Evaluating Impact of the Common Agricultural Policy 2004-2013 Direct Payment Scheme on Economic Sustainability of Agriculture in Lithuania

The Common Agricultural Policy (hereinafter – CAP) direct payment scheme has contributed to structural change in Lithuanian agriculture. In particular, it has influenced farmers’ behaviour by making them reconsider their participation in agricultural production, leading to farm exits or reorientation towards production of cereal. The problem of the research: in order to assess if Single Area Payment Scheme worked for sustainable development of agriculture in Lithuania, the extent to which the CAP 2004-2013 direct payment scheme has contributed to the increase/reduction of viability and economic attractiveness of different types of farming in Lithuania is examined. The objective of the research is to carry out selection of indicators that characterize the economic attractiveness of different types of farming and to apply these selected indicators for assessing the impact of CAP 2004-2013 direct payment scheme in Lithuania.


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diversified production practices and rural development (Lindberg, 2011). Right in time with this reform towards sustainability, new Member States started implementation of CAP (Gay et al., 2005). The decoupling was applied in subsidies and integration through rights in the Single Payment Scheme (SPS) as well as in the Single Area Payment Scheme (SAPS). The latter was a transitional, simplified income support scheme offered to the Member States who joined the EU in 2004 and2007 (EU-12) as an option in order to facilitate the implementation of direct payments (Markopoulos et al., 2015).
Whole CAP and especially its one of the best-funded measures -direct payment scheme -should have contributed to the objectives of sustainable agriculture (Meléndez-Ortiz et al., 2009). However, ensuring sustainability (universally accepted as three-dimensional -economic, social and environmental -subject) of direct payments is rather complicated and challenging goal. First of all, direct payments were conceived to perform economic function without deepening social conflict and segregation between different farm groups or farming types, while contributing to securing environmentally sustainable farming practice (Ferrer and Kaditi, 2007). The CAP has presupposed that direct payment scheme should have contributed to the maintenance of environmental standards; food safety, animal welfare, competitiveness, market orientation, income stability for farmers (Erjavec and Erjavec, 2009) (see Figure 1). Source: own elaboration according to Erjavec, K., Erjavec, E., 2009, 2015 However the sustainability role of the direct payment scheme eventually had stronger socio-economical dimensions, such as reduction of income inequality among farmers, reduction of unemployment rate in rural areas, etc. (Schmid et al., 2006). Therefore, while analysing impact of the direct payment scheme on the agricultural sustainability, this paper places a special attention to direct pay-Environment Community Economy

Figure 1. The direct payment scheme's contribution to the agricultural sustainability
Source: own elaboration according to Erjavec, K., Erjavec, E. 2009, 2015 However, the impact of the direct payment scheme on sustainability eventually had stronger socio-economical dimensions, such as reduction of income inequality among farmers, reduction of unemployment rate in rural areas, etc. [Schmid et al. 2006]. Therefore, while analysing impact of the direct payment scheme on the agricultural sustainability, this paper places a special attention to direct payment scheme's economic sustainability, i.e. the most elusive component of the triple bottom line approach. Economic sustainability is integrally linked to the environmental and social outcomes a farm achieves. Although good financial and (in a broader sense) economic performance might mean that farm survives in the short run, it neither secures a long-term economic future, nor does it guarantee positive environmental or social outcomes. Moreover, this  maintenance of environmental standards  food safety  animal welfare  income stability for farmers  competitiveness  market orientation Electronic copy available at: https://ssrn.com/abstract=2851380 Zagadnienia Ekonomiki Rolnej ment scheme's economic sustainability, i.e. the most elusive component of the triple bottom line approach. Economic sustainability is integrally linked to the environmental and social outcomes a farm achieves. Although good financial and (in a broader sense) economic performance might mean that farm survives in the short run, it does not necessarily secure a long-term economic future, nor does it guarantee positive environmental or social outcomes. Moreover, this paper looks at the economic sustainability of agriculture in the context of direct payment impact on choice of specialization through economic attractiveness.

