Do CAP direct payments stabilise farm income? Empirical evidences from a constant sample of Italian farms

Abstract

Common Agricultural Policy uses a large share of its budget to support and stabilise the income of EU farmers by means of direct payments (DP). This paper assesses how much and how DP reduce the variability of farm income over time. The analysis is developed on a constant sample of 2402 Italian farms during the decade 2003–2012. It considers both the whole sample and farms grouped according to: types of farming; economic size classes; relative importance of DP. Income variability is analysed by mean of variance decomposition by income components. Variability of farm income over time is high and most of it is coming from the revenue component. The DP stabilise farm income and this is mainly because DP are less variable than the remaining part of income. Indeed, DP are found to play a very limited countercyclical role against fluctuations of the remaining part of farm income. Finally, DP are not targeted to those farms facing the highest level of income variability. These latter two results suggest that, while DP stabilise farm income, there is a potentially large room of manoeuvre for increasing the efficiency of DP as income stabilising tool.