Cosmetic or Cutting? The impact of the modulation of EU direct payments on farm profitability in the Navarra region of Spain

The study analyses the effects of CAP direct payments and their modulation on farm profitability for a sample of 369 farms in the Navarra region of Spain. Cost-revenue ratios are calculated in order to highlight the impact of CAP direct payments, modulation and the valuation of own production factors at opportunity costs on farm- specific profitability. A multinomial logit model is employed for explaining the resulting profitability and relationships to farm characteristics. The results suggest that the rate of modulation, introduced by the 2003 reforms, will have a very minor impact on farm profitability and will exert little pressure on farms to restructure. Farms that can be profitable without any direct payments while valuing unpaid land and labour input at their opportunity costs are significantly more likely to be large, extensive, specialised in cropping and based in a non-mountainous less favoured area. Direct payments account for a smaller share of the gross revenue of profitable farms. Overall, the analysis highlights that the 2003 reforms do little to remedy the poor distributional efficiency and targeting of direct payments.