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Farm Economics brief N°1 Income developments in EU farms

June 2011

Contents The economic crisis disrupted the increasing trend in farm income Differences in income situation among Member states, regions, types of farming, farm size Main factors influencing the trend in income A great volatility of farm income

Introduction This brief analyses income developments of EU farms over the last decade. Farm income is compared between Member States and among regions. We analyse also the main drivers influencing the trend in income.

Differences in income levels reflect differences in orientation of production in Member States and regions, the significant diversity in farm structures, farm technical strategy and natural conditions.

During most of the last decade, significant gains in labour productivity, driven by structural adjustments (reduction in the labour force, in the number of farms and increase in the average farm size) have offset the unfavourable trend in output and input prices, allowing income to increase. But the commodity price bubble and the economic crisis disrupted the continuity of the small increasing income trend and introduced significant volatility.

Results indicate that direct payments play a crucial role in farm profitability. When taking into account the costs for own and external factors of production (land, labour, capital), many farms are not profitable with market revenues alone. Direct payments increase significantly the share of farms able to cover their total costs.

The main data source in this brief is the Farm Accountancy Data Network (FADN). The FADN is an annual sample survey collecting structural and accountancy data on farms. The brief summarises the following two reports: http://ec.europa.eu/agriculture/rica/pdf/hc0301_income.pdf http://ec.europa.eu/agriculture/rica/pdf/report_2007.pdf

This publication does not necessarily reflect the official opinion of the European Union. Neither the European Union institutions and bodies nor any person acting on their behalf may be held responsible for the use which may be made of the information contained therein.

Contact: DG Agriculture & Rural Development, Microeconomic analyses of EU agricultural holdings E-mail: [email protected] Internet: http://ec.europa.eu/agriculture/rica/index.cfm

http://ec.europa.eu/agriculture/rica/pdf/hc0301_income.pdf

http://ec.europa.eu/agriculture/rica/pdf/report_2007.pdf

mailto:[email protected]

http://ec.europa.eu/agriculture/rica/index.cfm

Farm economics brief / 12

1. The economic crisis disrupted the increasing trend in farm income

During the last decade, farm income1 per worker increased in nominal terms for all EU groups up until 2007 (Figure 1). However the commodity price bubble of 2007 and the economic crisis resulted in sharp declines of gross margins for major EU agricultural products (income and gross margin are defined in Box 1 in the annex). As a result, the farm income trend was interrupted with a significant drop in 2009, but the recovery of agricultural prices in 2010 led to the recovery of average farm income as well (Figure 2).

The level and trend in farm income are very different among EU Member State groups: EU-2 and EU-10 average farm income corresponded to 10 % and 30 % of the EU-15 2007 average respectively. But Member States that joined the EU recently are gradually bridging the gap: the average annual increase is 3,9 % in the EU-15, 11,4 % in the EU-10, and 205 % in the EU-2 between 2007 and 2008 (more details about the methodology in Box 2 in annex; for data by Member State, see Table 8 in annex).

Figure 1: Trend in income and some gross margins per unit of product (nominal terms)

0

5000

10000

15000

20000

25000

30000

2000 2001 2002 2003 2004 2005 2006 2007 2008e* 2009e

€/Annual Work Unit (nominal terms)

-20

020

40

60

80100

120

140Index 100 = 2007

EU-27 Income - EUR/AWU EU-15 Income - EUR/AWUEU-10 Income - EUR/AWU EU-2 Income - EUR/AWUEU-27 Gross margin CEREALS - index 100=2007 EU-27 Gross margin MILK - index 100=2007EU-27 Gross margin BEEF - index 100=2007 EU-27 Gross margin PIG - index 100=2007

Source: EU FADN — DG AGRI, Models for the allocation of costs. 2008e*: observed values for income and for pig gross margin (without Italy),

estimates for the others. 2009e: estimate.

Figure 2: Index of EU 27 agricultural income per annual working unit (2000=100)

70

80

90

100

110

120

130

140

150

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 *

Agricultural income at real prices Agricultural income at curent prices

Source: EUROSTAT – Economic Accounts for Agriculture – elaboration DG AGRI. *: provisional data.

1 Unless otherwise stated, in this brief, farm income refers to the Farm Net Value Added (also named factor income), i.e. to total output (total

production value), plus direct payments minus intermediate consumption and depreciation (Box 1 in the annex).


2. Differences in income situation

There are big differences in income between Member States (Figure 3). For example in 2007, the Member State with the highest average income per worker was Denmark, followed by the Netherlands, Belgium, United Kingdom and Luxemburg.

