Farm survival and direct payments in the Norwegian farm sector
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The aim of the paper is to explore what roll policy plays for farmer’s exit/survival decision. We aim in particular to explore the importance of the total farm income as well as the on-farm wage rate for farm exit. Both the total income well as the on-farm wage rate is heavily influenced by agricultural support. A common believe which is often brought forward by the farmers lobby is that an increase in agricultural support can decrease farm exit rates. We aim to analyse this claim empirically by using data of all farms for the period 1999 to 2009. Our findings show that the absolute size of farms is most important in explaining farm exits. Larger farms have a substantially lower probability to exit than smaller farms. The on-farm wage rate or changes in it are less relevant. Farms seem to need a given size in order to generate a sufficient income for the farmer. In the long run, policy can influence farm size and a farm’s income potential. Our results therefore support in some way the common believe that an increase in support decreases the number of farm exiting. However, we see two problems that need to be considered in this respect. First our findings indicate that the changes is support needs to be rather drastic in order to meaningfully reduce farm exist. We calculate for the period 1999 to 2009 that total support would have need to be approximated 47% (or around 5 billion nkr) higher in order to reduce the yearly exit rate by around 1 percentage point. It is a question if society is willing to pay huge increase in agricultural spending if the effects on farm structural change are rather moderate. In addition we see a more fundamental problem. If support is increase drastically it is likely that the increased income opportunities in agriculture are mirrored by increases in land values. If farmers can earn more in agriculture there might be willing to pay more for agricultural land, if land is scarce this will lead in the long run to an increase in land values. This in turn increases the attractiveness for giving up the farm and renting out or selling the land. Therefore, exits rates might even be less affected by changes in direct payments as our calculations indicate. There is much we do not yet understand. Farms close down despite of favourable income expectations or relatively large farm sizes. Farmers do not seem to make their decisions out of pure economic considerations. Personal preferences for farming as a lifestyle, family ties, local infrastructure, networks, and employment opportunities may add to the explanation of structural change. But our findings suggest that a continuation of the current policy or even a rather strong increase in support is not likely to fundamentally change the current pattern of structural change in Norwegian agriculture.