EU commodity markets are projected to remain balanced - on average - over the outlook period, without the need for market intervention. Prospects for agricultural income grow at EU level during the outlook period, resulting from continuing decline in labour input rather than from income increases at sector level.

Policy and Macroeconomic Assumptions

The present medium term outlook for EU agricultural markets and income is based on a status quo assumption for agricultural and trade policy. The present proposals of the Commission to reform the Common Agricultural Policy (CAP) are not taken into account, but the CAP is assumed to follow the Health-Check decisions and global trade policy is assumed to respect the Uruguay Round Agreement on Agriculture. Macroeconomic assumptions include negative EU GDP growth of -0.3 per cent in 2012, followed by a gradual return to a modest growth of about two per cent per year as of 2015, and the exchange rate remaining at current levels until 2014, with a subsequent slight appreciation of the Euro to around 1.35 US$/€ in 2022.

Arable Crops

The medium term prospects depict a relatively positive outlook for arable crops in the EU as a result of solid world demand and firm prices. In the EU, market developments for arable crops are driven by the biofuel market, which is the most dynamic demand factor, as EU feed and food demand are expected to show only a marginal increase.

The medium term outlook for EU cereal markets is characterised by tight market conditions, low stock levels and prices remaining above historical levels. These developments are driven by moderate supply growth reaching 309 million tonnes by 2022, mainly the result of low annual yield growth rates (0.9 per cent on average), and an increase in the domestic use of cereals in the EU, most notably due growing demand by the ethanol and biomass industry in the framework of the Renewable Energy Directive (RED). Some reallocation between crops in the context of a stable overall cereal area is expected, with maize and common wheat further increasing their share (up to 17 per cent and 42 per cent, respectively) at the expense of other cereals. The growing demand for rice will be satisfied by increasing imports further reducing the EU self-sufficiency to 56 per cent.

Similar drivers impact upon the medium term prospects for the EU oilseed markets, which show a positive outlook for producers with strong demand and high oilseed oil prices. Supply growth is driven by moderate yield growth and to a lesser extent from a slightly expanding oilseed area. The expected increase in domestic use of oilseeds in the EU would also be driven by additional demand for vegetable oil as biodiesel feedstock.

Prospects for EU sugar markets are mixed. The growing demand for ethanol in the framework of the RED supports a growth in sugar beet production geared towards ethanol. On the other hand, for food consumption, isoglucose is expected to increasingly replace beet sugar, following the expiry of quotas in 2015. The expiry of the sugar quota will lead to a reduction of the domestic sugar price in the EU and make imports, including preferential access, less attractive.

Overall, the projected growth in domestic consumption of cereals, oilseeds and sugars is largely dependent on the assumptions for bioenergy use. Regarding biofuel, it is assumed that progress towards meeting the Renewable Energy Directive (RED) target of 10 per cent of renewables in energy share will continue, but the target will be met after 2020. Nevertheless, the production and use of biofuels will increase by about two-thirds, reaching a 8.5 per cent share by 2022.

Meat

The EU market is likely to be affected by the on-going economic downturn and historically high levels of unemployment, which tend to push EU demand towards cheaper meat options.

The new animal welfare requirements in the pig sector are also expected to play an important role in the near future. As a consequence, total EU meat production, after having increased during both 2010 and 2011, will contract by two per cent over the next two years. After this reduction, total meat production is projected to steadily recover over the 10-year horizon and to reach almost 45 million tonnes in 2022, approximately the same level recorded in 2011.

Meat production is mainly driven by increasing poultry and pork meat consumption, as well as by a firm external demand and higher prices. On a per-capita basis, EU meat consumption in 2022, at 82.6kg, would be at approximately the same level as it was in 2009 and one per cent lower than in 2011, despite the improved macroeconomic prospects. Pig meat is expected to remain the preferred meat in the EU with 40.8kg per capita consumption in 2022, compared to 24.1kg for poultry, 15.7kg for beef/veal and less than 2.0kg for sheep and goat meat.

The net trade position of the EU is projected to deteriorate over the outlook period, driven by an increase in meat imports (of beef/veal, sheep and goat and poultry meats) and a parallel decline in exports of poultry. Aggregate meat imports would grow by 5.2 per cent (2022 versus 2011) and exports would decline by 6.8 per cent, leaving the EU, nevertheless, a net exporter of pig and poultry meats in 2022.