In the EU15, six Member States had average farm income that exceeds at least twice the EU average. On the other extreme, Portugal and Greece - two Member States which are characterised by a large number of small farms – were the only two EU-15 Member States with incomes per worker below the EU average.

All Member States of EU-12 had average incomes below the EU-27 average, with Romania, Bulgaria and Slovenia posting the lowest income per worker.

Compared to the EU-27 average, the EU15, EU-10 and EU2 averages were 57 % higher, 53 % lower and 85 % lower, respectively.

Significant farm income differences also exist between regions (Map 1 on p.5). The regions that exhibit the highest agricultural income per worker (> EUR 40 000 per year) are mainly located in Benelux, northern Germany, northern Italy and the UK. Most regions with low incomes (< EUR 15 000 per year) are located in Eastern Europe. Greece and Portugal also have low average incomes.

However, nominal income growth between 2004 and 2007 was highest in Eastern Europe while income decreased in Southern Italy and Southern Greece. Several Member States with high incomes in Northern Europe, such as Belgium, Denmark, Germany (North-West) and the Netherlands showed only a moderate increase in income over this period (although this was mainly due to the importance of pig production in these regions, which was hit by unfavourable market conditions in 2007).

Figure 3: Income per worker by Member State - 2007

EU-27 Income per worker 16 651

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

DK NL BE UK LU SE DE FR FI AT IT IE ES MT CZ EE HU EL LT SK LV CY PT PL SI BG RO

EUR/AWU

Income per worker EU-27 Income per worker

Source: EU FADN — DG AGRI. FNVA/AWU: Farm Net Value Added per Annual Work Unit (see methodological box).


Figure 4 illustrates the widespread distribution of income in the EU-27: 7 % of farms have a negative income, with 1 % below -10 000 EUR/AWU, while a third of farms receive between 0 and 5 000 EUR/AWU. On the other end of the scale, 3 % of farms obtain more than 70 000 EUR/AWU.

While income varies largely between EU-15 farms, the differences are less pronounced in EU-10 and EU-2 where incomes range mainly between -5 000 and 25 000 EUR/AWU. It is interesting to notice that the 3 % of farms with the highest income represent 18 % of the agricultural output whereas the 33 % of farms obtaining between 0 and 5 000 EUR/AWU produce only 7 % of agricultural output (Figure 5).

Agricultural income also differs between farm types and farm sizes (Figure 6 on p.5). On average for the EU-25, the income per worker is the highest in pig and poultry farms while it is the lowest in mixed farms (based on 2004-2006). Income per worker increases with farm size. On average, the income per worker of the largest farms (size class with > EUR 120 000 potential gross margin2) was about EUR 35 000, which is more than 10 times the figure for the smallest farms. This is largely explained by differences in farm structure. In the largest size class, the average amount of land (168 ha) is 20 times higher than in the smallest, while the number of workers is only 4 times greater.

Figure 4: Distribution of farms by class of income in the EU-27 – average 2007-2008

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Income class (€/AWU)

Share of EU-27 farms EU 15 EU 10 EU 2

Source: EU FADN — DG AGRI.

Figure 5: Distribution of total agricultural output by class of income in the EU-27 – average 2007-2008

0%2%4%6%8%

10%12%14%16%18%20%

]Low,-1

0000]

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Income class (€/AWU)

Share of EU-27 total outputEU 15 EU 10 EU 2


2 To compare farms of different sizes with very different types of production - such as wheat, milk, flowers under glass, or wine - the size of the

farm is measured in economic terms (potential gross value added) as established in the EU typology of farms.


Map 1

Source: EU FADN — DG AGRI

Figure 6: Income per worker by farm type and by economic size in the EU-25 - average 2004-2006

0

5 000

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30 000

Pig & Poultry Milk Wine Horticulture Grazinglivestock

Field crops Otherpermanent

crops

Mixed

€/AWU


0

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40 000

< 4.8 4.8 - 9.6 9.6 - 19.2 19.6 - 48 48 - 120 >120Economic size (potential gross margin in 1000€)

€/AWU


3. Main factors influencing the trend in income

Farm income per worker has increased over the last decade thanks to great gains in labour productivity driven by structural adjustments, i.e. the reduction in the labour force employed in agriculture, the decrease in the number of farms and the increase in the average farm size.

Another crucial factor driving EU farm income developments was the gradual shift from market price support to direct payments, more directly transferred to income.

The share of direct payments in farm income differs between EU15 and EU12 (Figure 7) and between farm types (Figure 8). In particular, the share of direct payments in income of field crop farms and grazing livestock farms was 43 % and 54 %, respectively, much greater than the average (31 %).

