Agricultureand Rural Development

Future perspectives and challenges for European agriculture

Seminar at PRIMAFF, Tokyo, 2 February 2017

Pierluigi LonderoHead of Unit

Analysis and outlookDG Agriculture and Rural Development

European Commission

Outline

1. Agriculture in the European Union and the role of the Common Agricultural Policy

2. Trends, drivers and challenges for EU and world agriculture

3. The EU agricultural outlook

4. Need to modernise and simplify the EU Common Agricultural Policy

2

175 million ha land=> roughly 40% of EU land cover

11 million farms=>16 ha per farm

22 million people (around 9 million full-time equivalent jobs)=> 4.4% of total employment

The big picture

3

Distribution of farms by size of farmland

0%10%20%30%40%50%60%70%

< 5 ha 5-50 ha 50-100 ha 100 ha or over

EU farms by land size (ha) 2013

EU-28

4

arable crops34%

horticulture2%permanent crops

17%

grazing livestock21%

pigs and poultry10%

mixed farming14%

Main activities of EU farmsEU-28, 2013

5

6

The farmer

0%10%20%30%40%50%60%70%80%90%

total Less than 4 000euros

4 000 - 24 999000 euros

25 000 - 499 999euros

500 000 euros orover

Farmers' age by farm sizeEU-28, 2013

< 35 years 35-64 years >= 65 years

28%

♀

72%

♂

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EU-27

Farmers' gender

6

The long drive of Common Agricultural Policy reform…

Source: DG AGRI.

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0

10

20

30

40

50

60

70

80

19

80

19

81

19

82

19

83

19

84

19

85

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86

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87

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88

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89

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90

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91

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92

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93

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94

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95

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96

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97

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98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

% GDPbillion EUR

Export subsidies Other market measures Coupled supportDecoupled support of which direct payments of which green paymentsRural development - environment/climate Rural development - other measures CAP as share of EU GDP

EU-10 EU-12 EU-15 EU-25 EU-27

outlook 2015-2020

7

Source: AGRI calculations based on European Commission AGRI and OECD data.

… has bridged the gap between EU and world prices…

0%

50%

100%

150%

200%

250%

300%

350%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Percentage gap between EU and world price

Wheat Milk Beef (US) Beef (BR) Sugar

8

…with all the pros and cons this brings…

Source: DG Agriculture and Rural Development calculations based on ESTAT and OECD/FAO data.

100

150

200

250

300

350

400

450

500

15/0

1/00

15/0

6/00

15/1

1/00

15/0

4/01

15/0

9/01

15/0

2/02

15/0

7/02

15/1

2/02

15/0

5/03

15/1

0/03

15/0

3/04

15/0

8/04

15/0

1/05

15/0

6/05

15/1

1/05

15/0

4/06

15/0

9/06

15/0

2/07

15/0

7/07

15/1

2/07

15/0

5/08

15/1

0/08

15/0

3/09

15/0

8/09

15/0

1/10

15/0

6/10

15/1

1/10

15/0

4/11

15/0

9/11

15/0

2/12

15/0

7/12

15/1

2/12

15/0

5/13

15/1

0/13

15/0

3/14

15/0

8/14

15/0

1/15

15/0

6/15

15/1

1/15

15/0

4/16

€/100 kg EU and world dairy prices

EU Milk Equivalent Support Price Oceania Milk Equivalent Price EU Farm Gate Milk Price

283265

246

227 221 217

9

…and turned the EU from major agro-trade player…

10

…in a rapidly expanding world trade environment…

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…into a net agro-food exporter…

Source: COMEXT.

12

-150

-100

-50

0

50

100

150

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Commodities Other primary Processed (incl. wine)Food preparations Beverages Non-edible

billion Euro

Exports

Imports

…while providing relative income stability…

Source: AGRI calculations based on ESTAT and ERS/USDA data.

50

75

100

125

150

175

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EU and US nominal farm income (2010=100)

EU entrepreneurial income US net farm income

13

…and some positive environmental externalities

Source: AGRI calculations based on ESTAT data.

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EU fertiliser use (average 2004-06=100)

Nitrogen Phosphorous

14

EU agricultural productivity grows slowly…

80

85

90

95

100

105

110

115

120

125

130

Overall and partial productivity growth in the EU

3-year moving average (2005=100)

TFP

Land

Labour

Capital

Intermediateinputs

• Sustainable growth in productivity is key to meet the challenge of feeding more people, better, in a resource constrained world

• Annual Total Factor Productivity TFP growth in the EU is 0.8%• Labour productivity gains are due to

labour outflow…

• …substituted by capital prior to economic crisis

• …but now growing without increasing capital inflow

15

2. EU and world agriculture: trends, drivers and challenges…

16

Population, diets and the food chain

Drivers of the agricultural outlook

EU food supply and demand interaction Climate, energy and

natural resources

Macroeconomic and trade environment

17

Price and income prospects: more uncertain than before

18

The trend in real commodity prices observed till 2011…

Source: World Bank.

0

20

40

60

80

100

120

140

160

180

200

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

(2010 = 100)

Agriculture Fertilizers Energy Metals & minerals

19

…has dramatically changed in recent years (incl. 2016)…

Source: World Bank.

