Volume 4, Issue 1, June 2015, Pages 22–34
Open Access
- Open Access funded by UniCeSV, University of Florence
- Under a Creative Commons license
Abstract
This
paper assesses the existence of both greater profitability for
large-scale farms and economies of scale in the French viticulture
sector, thereby confirming or invalidating the argument put forward by
the European Commission to justify the abolition of vine planting
rights. According to this argument (1) economic efficiency increases
with the extension of the vine area in vineyards, and (2) vine planting
rights prevent the expansion of farms.
This article
discusses the issue of economies of scale in agriculture and focuses on
specific matters related to viticulture. The key issue of our
demonstration lies in the impossibility of defining economies of scale
by comparing the profits of farms producing different types of product
at different prices. By using an assessment of these variables through
FADN, it proposes and justifies the interest of using a measurement of
output which is the net value added per unit of labor.
The
report prepared on behalf of the European Parliament is criticized as
it demonstrates a positive correlation between size and efficiency,
without taking account of the broad farm gate price dispersion for wine.
This article demonstrates that in the case of France, over the period
2005–2007, farm size has little impact on performance. The significant
differences observed are the result of differences in the selling price
of wine.
In summary, the main argument put forward by
the European Commission to justify canceling vine planting rights is not
adapted to the case of France because it considers wine as a single
product sold at a single price.
Keywords
- Planting rights;
- Wine growing farm;
- Profitability;
- Economies of scale;
- Price
1. Introduction
The
European Commission is pursuing the goal of reforming the Common
Agricultural Policy through the adaptation of agriculture and farmers to
market signs: the regulations are changing and interventions are
gradually being redirected towards new efficiency goals on the one hand
and sustainability on the other (European Commission, 2008).
Efforts aimed at increasing efficiency are accompanied by the hope that
an improvement in the economic performances of producers will be based
on increased farm size as this provides an opportunity to exploit
economies of scale. According to some authors, such economies of scale
can be achieved in agriculture just as in other industries (Nooteboom, 2006), even if some researchers have long contested their existence (Boussard, 1973).
The
last CMO for wine, introduced in 2008, established new legislation
ensuring the definitive suppression of vine planting rights. The main
justification for this decision was based on the negative impact of the
previous legislation on the production costs and competitiveness of
European viticulture compared to New World wine producers (Montaigne and Coelho, 2006): according to the European Commissioner, M. Dacian Ciolos, “…
this analysis demonstrated that vine planting rights lead to an
increase in the cost of production and are a barrier to the
rationalization of farm holdings, thus decreasing competitiveness”. 1 In the months following this reform, many heated debates were held ( Vautrin, 2010 and Montaigne et al., 2012)
concerning the existence of economies of scale in the viticulture
sector and the commission wrote a draft containing new rules for
managing production potential through vine planting rights. The current
status of the European legislation concerning permission to plant vines
is going to change, transforming the planting right regime in a regime
based on authorizations (reg. 1308/2013. chapter III).
In
the viticulture sector, increased farm size may be the result of two
mechanisms: first, the promotion of economic concentration, when the
total volume of production is unchangeable, through the elimination of
small-scale producers. Such a phenomenon has been observed in many other
agricultural segments (Kroll, 1987).
While this mechanism worked well in viticulture, some researchers
considered it insufficient. The suppression of vine planting rights will
have no impact on this speed of change, at least in those zones where
farm holdings are highly specialized in viticulture, because the
mechanism depends on the life-cycle of farms and of the individual
choices between sale of the land and grubbing-up of vines.
Second,
the result may be achieved through the growth of certain farm holdings
by planting new vines resulting in an increase in the total surface area
of the vineyard. We can therefore raise two questions: first, what
would be the consequences of increased production on the market in terms
of prices and farmers׳ revenues? while this is an important question,
it exceeds the scope of this paper. Second, would large-scale farms,
either newly created or recently expanded, be more efficient than the
smaller ones?.
Our
article focuses on the final issue. We intend to determine the existence
and extent of economies of scale in the viticulture segment as well as
the direct link between the size of farm holdings and their
profitability. At present, as a study at European level seems unfeasible
due to access constraints to European agricultural data, we will focus
here only on the case of France.
In the first section we explain how the paper contributes to the existing literature research about vine planting rights in EU.
In
the second section, we will address measurement issues relating to
economies of scale in agriculture, and more particularly viticulture.
Here, we will introduce an index to identify their existence and extent.
We
will then study the variations in this index, illustrating the need to
take account of the significant differences in the price of wine.
In
the fourth section, we will demonstrate that for each class of prices
in the French viticulture sector, variations in profitability as a
function of vine surface area do not exist or are simply erratic.
Whatever the case, these variations are too weak to increase the
capacity of large-scale farm holdings to achieve acceptable revenues and
small-scale farm holdings do not reach such revenues.
In
the final section of this article, in order to extend our discussion
beyond the French case, we will demonstrate that the legislation
relating to vine planting rights in the European Union did not prevent
the increase in the average size of farm holdings over the past 17
years.
2. Literature research about vine planting rights
Economic
research literature on planting rights is limited. If we consider it
extensively, we find parliamentary reports summarizing expert opinions,
taking stock of the legal texts and providing some statistics on land
which is not planted in vines in the appellation areas (Vautrin, 2010 and Suguenot and Got, 2011).
These reports, although expressing clear and fully detailed diagnostic,
give no scientific demonstration, even if the stakes are clearly laid.
