- Open Access funded by UniCeSV, University of Florence
- Under a Creative Commons license
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.
- Planting rights;
- Wine growing farm;
- Economies of scale;
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.