Methodology
In this paper economic sustainability in agriculture is linked with the maintaining of current farming type by farmer while securing sufficient level of income in the long run. Farmers' choice on specialization depends on many indicators; however, it is complicated to specify which of those indicators outline the 'economic attractiveness' best. According to Knoke et al. (2001) andGeorgopoulou et al. (2008), the economic attractiveness of farming activities is closely linked to economic performance: if it is cost-effective, then it is economically attractive too. Thus, economic attractiveness and efficiency is closely linked. In the Lithuanian literature, there are a number of 'economic efficiency' interpretations that are applicable to the economic activities assessment (see Table 1).
The analysis of various definitions of 'efficiency' led to general concept that efficiency is seen as a ratio between company's performance and the resources consumed to achieve those performance results.
Economic efficiency -i.e. better performance (higher profits) at lower costs -was primarily analysed in order to establish a model for assessing economic attractiveness of farmers' choice in specialisation. Andrijauskienė (2004) argues that the term 'economic efficiency' means effectiveness of production activities, i.e. shows the relationship between economic activities (process) and the objectified performance (results).
One of the main financial indicators that characterise economic efficiency is profitability. Berry ratio is commonly applied indicator (Przysuski and Lalapet, 2005); it shows the company/farm profitability resulting from their typical value-building functions, assuming that the costs incurred in the execution of these functions are included in the operating costs (Berry, 1999). Berry ratio may be applied only with existence of a strong correlation between company/ farm operating costs and sales revenue.
Another widely applied economic efficiency indicator is Gross profit per employee (or one annual work unit, AWU) (Berger et al., 1993;Chavas et al., 1993). This ratio shows how efficiently the company or farm use human resources. Dividends are also in some cases taken into consideration in line with this indicator in order to assess cash balance at the end of fiscal year (Porter and Scully, 1987).

Buklytė and Ruževičius 2010
Comprehensive tool for assessing the company's operational excellence and its inner potential <...> with regard to performance of the activities, customers, people and society.

Štaras and Šiopė 2010
Ratio of costs, resources and qualitative output.

Daft 2009
Amount of resources used to achieve organizational goals.

Deksnienė et al. 2007
Level of utilization of productive resources, guaranteeing maximum effect. Šimaitytė et al. 2006 Company's operating efficiency, effectiveness, expressed in the ratio of the achieved results and the costs used.

Puškorius 2002
Ratio of operating results to complex resources, deposits, costs and other.
It is important to draw attention to the achievement of maximum output with the existing resources and technology, working in a moderate pace, avoiding unnecessary wastage and defects. ROCE (Return on Capital Employed) is another indicator widely used for economic effectiveness analysis (Muhammad 2009;Whiting 1986;Andersson 2006). ROCE is calculated as ratio of company's operating profit to the capital employed (Whiting, 1986). The indicator demonstrates return on capital investments in the core business activities. It is often used in the financial reports intended for investors and company owners (Whiting, 1986).
One of the recently emerged indicators describing economic efficiency of technologies is investment depreciation rate. This indicator is especially important while establishing a new company or while changing/expanding its activities, as it helps to determine how long the capital investments will generate profit.
Labour productivity is essentially important factor in economic efficiency of business (Arrow et al., 1961;Harris et al., 2005), no matter if it is labour-intensive or not. However, in evaluating attractiveness, it can be noticed that the less labour-intensive own business is, the more attractive it is (Saez, 2000), especially in family farm case, when the basic work is performed by family work units.
Initial overview of available economic efficiency measurement tools led to development of a system of indicators (see Figure 2) for assessment of company's economic attractiveness or, in case of farm, choice to specialize in a certain farming type.
The economic efficiency indicators mainly used for companies, were adapted to be applicable for farms. Basing on 2004-2013 data of respondent farms belonging to Farm Accountancy Data Network (hereinafter FADN), two indicator systems -Alfa and Status Quo -were formed with six indicators (Berry ratio,