In particular, they argue that (1) significant non-planted areas are
available at European level (1.2 million hectares of 1.67 in delimited
PDO areas); (2) the planting rights are neither an obstacle to the
development of the wine industry, nor a barrier to entry for investors;
(3) they provide regulation in the economy without budgetary cost. They
also expressed fears of the professionals: (1) an increase in
production, (2) relocation of vineyards in particular for the production
of wines without geographical indication, (3) the usurpation and abuse
of the protected denomination of origin (PDO) reputation by plantations
nearby these areas, (4) the industrialization of wine-making and a
concomitant decrease in quality. We could add the work of political
science focusing on political action and lobbying to challenge the
decision of the signing of the new CMO wine in 2008 (Blancaneux, 2014).
The
pioneering work of Luigi Galletto, analyzed the planting rights market
in a PDO region from two surveys (2004 and 2008). The author has
characterized the size of transfers, the role of brokers, delays, zoning
restrictions, the size and age of the growers, the quality of wine
(PDO), the share of intra and extra-regional transfers, the impact of
limiting the transfer price of planting rights, their high variability
and the main factors of increasing or decreasing of these prices (Galletto, 2010).
The
applied study of Roberta Sardone׳s team is the most ambitious and most
important. In its theoretical part, the study uses the Nerlove׳s model (Sardone, 2012).
This model tests the response, in terms of area planted with vines by
producers, to the price indicator to verify the ability of this
mechanism to achieve market equilibrium. The introduction highlights the
difficulties encountered in seeking to support relevance of these
reactions mainly due to the existence of agricultural policies, market
uncertainty, low elasticities of supply and demand, price volatility and
income. The price indicator is the average export price. This model is
applied at a high level of aggregation and the simplicity of data are
very poorly suited to a highly differentiated qualitatively production,
therefore in price.
In
its applied part, the study frequently uses the concept of economies of
scale but in two different meanings: sometime, they apply the notion to
large companies and the ‘downstream’ industry. In that case the
definition is related to economies of scope and economies of
organization: large size, ability to provide services in different
conditions, marketing, international market access, etc. On the other
hand, this concept is more typically applied to the size of the
vineyards. These double meanings can induce misunderstanding in
analyzing the phenomenon.
Deconinck and Swinnen (2014),
propose a theoretical model assessing the effect of planting rights on
areas planted with vine based on market supply and price of land. This
is a classic application of surplus accounts (Welfare effects) to
evaluate the economic policy consequences on who are the beneficiaries
and the losers (Bourdon, 1982).
“Our
theoretical model integrates the markets for wine, land and planting
rights. We identify the efficiency and distributional consequences of
planting rights and we show how differences between Member States in
implementation of planting rights, in particular concerning trade and
enforcement of planting rights and the functioning of the reserve
system, affect efficiency and welfare.” (Deconinck and Swinnen, 2014, p. 18).
The
advantage of this model is to be based on the microeconomics of
production. But like any model of this type, we can discuss the
assumptions, the assessment of key variables and the lack of application
demonstrating its relevance. The important point is price
differentiation. The authors have difficulties to deal with
differentiated products and different levels of price, by offering as
much land markets (thus models) as there are price levels and quality of
wines.
“That is, we
assume that producers within one region are producing a homogenous
product. In reality, of course, the quality and price of wines can vary a
lot between different producers. This could be incorporated in the
model by assuming that ‘high quality’ producers and ‘low quality’
producers form two separate regions (with or without trade in planting
rights between regions, as analyzed later).” (Deconinck and Swinnen, 2014, p. 6).
In that case it should be difficult to aggregate the results for the whole region and every price segment.
3. The size of farm holdings: an economic issue
“Economies
of scale may be defined initially as those that result when the
increased size of a single operating unit producing or distributing a
single product reduces the unit cost of production or distribution” (Chandler and Hikino, 1994).2
Economies
of scale result from the existence of fixed costs or, in other words,
the indivisibility of certain production factors, as well as from
learning economies (improved skills) and economies relating to the cost
of inputs in relation to changing production techniques (Vettori, 2003).
3.1. Economies of scale in agriculture.
In
agriculture, economies of scale are most often linked with
mechanization which allows the use of more powerful and high-performance
machines. However, the existence of economies of scale in agriculture
has been always at the heart of agricultural studies. Some authors have
contested their very existence or the extent to which they can be
achieved in agriculture (Boussard, 1973, Boussard, 1987, Marshall et al., 1997 and Gleyses, 2007; and initially Marshall, 1890) “In
agriculture and other trades in which a man gains no very great new
economies by increasing the scale of his production, it often happens
that a business remains of about the same size for many years, if not
for many generations”. ( Marshall, 1890, p. 238). Others, without systematically questioning their existence, note their limited importance (Chavas, 2001).
With
regard to the debate on the existence and extent of economies of scale,
two recent studies in the dairy industry provide ambiguous conclusions:
the first (Institut de l’Elevage, 2011)
shows economies of scale ranging from €10 to 19 per thousand liters of
milk, depending on the type of production system, for an estimated
average cost of approximately €500.
If
we exclude the cost of labor, these economies of scale exist for a
volume of between 200 and 700 thousand liters of milk produced every
year. Above this level of production, economies of scale do not exist.
The main result shows that individual costs vary considerably from one
farm to another, independent of the size of the farm, a fact which can
lead to very significant variations in the revenues of family labor.
A second study in the same industry in Canada (Perrier, 2011)
reaches similar conclusions: small economies of scale are achieved for
between 45 and 120 cows while economies of scale stabilize for larger
farms. The author finds a lack of economies of scale if labor
constraints are taken into account together with scattered profits:
small farm holdings may be considerably more profitable than larger
farms.
