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
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
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…
11
…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
250
300
350
400
450
500
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Mill
ion
t
Milk (developed) Milk (developing)
26
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 )
27
0
2
4
6
8
10
12
14
16
18
20
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
USEuropeJapan (LNG)
Frequency of extreme weather events
Data from EM-DAT The international Disaster Database28
0
5
10
15
20
25
30
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
extreme temperatures, droughts, storms and floods in the EU
29
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%
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
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
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 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