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Family farm income per 1 FWU, Savings at the end of the year, Labour input (hours), Rate of return and Investment depreciation rate). In Alfa indicator system, all the above listed indicators are calculated eliminating all direct financial support available to farmers (i.e. direct payments, organic farming (OF) payments, and less favoured areas (LFA) payments). Meanwhile in Status Quo indicator system, values of the same indicators were calculated basing on results of factual implementation of 2004-2013 CAP direct payment scheme in Lithuania. Indicator values for a ten year period (from 2004 to 2013) are estimated separately for each of the selected farming type. In this model, a shortened set of FADN farming types (eliminating mixed types) is applied, containing the following -Specialist cereal/rapes 1 , General field cropping 2 , Horticulture 3 , Specialist dairying 4 , Grazing livestock 5 (see Figure 3). In the Alfa system, Berry ratio was calculated by dividing farm's gross profit (without subsidies 6 and depreciation) by total production costs (variable and fixed). In the Status Quo system, the same formula was applied for calculating Berry ratio except that production subsidies were added to farm's gross profit.
Gross profit was calculated by deducting total production costs, variable and fixed (including VAT payable), from total farm output. In the Status Quo system subsidies for production were added to gross profit. Gross profit per 1 annual farm working unit (€/AWU) was calculated by dividing gross profit by number of AWU.
In the Alfa system, savings at the end of the year (€) were estimated in the following way: cash flow without subsidies plus asset sales-purchase balance plus quota sales-purchase balance minus returned debts minus private expenditures. In the Status Quo system, savings at the end of the year adds production subsidies received.
Farm labour input includes working time (hours) of farmers, their spouses and other farm members as well as hired employees. The value of this indicator is identical in both: Alfa and Status Quo systems. 6 Subsidies = production subsidies + investment support; where production subsidies contain direct payments, less favoured areas (LFA) payments, organic farming (OF) payments, support in case of disaster, and other production-related subsidies. In the alfa system, Berry ratio was calculated by dividing farm's gross profit (without subsidies 24 and depreciation) by total production costs (variable and fixed). In the Status Quo system, the same formula was applied for calculating Berry ratio except that production subsidies were added to farm's gross profit.
Gross profit was calculated by deducting total production costs, variable and fixed (including VAT payable), from total farm output. In the Status Quo system subsidies for production were added to gross profit. Gross profit per 1 annual farm working unit (EUR/AWU) was calculated by dividing gross profit by the number of AWU. In the Alfa system, savings at the end of the year (EUR) were estimated in the following way: cash flow without subsidies plus asset sales-purchase balance plus quota sales-purchase balance minus returned debts minus private expendi-24 Subsidies = production subsidies + investment support; where production subsidies contain direct payments, less favoured areas (LFA) payments, organic farming (OF) payments, support in case of disaster, ant other production-related subsidies. Electronic copy available at: https://ssrn.com/abstract=2851380

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In the Alfa system, Rate of return (%) was estimated by dividing net profit 7 (without subsidies and depreciation) by total value of agricultural assets, including rented land, at the beginning of year. In the Status Quo system, net profit adds production subsidies.
In both: Alfa and Status Quo systems, Investment depreciation had the same value (%), which has been estimated by dividing net investments by gross investments 8 .
Ten Alfa indicator systems were composed basing on the estimated indicator values from the years between 2004 and 2013. Equally, ten Status Quo indicator systems were drawn.
According to Podvezko (2010) the TOPSIS method is the most suitable in evaluation of described model. Thus, each of the system had TOPSIS method applied on them. The calculated TOPSIS values demonstrate dynamics of economic attractiveness of each farming specialisation over the selected years. Striving to identify the most economically attractive farming specialisation over the whole year range, a mathematical average of values of normalized TOPSIS criteria was drawn: (k = 1, ..., 10, where k = 1 corresponds to year 2004, k = 2 respectively corresponds to year 2005, ..., k = 10 corresponds to year 2013).