…leading to a deterioration of the Term of Trade for agriculture…

Period Agriculture Fertilisers Energy Metals & Minerals

2008/1997 29% 336% 298% 83%

2009/2008 -7% -45% -34% -25%

2011/2009 21% 20% 43% 40%

2016/2011 -26% -47% -57% -39%

2016/2008 -17% -65% -59% -35%

2016/1997 7% 83% 162% 54%

20

Source: AGRI calculations based on World Bank data (updated: January 2017).

21

Main uncertaintiesThe macroeconomic picture

• Which price environment for crude oil price - will disinvestment hit supply post-2020? • Exchange rate volatility – farmers see prices in national currencies• Slow GDP growth –expanding to emerging economies

The uncertain world of crude oil prices

…and alternative scenarios

22

Diverging crude oil assumptions…

0

20

40

60

80

100

120

140 IHS 9/16

OECD FAO,2016

EC,2015

WB, 7/16

IMF, 8/16

EIA mediumterm, 5/16

EC 2016assumption

0

20

40

60

80

100

120

140

EC 2016assumption

97.5thpercentile

2.5thpercentile

23

Main uncertaintiesThe macroeconomic picture

• Which price environment for crude oil price - will disinvestment hit supply post-2020? • Exchange rate volatility – farmers see prices in national currencies• Slow GDP growth –expanding to emerging economies

The demand side picture

• Long-term population dynamics, challenges and opportunities• Global dietary patterns reflect different developments • Diverging trends and cross-cutting effects exist within same group of commodities

Population assumptions(million, annual growth rate 2017-2026)

0100020003000400050006000700080009000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

China India Other Asia Africa Rest of the World EU-28

EU-28

AfricaRest of the World

India

Other Asia

China

+1.1%

+1.0%

+0.8%

+0.2%

+0.1%

+2.5%

Yearly +75 million (2026)

Source: Preliminary DG AGRI Outlook 24

Milk consumption

Source: DG AGRI based on FAOSTAT25

0

50

100

150

200

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350

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450

500

1961

1963

1965

1967

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1971

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1987

1989

1991

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1995

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1999

2001

2003

2005

2007

2009

2011

2013

Mill

ion

t

Milk (developed) Milk (developing)

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Main uncertaintiesThe macroeconomic picture

• The long-term level of the crude oil price - will disinvestment hit supply post-2020? • The exchange rate volatility – when a price decline for some is increase for others • The persistence of sluggish GDP growth – now expanding also to emerging economies

The demand side picture

• Long-term population dynamics, challenges and opportunities• Global dietary patterns reflect different developments • Diverging trends and cross-cutting effects exist within same group of commodities

The supply side picture

• The wider energy picture – not just crude oil but also impacts from natural gas etc.• Short-term and long-term impacts of climatic events, including from climate change• Diverging productivity patterns

Diverging world natural gas prices

Source: World Bank.

( USD per mmbtu )

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USEuropeJapan (LNG)

Frequency of extreme weather events

Data from EM-DAT The international Disaster Database28

0

5

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25

30

1995

1996

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2014

extreme temperatures, droughts, storms and floods in the EU

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Main macro conclusionsThe new market environment

• Depends on price environment for crude oil price - supply response post-2020? • Exchange rate volatility – farmers see prices in national currencies• Slow GDP growth –expanding to emerging economies

The new trade environment

• Trade in both food commodities and food products remains strong • Demand in most emerging economies will grow faster than their domestic production • Yet, as always, in agricultural markets the surprise is around the corner…

The new price environment

• Despite significant declines, prices are still higher than pre-financial crisis levels• The terms of trade for agriculture may improve some if energy prices stay low• The likely price path lies between the highs and lows of the post-2008 situation

2. EU agricultural outlookwhat, how and why

30

What is the EU Agricultural Outlook?

• 10-year projections of agricultural markets and income, with focus on the EU

• Not as a forecast of what the future will be, but a description of what may happen under a specific set of assumptions, which at the time of making the projections were judged plausible

• Main commodities covered (grains, meats, dairy, biofuels, sugar – being extended to olive oil, wine and some fruit & vegetables)

• Results in terms of supply balance sheets (production, consumption, imports, exports, stocks) and prices

31

How is the EU Agricultural Outlook done?

Starting point: OECD-FAO Outlook (model, baseline 2016-2025)

Zero-Draft of the EU Outlook

Incorporation of Short-Term

Outlook

Update of macroeconomic & policy assumptions

New model development

s

Checking results, model debugging

Numerous repetitions and model adjustments

32

How is the EU Agricultural Outlook done?

Starting point: OECD-FAO Outlook (model, baseline 2016-2025)

Zero-Draft of the EU Outlook

Incorporation of Short-Term

Outlook

Update of macroeconomic & policy assumptions

New model development

s

Checking results, model debugging

Baseline week

Discussions between AGRI / JRC modellers and AGRI market experts and hierarchy; iterative process to

obtain a preliminary outlook

33

How is the EU Agricultural Outlook done?

