This project analysed the role of risk in farmers’ production decisions and the impact of policy changes on risk in agricultural production. · A stochastic budgetary farm level model was developed using Irish National Farm Survey data and FAPRI-Ireland projections. · The model was used to examine the varying level of farmers’ exposure to risk under different policy regimes. · Results showed that under the Mac Sharry and Agenda 2000 regimes of agricultural policy the major incentive for profit maximising farmers to engage in production was to qualify for direct income support. Direct payments were relatively risk free sources of income and therefore risk played only a minor role in the production decision. The results showed that farmers would be exposed to more risk under decoupling. The return to production post decoupling is market based only, as the direct payment is no longer linked to production, and therefore is more exposed to price and production risk. · The stochastic budgetary model, which accounts for price and production risk, was used to estimate the economic trade off between “entitlement farming”, that is retaining farm land only to claim payments and not produce any tangible products, and conventional farming. · The results showed that for less efficient farms, the probability of achieving a significantly higher profit by engaging in entitlement farming is 46 percent, while further analysis shows that there is a 9 percent probability that profits from conventional farming systems would be only marginally higher than the ‘entitlement farming’ option.

This research project set out to build an EU agricultural policy modelling system involving participants from right across the enlarged EU. Policy Analysis is conducted at an aggregate commodity level for the main sectors of EU agriculture. The work summarised here took place over the period 2001 to 2004. The implementation of the Luxembourg Agreement and the Enlargement of the EU will lead to significant changes to the way in which agriculture operates in the EU25. Under the reform, direct payments that have been linked to production are to be decoupled to varying degrees across the Union. Enlargement will mean that agriculture in several New Member States (NMS) will come under the EU system of payments, supply constraints and market price supports for the first time. In light of the above, the most common current approach to agriculture commodity modelling and policy analysis - that which treats the entire EU as a single entity - faces a considerable challenge. Given the heterogeneity of EU agriculture and agricultural policy across the enlarged EU, it is increasingly the case that ‘the devil is in the detail’. From a scientific perspective, country level policy analysis is important in order to capture the consequences of this heterogeneity. Moreover, at a political level, policy makers realise that policy proposals either sink or swim on the basis of the perception of their expected future impact at a national level. Hence, it is important to be able to inform and facilitate a debate on the relative merits of particular reform proposals by having national (or even sub-national) level analysis to hand. The case for national level modelling across the EU is easily made, but few practitioners have taken up the challenge it presents.i Key problems include funding constraints, the absence of reliable national data sources, difficulties in agreeing and co-ordinating a consistent modelling approach and, perhaps most importantly, the absence of an integrated network of economists with knowledge of local level agriculture and agricultural policy across the enlarged EU.

The research conducted under the project no. 4822 resulted in an extension of the FAPRI-Ireland econometric model of Irish agriculture, established by Rural Economy Research Centre, to include an environmental dimension. The original model was first extended by a forestry component. As a result, the standard output is now enhanced with the additional projections of agricultural land area allocated to forestry. In the next stage the model was developed to enable the conversion of standard agricultural and forestry output into environmental indicators associated with global warming. Therefore, the model currently provides projections of greenhouse gas emissions and carbon sequestration from Irish agriculture and forestry. The general objective is to generate projections of net greenhouse gas emissions from Irish agriculture. In order to achieve this objective we extend the existing model to generate projections of: 1. farmers’ uptake of forestry on farmland 2. carbon sequestration from on-farm forests 3. greenhouse gas emissions from agricultural activities.The forestry component was added to the existing FAPRI-Ireland modelling system. An econometric technique is used to model farmers’ forestry planting decision. The greenhouse gas emissions are calculated following the guidelines provided by the Intergovernmental Panel on Climate Change, which have been adjusted for Irish specific conditions. Carbon sequestration levels are generated by applying a methodology developed by COFORD, Ireland. The projections were generated under two policy scenarios. First, it was assumed that there would be no change in agricultural or forestry policy over the projection period. Second, the assumption was made that policy measures are introduced to encourage further extensification of agricultural practices. If there was no policy change, the results suggest that afforestation on farmland would exceed 10,000 ha per annum; However the uptake would not, at any point, reach the level of planting recorded in 2001. As forests planted on farmland mature, carbon sequestration levels are projected to continuously increase in the coming years. On the other hand, greenhouse gas emissions from agriculture are expected to decline as a result of the projected contraction in the national cattle herd and sheep flock. If policy was reformed to include further extensification of livestock production, it is expected that less agricultural land would be allocated to forestry. The reduction in planting, however, would not be sufficient to significantly affect the carbon uptake levels projected under the no policy change scenario. However, further extensification would lead to further contraction in livestock numbers, which would result in more pronounced reductions in greenhouse gas emissions.