Do CAP subsidies stabilise farm income in Hungary and Slovenia?

Abstract

A large share of the Common Agricultural Policy (CAP) budget takes the form of subsidies for supporting and stabilising the income of European Union farmers. This paper assesses whether CAP subsidies stabilise farm income and examines how subsidies may reduce the variability of farm income over time. The analysis is developed on a constant sample of Hungarian and Slovenian Farm Accountancy Data Network farms during the period 2007–2015. It incorporates both the whole sample and farms classified according to two criteria: economic size, and the relative importance of subsidies. Farm income variability is analysed by means of variance decomposition using three main income components: market revenue income, subsidies, and the cost of external factors. Variability in farm income over time is high due to the high variability in the market revenue component. Subsidies mitigate instability in farm income because their variability is lower than that of market revenue income. While CAP subsidies thus represent a stable source of farm income, they have played a limited countercyclical role in stabilising total farm income. Subsidies are not found to be targeted at the farms that face the highest level of income variability and thus may not be an efficient tool for stabilising farm income.