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Prospects for Agricultural Markets and Income 2010-2020

by 5m Editor
11 February 2011, at 12:00am

Market and sector income prospects elaborated on the basis of specific assumptions regarding macroeconomic conditions, the agricultural and trade policy environment, weather conditions and international market developments from the European Commission Directorate-General for Agriculture and Rural Development.


The medium-term outlook for EU agriculture depicts a mixed picture with regard to commodity market developments. The outlook for EU agricultural markets remains subject to a number of uncertainties regarding future market developments as well as the macroeconomic and policy settings.

They concern in particular the drivers of demand and supply of agricultural commodities, the linkage between agriculture and energy markets and the path of economic recovery; uncertainties whose possible impacts on the baseline are addressed in Part II of the publication. Climate change will remain to influence the market outlook, with unpredictable weather patterns leading to supply fluctuations. Other factors such as future changes in agricultural and trade policies as well as the outcome of the current Doha Development Round of trade negotiations and bilateral/regional trade discussions and the policies on renewable energy could also have far reaching implications for the future pattern of EU agricultural markets.

While the expected demand growth resulting from the assumed economic recovery and mandatory biofuel mandates should support production expansion, EU output would remain under its full potential as the expected increase in input costs would limit the profitability of production. In addition, crop yields are expected to grow at a slow pace, continuing the decline in the rate of growth observed during the previous decade.

The assumed appreciation of the Euro would further weaken the competitiveness of EU exports on world markets, leading to a loss in world market share at a time when global demand is growing at a relatively fast pace. The deteriorating competitiveness of the EU under the current setting is further emphasised in the analysis of alternative assumptions on yield and global demand growth rates.

On the other hand, commodity markets are expected to remain balanced over the outlook period, without the need for market intervention, (only the SMP market will remain sensitive to global supply-demand developments over the near term). Prospects for agricultural income remain positive, displaying a modest growth rate at the EU level, driven by the decline in labour input which is expected to continue.

Policy, Economic and World Market Environment

The outlook for EU agricultural markets and income over 2010-2020 assumes a status quo policy environment, stable macroeconomic conditions and relatively favourable world market perspectives. The Common Agricultural Policy is assumed to follow the Health-Check decisions, and global trade policy to respect the Uruguay Round Agreement on Agriculture. Macroeconomic assumptions include a gradual and modest EU GDP growth at around two per cent per annum and a steady appreciation of the EUR to around 1.47 US$/€. Commodity prices are expected to stay firm over the medium term supported by factors such as the growth in global food demand, the development of the biofuel sector and the long-term decline in food crop productivity growth.

Arable Crops

The medium-term prospects for the EU cereal markets depict a relatively positive picture with tight market conditions, low stock levels and prices remaining above long term averages. Supply growth is expected to result mostly from very moderate yield growth (just above 0.5 per cent per year on average) with some reallocation between crops in a stable cereal area.

The domestic use of cereals in the EU is expected to increase, most notably thanks to the growth in the emerging bioethanol and biomass industry in the wake of the initiatives taken by Member States in the framework of the 2008 Renewable Energy Directive (RED).

The medium-term prospects for the EU oilseed markets depict a positive picture with strong demand and high oilseed oil prices. Supply growth is expected to result mostly from moderate yield growth and to a lesser extent from a slightly expanding oilseed area, with some reallocation between crops. The expected increase in domestic use of oilseeds in the EU would also be driven by the growth in the emerging biodiesel and biomass industry following the initiatives taken by Member States in the framework of the RED. The trade balance is not expected to improve over the medium term as additional imports are required to meet the biofuel targets.



Meat

Total meat production is expected to recover over the near term from the decline suffered in the wake of the economic crisis but longer term growth prospects remain modest at an annual rate of 0.3 per cent on average. Aggregate meat production would reach 44.4 million tonnes in 2020, exceeding the 2009 level by four per cent. The situation differs between ruminant and non-ruminants, as beef/veal and sheep/goat meat production would drop by seven per cent and 11 per cent, respectively, while pig and poultry meat production would expand by seven per cent each. The potential growth in non-ruminant meat production would remain constrained by the expected increase in production costs.