After subtracting wages, rents and interests paid from farm income, the share of direct payments in this new value called family farm income rose to more than 65 % in the EU-27 in 2009. In recent years, the positive income growth path has been reversed as the labour productivity gains were not sufficient to compensate for the deterioration of the terms of trade in agriculture as a result of unfavourable developments in farm output and input prices.

Costs of production have risen due to the increase in input prices (see Farm Economics brief N°2), whereas on the long-term agricultural prices are decreasing in real terms.

With the recent economic crisis, the divergent development of input and output prices has been accelerated, squeezing significantly the farmers’ margin and therefore income (Figure 9).

Figure 7: Share of direct payments in income

0%

5%

10%

15%

20%

25%

30%

35%

40%

2004 2005 2006 2007 2008 2009 2010 *EU 27 EU 25 EU 15 EU 12

Source: EUROSTAT – Economic Accounts for Agriculture – elaboration DG AGRI. *: provisional data

Figure 8: Share of direct payments in income by farm type in the EU-25, average 2006 – 2008

54%

46% 43%

33%

14% 12%

4% 3%

EU-25 average 31%

0%

10%

20%

30%

40%

50%

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70%

Grazinglivestock

Mixed Field crops Milk Otherpermanent

crops

GranivoresWine Horticulture

Source: DG AGRI EU FADN.

Figure 9: Revenues and costs for milk and cereals, EU-27

050

100150200250300350400

2007 2008 estimate 2009 estimate

Cereals and milk - €/t Cereals revenues Cereals operating costsMilk revenues Milk operating costs

milk gross margin

cereals gross margin

Source: DG AGRI EU FADN, models of allocation of costs.


So far, with farm income it was referred to the amount of income available to remunerate the production factors: land, labour and capital. The profitability problem of the agricultural sector and its dependency on direct payments become even more visible when the costs for own and external production factors are taken into account3. To illustrate Table 1 and Table 2 provide with information on the share of variable and total costs in market revenue. It is shown that on average variable costs (intermediate consumption) are lower than market revenue (the share is below 100 %).

Thus, farms are generally able to cover variable costs with market revenue. However, this is not true for total costs as the share of total costs in market revenue is in most cases bigger than 100 %. This is true in particular in the cases of field crop, milk, grazing livestock and mixed farms. Although the gap between costs and revenue diminishes with increasing size even large farms are on average not profitable based on market revenue alone.

Table 1: Share of variable costs in market revenue by farm type and size class

EU-25, average 2004-2006 Farm size (potential gross margin in 1000 EUR ) Type of farming < 4.8 4.8 - 9.6 9.6 - 19.2 19.6 - 48 48 - 120 >120 Total

Field crops 53 % 47 % 55 % 61 % 63 % 62 % 60 % Horticulture 52 % 43 % 41 % 42 % 47 % 51 % 48 %

Wine 31 % 31 % 28 % 33 % 36 % 34 % 34 % Other permanent crops 60 % 58 % 55 % 60 % 61 % 60 % 60 %

Milk 60 % 58 % 55 % 60 % 61 % 60 % 60 % Other grazing livestock 79 % 65 % 65 % 69 % 69 % 66 % 68 %

Granivores 77 % 74 % 73 % 67 % 67 % 66 % 67 % Mixed 64 % 60 % 59 % 66 % 69 % 68 % 67 % Total 59 % 44 % 51 % 56 % 60 % 59 % 57 %

Source: DG AGRI EU-FADN.

Table 2: Share of total costs in market revenue by farm type and size class







3 Data on the costs of own production factors are not available in the FADN data base. In order to estimate the profitability of farms these

costs components are imputed based on estimates of the opportunity costs for labour, land and capital.


These, however, are only averages. The situation on farm level is more complex. To illustrate this, Table 3 and Table 4 provide with information on the share of farms in the EU-25 which are able to cover respectively, variable and total costs based on market revenue alone. It is shown that variable costs are covered by more than 90 % of farms while only 20 % of farms would be able to cover total costs without receiving Pillar I and Pillar II payments. Not covering total costs means that farmers are not able to remunerate family labour and assets as in the other sectors of the economy. The situation would be particularly difficult for field crop, grazing livestock and mixed farms.

In these sectors even the vast majority of large farms would not be profitable as only 20-25 % of these farms would be able to cover total costs. Large farms in the pig & poultry, horticulture and permanent crop sectors are more profitable and rely less on direct payments.

This situation is addressed by the CAP as field crop, grazing livestock and mixed farms are the ones who receive the highest amount of direct payments (Table 7). Furthermore, it has to be noted that the amount of direct payments increases considerably with the size of farms.

