS should reduce land values in the short run. In the long run, the effect on land values depends on the tradability of entitlements, but one should expect lower capitalisation with the SPS than with the previous subsidy system.
If the SPS is capitalised into land values, then the effect of the SPS is expected to be more pronounced for less fertile land. This is because the previous subsidy system had a weaker effect on the price of less fertile land, as the level of subsidies was linked to productivity and thus less fertile land received less support. Under the SPS, less fertile land can be used to activate entitlements. At the same time, agricultural and nonagricultural drivers of land values are not as influential for less fertile land. This enables easier identification of the impact of the SPS on the value of less fertile land than on the value of more fertile land.
If the SPS is capitalised into land values, then the SPS may lead to changes in relative land prices for different types of land, and the regional and hybrid models may change the relative prices of land among regions. The first effect stems from the ability of the SPS entitlement to be activated for various land types, and thus the ramifications of the SPS are expected to be uniform across all eligible land. The second effect is owing to the possible redistribution of subsidies among regions by the regional and hybrid models, and consequently an increase in land values by the SPS in regions that obtain more subsidies through the SPS relative to the previous subsidy system.
The decoupling that accompanied the introduction of the SPS may lead to higher land prices. Decoupling subsidies from production allows farms to respond to market signals better, for example by adjusting the farm production structure, which may increase farm profitability. Higher farm profits would increase competition for land and lead to higher land prices. This effect is independent of the SPS payments (Ciaian et al., 2010).