Efficiency, subsidies, and environmental adaptation of animal farming under CAP

The purpose of this article is to model the interaction between the targets of the current Common Agricultural Policy (CAP): environmental adaptation, subsidies, and efficiency of animal farming. To this end we first have to identify the production frontier and relative efficiency level for each animal-oriented farm in the sample. The production frontier and efficiency index for each type of farm (assuming no specific production functions) are identified using Data Envelopment Analysis (DEA) techniques. We then address the relationship between relative efficiency, farm size, and environmentally friendly behavior by carrying out a nonparametric regression of efficiency, on economic size, a proxy for the degree of environmental appropriateness, and regional dummies. Calculations of the efficiency of the farms including direct subsidies are compared with the counterfactual exercise in the case in which direct subsidies are not considered. Finally, we look for relations between subsidies and factors such as farm size, efficiency, and environmentally friendly behavior. One key result shows that on average direct payments generally tend to increase efficiency. However, in most of the cases the mean efficiency decreases as the percentage of direct payments rises. Direct payments are found to be positively related to environmentally friendly production, at least in Germany. However, in general, the direct payment system is not sufficient to offset the fact that the less environmentally friendly farms as well as the larger farms are more efficient.