The driving factor for production growth would be the increasing poultry and pig meat consumption. On a per-capita basis, overall EU meat consumption would reach 85.4kg in 2020, two per cent higher than 2009. Poultry meat consumption would increase most, above six per cent and pig meat growth would remain below five per cent on aggregate between 2009 and 2020. Pig meat would remain the most preferred meat in the EU at 43.3kg per capita in 2020, compared to 24.7kg for poultry, 15.4 kg for beef and veal and less than 2kg for sheep and goat meat.

The net trade position of the EU is projected to deteriorate over the outlook driven by a steady increase in meat imports (of beef and poultry meats) and a parallel decline in meat exports (of beef, pig and poultry meats). Aggregate meat imports would grow by 14 per cent altogether, while meat exports would decline by almost 23 per cent by 2020, leaving the EU with net exports of around 200,000 tonnes, with pig meat as the single commodity with a positive net trade balance.



Milk and Dairy Products

Milk production is expected to return to an increasing path, driven by a fairly optimistic demand outlook based on improved macroeconomic prospects. The rate of increase will be rather moderate, with EU-27 milk production in 2020 projected to exceed the 2009 level by less than four per cent. Milk deliveries would increase by a slightly higher rate (of almost five per cent), the difference being due to the gradually declining on-farm consumption in the EU- 12. The quota abolition is expected to lead to a very modest reaction of EU-27 milk deliveries at the end of the quota regime in 2015.

The outlook appears favourable for higher value-added dairy commodities, driven by growing demand for cheese and fresh dairy products. Production of fresh dairy products (including drinking milk, cream, yoghurts etc.) is projected to increase by about eight per cent (from 2009 to 2020) and cheese output is depicted to grow by about 10 per cent. Prospects for cheese exports are favourable despite the strengthening Euro, with the EU maintaining a steady share in global cheese exports above 30 per cent.

Whole milk powder (WMP) production is expected to fall only marginally below its 2009 level and EU exports would remain firm over the medium term, driven by strong global demand. Nevertheless, the EU is expected to lose market share of global exports that would decline to 21 per cent in 2020 (from 24 per cent in 2009).

The outlook depicts continued market stability for butter, conditional on firm domestic demand around the level of two million tonnes. The projected increase in production for 2015 (year of quota abolition) would lead to a temporary increase in EU exports.

Skim milk powder (SMP) export perspectives are less favourable given the assumed strengthening of the Euro and strong supply from other exporters. As EU demand prospects are also fairly weak, the outlook for price growth is rather constrained over most of the projection period. However, supply pressure on the market would be mitigated by reduced EU production.

All in all, and despite the relatively favourable outlook and apparent short- and long term market stability for SMP, the nearer term prospects remain sensitive to global supply-demand developments and the market's ability to absorb the release of intervention stocks.

Agricultural Income

Agricultural income (expressed as real factor income per labour unit) is expected to recover from the significant low in 2009 with an outlook for a gradual, albeit modest growth in aggregate EU income over most of the projection period that would exceed the 2005-2009 average (base) level by around 20 per cent in 2020. This overall gain would mask uneven developments for the EU-15 and EU-12; whereas agricultural income in the EU- 15 would show a more moderate increase to almost 10 per cent above the base level, it is foreseen to display a more pronounced picture in the EU-12 rising 45 per cent above the base level by 2020 and converging towards the EU average.

While the assumed decline in agricultural labour remains an important factor behind the income prospects for both EU-15 and EU-12, the increase in the subsidies granted to agricultural producers in the EU-12 over the phasing-in period should remain a key driver of income growth in this group of Member States.

Further Reading

- You can view the full report by clicking here.


February 2011