Outcomes
According to the results, retrieved from the Alfa indicator system analysis, while direct aid to farms is eliminated, sole cultivation of Specialist cereals/ rapes in 2012 would have been the most attractive farming specialisation in Lithuania, in comparison to other farm types. In any other year, the most economically attractive farming activity would have been horticulture (see Table 2).
Economic attractiveness of dairy farming may be observed in 2005 and 2006, while between 2008 and 2010 general field cropping might have been considered an attractive option too. Table 3 demonstrates the major outcome of assessing economic attractiveness of different farming specialisation according to the developed indicator systems, i.e. 2004-2013 Alfa and Status Quo systems' average TOPSIS values. In the Alfa indicator system case (when direct aid to farmers is eliminated), the average of indicators values demonstrated a strong economic attractiveness of solely horticultural farming over the 2004-2013 period. The other farming types were less attractive by at least 42% in comparison to horticulture. The second most economically attractive type of farming was general field cropping; the third was dairying (half as economically attractive as horticultural farm-7 Net profit = Gross profit minus family remuneration. 8 Gross investments equals' difference between purchase and sales price of land, forest, permanent crops, farm buildings, machinery and quotas. Gross investments -depreciation = net investments. ing). Cultivation of cereals/rapes without direct payments would have been only fourth option for farmers, while grazing livestock sector would have been the least attractive.   Source: own elaboration.
The obtained TOPSIS method values clearly demonstrate that the direct support scheme has made cultivation of specialist cereals and rapes the most economically attractive agricultural specialization for Lithuania farmers in 2004--2013 period. Compared to Alfa scenario, which eliminates effects of the direct support, the economic attractiveness of Specialist cereals/rapes cultivation has increased by 93%. According to Statistics Lithuania (Statistics, 2014), cereal crop area has increased by more than 27% from 2005 to 2013; and in 2013 it already accounted for about 45% of all utilized agricultural area (UAA) in Lithuania.
According to TOPSIS results, in Status Quo system case, the second most popular farming activity General field cropping remained at similar level as in the Alfa system. The economic attractiveness of this farming type has increased by 9% as compared to 2004.
Meanwhile attractiveness of horticulture was significantly (-39%) reduced by direct support scheme applied in Lithuania in 2004-2013: according to Statistics Lithuania (2015, fruit and vegetable production area decreased by 36.3% and 23.4%, respectively, during the same period. Impact of direct payment scheme on Specialist dairying sector was negative as well: its economic attractiveness decreased by 16%. In Status Quo system Specialist dairying farming type has 48% lower economic attractiveness than specialist cereals/rapes. Grazing livestock has become slightly more attractive (+9%) to farmers due to the subsidies from direct payment scheme. Nevertheless this farming type is still 60% less economically attractive than Specialist cereals/rapes.

Conclusions
Since 2003, direct payment scheme, as one of the most intensely financed CAP measures, together with whole CAP in general, was expected to contribute to the objectives of sustainable agriculture. However, the role of the direct payment scheme focused on stronger socio-economical dimensions of agricultural sustainability, such as reduction of income inequality among farmers, reduction of unemployment rate in rural areas, etc.
Identification of the link between economical sustainability, economical attractiveness and economic efficiency allowed development of a model for assessing impact of direct payment scheme on economic sustainability.
The values obtained within application of TOPSIS method, showed that direct support scheme made cultivation of specialist cereals and rapes the most economically attractive agricultural specialization for Lithuanian farmers in 2004-2013. The economic attractiveness of this particular farming type has increased by 93% as compared to Alfa system scenario, where the effects of production subsidies were eliminated.
Model of economic attractiveness to different farming types essentially replicates structural changes in Lithuanian agriculture in 2004-2013. According to the outcomes brought by applying this pilot economic attractiveness evaluation model, the 2004-2013 CAP direct support in Lithuania basically prompted economic attractiveness of such farming type as Specialist cereal/rape that in turn stimulated farmers' reorientation towards this most economically attractive type of farming.
In case of Lithuania, SAPS has become economically attractive niche for farmers' strong orientation towards financial support and basically repositioning the major part of economic risks on direct payments. As proved by Alpha system case results, without the production support, cereals/rape sector would have been way less economically attractive and in terms of agricultural sustainability can be more sustainable.