Challenges and uncertainties

How the European Commission expects the markets for the major farm products to develop over the next decade.

Land-grabbing biofuel, chicken Kiev and the enduring popularity of the cheese course will all help to shape the future for Europe’s farmers. 

These conclusions can be drawn from a recent report by the European Commission setting out its expectations for agricultural markets in the European Union in the next decade. The report is the Commission’s best guess on farm prices and incomes in a world where demand is growing and production faces a host of uncertainties, such as the effects of climate change.

European cereal farmers face a relatively positive future. The Commission forecasters think that demand and prices will be driven up by consumers’ increasing demand for meat (fed on grain) and EU policies that favour the use of crops to fuel cars.

In the short term, however, crop prices may fall, as farmers grow more cereals in response to last year’s drought-spoiled harvests in Russia and Ukraine. Thereafter, prices are likely to increase until 2015 and then stay at relatively high levels.

The producers

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The prospects for cattle and poultry farmers are mixed, reflecting changing tastes, as well as the European meat industry’s competitiveness on world markets.

Europeans are expected to continue to prefer pig meat above all other kinds of meat. Consumption per person of pork and bacon is expected to be 5% higher in 2020 than it was in 2010. The EU will probably also raise more pigs, as, in the Commission’s view, non-European exporters are not interested in trying to meet the Union’s exacting hygiene rules.

By contrast, EU producers are not expected to benefit from rising demand for chicken and turkey meat. Indeed, a strong euro and relatively high production costs suggest that the EU is likely to become a net importer of poultry meat by 2020.

The same issues also spoil the prospects for European sheep and beef farmers, who labour under the extra disadvantage of falling demand for their products. Europeans’ taste for sheep and goat meat is set to continue its decline, with consumption per person likely to be 14% lower in 2020 than in 2009.

Sheep and goat farmers – already reeling from losing subsidies that were tied to production and from bluetongue disease – will continue to face tough competition from Australia and New Zealand: Oceania is projected to increase its exports to the EU, deepening Europe’s status as a net importer.

Demand for beef and veal is also on a downward trend in Europe. EU consumers will continue to favour high-quality cuts from Brazil and Argentina, and imports (from all countries) are expected to increase by 45% over the decade.

Dairy sector

The future for dairy farmers looks uncertain, but they may benefit from increasing demand for dairy products in emerging markets. EU milk quotas are set to be phased out entirely by 2015, diminishing production incentives. However, demand for cheese, yoghurt and other so-called value-added dairy products is likely to pick up with the recovery in the global economy, leaving European farmers, who have centuries of expertise in these products, in a strong position.

On average, farmers are expected to see moderate increases in their income: the Commission forecasts that the average income in 2020 to be 20% higher than it was in 2005-09. But the headline figure masks considerable variation, with farmers in central and eastern Europe projected to see bigger gains, as the big difference between subsidies given to them and to farmers in the 15 older member states will be reduced.

But these income figures do not take into account changes to a reform to the EU’s farm subsidy system that will take effect from 2014.

The looming changes to the Common Agricultural Policy are a reminder of the uncertainties that go with any forecasts. The Commission’s models are based on the safe assumption that demand will continue to increase as the world’s population grows. But supply will be under increasing constraints, with competing uses for land and the impacts of climate change. Analysts also have to factor in the known unknowns: bad weather and animal disease.

So is the only certainty uncertainty? Not quite. What appears certain is that food prices will be higher. They will, though, also be more volatile, as agricultural commodities are increasingly caught up with price movements in other markets, especially energy.

One thing that is less certain is how politicians and policymakers will respond to these changes.