Table 3: Share of farms where variable costs are covered by market revenue by farm type and size class







Table 4: Share of farms where total costs are covered by market revenue by farm type and size class







Table 5: Amount of direct payments per AWU by farm type and size class in the EU-25, average 2004-2006


Field crops 1225 2386 4445 8414 15444 17240 8456 Horticulture 123 124 151 363 576 666 475

Wine 393 559 867 957 1324 1293 1018 Other permanent crops 1201 1742 1853 2445 2666 3410 2080

Milk 788 1023 1811 4970 10307 13595 7841 Other grazing livestock 2116 3259 5539 10846 16538 20216 9527

Granivores 229 498 989 1850 3764 4917 3043 Mixed 785 1193 2272 6297 13910 12279 5552



Thanks to the reception of Pillar I and Pillar II payments the profitability of farms increases significantly (see the two following tables). The share of farms covering variable costs increases to almost 100 % and the share of profitable farms (which cover total costs) increases from less than 20 % to 35 %. Profitability of field crop, mixed and other grazing livestock farms improves the most.

This is true in particular for large farms. For instance the share of large profitable field crop, grazing livestock and mixed farms jumps from slightly more than 20 % to over 60 %. Overall this shows that in particular land based production systems such as field crop and grazing livestock farms which ensure that the bulk of the agricultural area is kept in good agricultural and environmental condition depend the most on direct payments.

Table 6: Share of farms with positive gross farm income by farm type and size class

EU-25, average 2004-2006 Economic size (potential gross margin in 1000 EUR ) < 4.8 4.8 - 9.6 9.6 - 19.2 19.6 - 48 48 - 120 >120 Total






Table 7: Share of profitable farms by farm type and size class

EU-25, average 2004-2006 Economic size (potential gross margin in 1000 EUR ) < 4.8 4.8 - 9.6 9.6 - 19.2 19.6 - 48 48 - 120 >120 Total







4. A great volatility of farm income

Average agricultural income has fluctuated over time. The graphs below show that the income of EU-15 pig and poultry farms was the most volatile. In 2007 for instance, they suffered a significant drop in income due to high input prices (the previous low in their income in 1998 was due to exceptionally low prices for pork). The income of pig and poultry farms in that year was indeed the lowest of all farm types. Pig production is characterised by cyclical fluctuations of supply and prices. This is due to the breeding time between the reaction of the farmer to higher prices (investment to increase the production) and the time when animals arrive on the market. In the EU-10, fluctuations are not apparent due to the rather short time-series.

However, the volatility of income is even higher at farm level: over the period 1998-2007, income changed on average in about 54 % of cases by more than 30 % in comparison with the average for the previous three years. In general, income volatility was more pronounced in small farms than in large farms (the change in income was greater than 30 % in 64 % of small farms and in 45 % of large farms) (see graphs below). This is understandable as the income of small farms is in most cases very low, so that small changes in revenue or costs can cause high relative changes in income.

Figure 10: Trend in income per worker by farm type (nominal terms)

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

€/AWU

Fieldcrops Horticulture Wine

Milk Other grazing livestock Granivores

EU-15

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10 000

12 000

2004 2005 2006 2007

€/AWU

Fieldcrops Horticulture

Wine Milk

Other grazing livestock Granivores

EU-10


Figure 11: Volatility of farm income (average change in agricultural income compared to the average for the previous 3 years in the EU-25, 1998-2007)

Small farms (2-4 ESU)

7 8

20 2016

12

4

13

0

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30

morethan -100%

-100 to-70%

-70 to -30%

-30 to0%

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30 to70%

70 to100%

morethan

100%

Big farms (above 100 ESU)

2 3

13

27 28

16

57

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30

morethan -100%

-100 to-70%

-70 to -30%

-30 to0%

0 to30%

30 to70%

70 to100%

morethan

100%

Source: DG AGRI EU-FADN


Annex Box 1: Definitions

The following income indicators are used in this brief:

–Gross Farm Income corresponds to total output (total production value), plus direct payments minus intermediate consumption (see the schema below);

–Farm Net Value Added (FNVA) equals Gross Farm Income minus depreciation. It corresponds to the amount available to remunerate all fixed production factors (land, labour and capital), either owned or rented by the farm;

–Economic profit equals FNVA minus external factors (wages, rent and interest paid) and imputed family factors. It represents the amount remaining after remuneration of all production factors.

These indicators are expressed per Annual Work Unit (AWU) to take account of the differences in the total labour force remunerated on the holding. All income indicators are calculated before deduction of income taxes and expressed in current EUR.