Positive Prospects for Poultry Meat

Higher EU demand for poultry in 2011 and its relative price competitiveness vis-à-vis other meat types triggered a 1.8 per cent increase in production compared to 2010. This growth is expected to continue in 2012, thus partially compensating the declining availability of other meats. Over the outlook period, poultry meat would be the only meat with increased levels of production (+4.4 per cent on aggregate compared to 2011), driven by higher global and domestic demand. The increasing production also reflects the capacity of poultry to adjust more rapidly to market shocks, both on the demand and the supply side.

EU broiler prices have been at very high levels during 2012, peaking in September (€2,040 per tonne), when they were 16 per cent above the 2007-2011 average.

EU poultry meat market developments (million tonnes)

Overall, poultry meat imports recorded a three per cent decrease in the period between January and August 2012 compared to the same period last year, with lower imports from Brazil (-6 per cent), the EU's main supplier, due to high prices and limited supply. On the other hand, imports from Thailand increased by four per cent. In July 2012, Thailand regained access to the EU market with frozen salted poultry meat (TRQ of 92,000 tonnes) and, according to trade sources, is still building up capacity to fulfil the quota, although a higher uptake is expected in 2013.

In contrast, for the same period, exports registered an increase of around two per cent, due to higher demand from African countries (exports to South Africa showing a 74 per cent increase), while exports to Russia and Asia decreased (-6 per cent and -31 per cent, respectively).

Over the medium term, EU exports are expected to remain strong - +3.2 per cent in 2022 against 2011 - due to growing world demand, especially in Asia, Africa and the Middle East. EU exports would be mainly concentrated on the lower-quality segment, i.e. the parts which do not find an outlet on the domestic market. Overall, imports of poultry meat into the EU would follow the same trend but at a slower pace, increasing by 1.3 per cent, thus settling at 831,000 tonnes by 2022. World consumption for poultry meat is projected to keep growing over the medium term (+25 per cent), a trend from which EU exports can benefit.

EU poultry meat consumption is expected to increase by 4.3 per cent on average and reach 24.1kg per capita by 2022, mainly driven by the increasing volumes consumed in the EU-N12.

Agricultural Income

While the medium-term changes in the price and volume components of the arable crops and major livestock sectors have been established in line with the market projections, in the remaining agricultural sectors – such as fruit, vegetables, wine and olive oil – it was assumed that income would follow a development related to its historical trend. Compared to a five-year average of the period 2008-2012, the EU-27 agricultural income per annual working unit in real terms would be 17.5 per cent higher in 2022 compared to the base period. This positive trend is the result of an expected sharp deterioration of the factor income in real terms at sector level (-15.6 per cent), which is more than compensated by a reduction in the workforce employed in agriculture (-28.4 per cent).

Against the background of an overall positive trend in real agricultural income per worker, marked differences appear between the EU-15 and EU-N12 aggregates. In the EU-15, agricultural income in 2022 is expected to be roughly unchanged (+0.1 per cent) compared the base period. On the other hand, in the EU-N12, agricultural income continues to display a positive trend, almost 55 per cent higher than the reference period by 2022, thus slightly converging towards the EU average.

Caveats

The outlook for EU agricultural markets and income presented in this publication is based on a specific set of assumptions regarding the future economic, market and policy environment. In addition, the baseline assumes normal weather conditions, steady yield trends and no disruptions caused by factors like animal disease outbreaks or food safety issues.

The projections are not intended as a forecast of future outcomes but instead as a description of what may happen given a specific set of assumptions and circumstances, which at the time of making the projections were judged plausible. As such, they serve as a reference for policy simulations. It follows that the baseline projections depict rather smooth market developments, while in reality markets tend to move along a more volatile path as observed in the past and particularly over recent years.

An uncertainty analysis accompanies the presented baseline to quantify some of the uncertainties and to provide background on variation of the results. The uncertainty scenarios analysed focus on the impacts of i) the variability of input costs at regional level on farmers' income, ii) climate change on the agricultural sector, and iii) different EU biofuel policy scenarios on feedstock markets.

Further Reading You can view the full report by clicking here.

January 2013