Starting point: OECD-FAO Outlook (model, baseline 2016-2025)

Baseline week => Preliminary Outlook

Zero-Draft of the EU Outlook

Preliminary Outlook & uncertainty assessment presented and discussed at

JRC/DG AGRI Outlook workshop

Validation Workshop Annually organised by JRC and DG AGRI

140+ market & modelling experts, food industry and other stakeholders

34

How is the EU Agricultural Outlook done?

Starting point: OECD-FAO Outlook (model, baseline 2016-2025)

Baseline week

JRC/DG AGRI Outlook workshop

Final EU Agricultural OutlookPublication & DG AGRI Outlook Conference

Incorporation of comments, final model adjustments

This year:6-7/12/2016

35

Why doing an EU Agricultural Outlook?

• To better understand markets and their dynamics

• To identify key issues for market and policy developments

• To have a benchmark for assessing the medium-term impact of future market and policy issues

36

2016 EU Agricultural Outlook: main market resultsMain cereals more dominant in area, but yield growth low Increase of production and use of main cereals mainly driven by feed useMeals more important in oilseed complex

World dairy demand to expand, especially in Africa and AsiaThe EU to become first world exporter, just in front of NZA moderate production increase in the EU

Stable meat consumption in EU but growing world demand by 2026EU meat production to grow moderately88-95% of EU meat production goes to domestic consumer

37

World sugar market deficit resulting in higher pricesEU to increase production after quota expiry in 2017Competition from isoglucose and lower biofuels use

Most of EU biofuels demand remains policy driven EU still a biodiesel market but ethanol shows some increaseRecent policy proposal for after 2020 compatible with outlook

Wine, olive oil, fruit and vegetables: important sectors but diversity of situationsRelative stagnation/decline of domestic consumption but exports keep growing. Adding value is key.

2016 EU Agricultural Outlook: main market results

38

100

120

140

160

180

200

220

240

260

97.5th percentile

2.5th percentile

How to address uncertainty in agricultural commodity markets outlook? Partial Stochastic Analysis: yield and macroeconomic uncertainties taken

into account –> implemented by JRC, DG AGRI, OECD, FAOPossible price paths for soft wheat in the EU (€/t)

39

Impact on agricultural income

• Real income per farmer to maintain or slightly increase

• The expected increase in production costs offset by increasing value of production

• Real income for the overall sector to decline

• Income not projected to follow a steady pattern

40

Environmental aspects• For the first time try to translate market outlook into

environmental indicators related to Emissions: • greenhouse gas (-1% for GHG): • and air pollutants (-7% for ammonia)

Nutrient surplus: Stability at EU level, but N surplus in some regions

41

Outlook: so what?

• Outlook and other advanced economic analysis are resource intensive exercises

• Need good balance between building up the tools (e.g. Agricultural Outlook) and using them (i.e. for policy simulations)

• They require at least 4 ingredients People Tools

Data

Evidence-basedpolicy

Culture

42

Need to modernise and simplify the EU Common Agricultural Policy

43

Addressing challenges for EU agriculture

EconomicCoping with volatility and price

uncertainty, andtheir impact on competitiveness

EnvironmentalBetter managing natural resources and addressing

climate change

SocialPromoting generational renewal to foster rural jobs and growth

44

The CAP reform path points to future challenges

Source: DG AGRI.

0.0%

0.1%

0.2%

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% GDPbillion EUR

Export subsidies Other market measuresCoupled support Decoupled supportof which direct payments of which green paymentsRural development - environment/climate Rural development - other measures

EU-10 EU-12 EU-15 EU-25 EU-27

outlook 2015-2020

45

46

Different ways to address similar challengesAgriculture as a sector (the 2 % EU sector)

• Narrow focus on sectorial interests exposes agriculture's low overall economic weight • Product-driven concerns are real; product-driven responses divide policy objectives• Farm policy often on the defensive to justify its spending, not its broader objectives

Agriculture as land coverage (the 40 % EU sector)

• Land use, new focus of the CAP, addresses both environmental and climate challenges• Input use challenges shift focus on "product" attributes and their impact on sustainability • Addressing the supply chain functioning is also relevant for land-use and food waste

Agriculture as food provision (the 100 % sector for all)

• Food demand-driven policy concerns unify the food policy focus and reform opportunities • Up-stream, down-stream and horizontal linkages are potentially growth and job enhancing • Technology and innovation will determine net employment and environmental effect

Reports and data available at:

http://ec.europa.eu/agriculture/index_en.htm

http://ec.europa.eu/agriculture/markets-and-prices/index_en.htm

http://ec.europa.eu/agriculture/policy-perspectives/index_en.htm

Thank you for your attention!

47

EU's farm cost and revenue structure changes

48Source: AGRI calculations based on ESTAT data.

0%

20%

40%

60%

80%

100%

2000-2002EU-27

2013-2015

Cost Structure

Taxes Other costsInterest RentsLabour FeedingstuffsEnergy Plant/animal protectionFertilisers Seeds

0%

20%

40%

60%

80%

100%

2000-2002EU-27

2013-2015

Revenue Structure

Other subsidiesProduct subsidiesNon-agricultural secondaryAgricultural services outputAnimal outputCrop output