Gross margins per unit of product are also calculated by deducting the operating costs allocated to the product concerned from the total revenues from this product (market revenues and coupled payments).

Income indicators Gross margin

Box 2: Methodology

The brief is based on Farm Accountancy Data Network (FADN) database. The FADN is a European system of sample surveys that take place each year and collect structural and accountancy data relating to farms; their aim is to monitor the income and business activities of agricultural holdings and to evaluate the impacts of the Common Agricultural Policy (CAP).

The scope of the FADN survey covers only those farms exceeding a minimum economic size so as to cover the most relevant part of the agricultural activity of each EU Member State (MS), i.e. at least 90 % of the potential agricultural production covered in the Farm Structure Survey (FSS, EUROSTAT). For 2007, the sample consists of approximately 81 000 holdings in the EU-27, which represent 5.4 million farms (39 %) out of a total of some 14 million farms included in the FSS. It allows covering 95 % of the EU agricultural production, 86 % of the agricultural area and 94 % of the livestock units.

The applicable rules are aimed at providing representative data along three dimensions: region, economic size and type of farming. FADN is the only harmonised source of micro-economic data, which means that the accounting principles are the same in all EU MS.

For further information see: http://ec.europa.eu/agriculture/rica/index.cfm.

Market revenues per unit

= Total revenues per unit

+ Coupled payments per unit

= Gross margin per unit

- Operating costs per unit

Market revenues

= Gross Farm Income

- Intermediate consumptions

= Farm Net Value Added

- Depreciation

- External factors

= Economic profit

- Imputed family factors

+ Balance subsidies & taxes

+ Balance subs. & taxes on invest.

http://ec.europa.eu/agriculture/rica/index.cfm


Table 8: Medium term development in agricultural income (base year 2005)

1999 2004 2005 2006 2007 2008 2009 2010BE 105,5 109,3 100,0 123,5 134,0 109,2 107,7 134,3BG 87,4 100,0 97,5 98,8 161,2 125,3 158,7CZ 55,2 93,2 100,0 102,7 118,6 125,1 98,5 113,9DK 81,3 98,8 100,0 104,2 106,4 66,6 50,3 78,7DE 69,6 111,9 100,0 108,9 134,9 128,8 101,8 124,6EE 29,0 94,8 100,0 100,4 142,1 112,1 94,5 138,2IE 73,3 80,4 100,0 84,0 94,3 87,0 67,0 85,4EL 119,0 99,3 100,0 98,3 99,0 88,2 89,6 86,5ES 99,8 113,2 100,0 95,5 107,3 97,4 93,8 101,7FR 112,9 105,2 100,0 111,4 121,2 106,2 86,6 116,3IT 124,3 114,6 100,0 96,3 93,7 94,3 86,0 83,6

CY 125,5 96,6 100,0 90,4 90,2 85,7 92,3 92,0LV 39,2 96,0 100,0 131,8 137,8 117,2 102,4 127,8LT 64,3 92,5 100,0 89,0 133,4 123,4 106,6 121,8LU 110,2 109,2 100,0 94,7 116,1 85,8 57,4 70,2HU 77,5 99,2 100,0 106,6 114,3 153,4 107,2 123,3MT 88,3 82,6 100,0 97,5 94,5 90,3 101,0 114,4NL 123,4 101,1 100,0 122,6 121,1 99,1 87,9 122,1AT 85,4 102,3 100,0 110,3 123,2 119,3 93,9 106,9PL 60,1 110,3 100,0 110,5 135,0 108,9 134,7 145,2PT 111,9 108,7 100,0 104,4 100,2 104,2 100,6 109,3RO 80,8 175,2 100,0 99,3 76,8 114,4 92,4 89,1SI 63,2 99,5 100,0 97,4 109,6 99,1 86,7 92,8SK 85,6 107,3 100,0 122,1 128,9 143,5 110,5 115,2FI 81,0 90,1 100,0 98,5 111,6 93,1 108,6 107,8SE 77,4 83,9 100,0 113,5 135,7 124,2 94,8 121,8UK 83,1 101,2 100,0 103,9 110,8 143,5 129,6 121,3

EU27 110,2 100,0 104,0 114,8 109,9 98,9 111,2

EU15 102,7 106,7 100,0 103,3 112,1 105,6 93,8 106,0NMS12 122,0 100,0 104,4 112,2 120,6 112,7 120,6

Source: EUROSTAT - Economic Accounts for Agriculture

farm economics brieffarm economics brief page 2 / 12 1. the economic crisis disrupted the increasing...

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