Future perspectives and challenges for European agriculture

Agriculture and Rural Development Future perspectives and challenges for European agriculture Seminar at PRIMAFF, Tokyo, 2 February 2017 Pierluigi Londero Head of Unit Analysis and outlook DG Agriculture and Rural Development European Commission

2 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

3 The big picture 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

4 Distribution of farms by size of farmland EU farms by land size (ha) 2013 70% 60% 50% 40% 30% 20% 10% 0% < 5 ha 5-50 ha 50-100 ha 100 ha or over EU-28

5 Main activities of EU farms pigs and poultry 10% EU-28, 2013 mixed farming 14% arable crops 34% grazing livestock 21% horticulture 2% permanent crops 17%

6 The farmer 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Farmers' gender 72% 28% EU-27 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Farmers' age by farm size EU-28, 2013 total Less than 4 000 euros 4 000-24 999 000 euros 25 000-499 999 euros < 35 years 35-64 years >= 65 years 6 500 000 euros or over

The long drive of Common Agricultural Policy reform 80 billion EUR EU-10 EU-12 EU-15 EU-25 EU-27 % GDP 0.8% 70 outlook 2015-2020 0.7% 60 0.6% 50 0.5% 40 0.4% 30 0.3% 20 0.2% 10 0.1% 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 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 2017 2018 2019 2020 Export subsidies Other market measures Coupled support Decoupled support of which direct payments of which green payments Rural development - environment/climate Rural development - other measures CAP as share of EU GDP 0.0% Source: DG AGRI. 7

has bridged the gap between EU and world prices 350% Percentage gap between EU and world price 300% 250% 200% 150% 100% 50% 0% 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 Wheat Milk Beef (US) Beef (BR) Sugar Source: AGRI calculations based on European Commission AGRI and OECD data. 8

with all the pros and cons this brings 500 /100 kg EU and world dairy prices 450 400 350 300 283 265 246 250 200 150 227 221 217 100 15/01/00 15/06/00 15/11/00 15/04/01 15/09/01 15/02/02 15/07/02 15/12/02 15/05/03 15/10/03 15/03/04 15/08/04 15/01/05 15/06/05 15/11/05 15/04/06 15/09/06 15/02/07 15/07/07 15/12/07 15/05/08 15/10/08 15/03/09 15/08/09 15/01/10 15/06/10 15/11/10 15/04/11 15/09/11 15/02/12 15/07/12 15/12/12 15/05/13 15/10/13 15/03/14 15/08/14 15/01/15 15/06/15 15/11/15 15/04/16 EU Milk Equivalent Support Price Oceania Milk Equivalent Price EU Farm Gate Milk Price Source: DG Agriculture and Rural Development calculations based on ESTAT and OECD/FAO data. 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 150 100 billion Euro Exports 50 0-50 -100-150 Imports 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Commodities Other primary Processed (incl. wine) Food preparations Beverages Non-edible Source: COMEXT. 12

13 while providing relative income stability 175 EU and US nominal farm income (2010=100) 150 125 100 75 50 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 EU entrepreneurial income US net farm income Source: AGRI calculations based on ESTAT and ERS/USDA data.

14 and some positive environmental externalities 120 EU fertiliser use (average 2004-06=100) 100 80 60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Nitrogen Phosphorous Source: AGRI calculations based on ESTAT data.

EU agricultural productivity grows slowly 130 125 120 Overall and partial productivity growth in the EU Labour Sustainable growth in productivity is key to meet the challenge of feeding more people, better, in a resource constrained world 115 110 105 100 95 90 Intermediate inputs Capital TFP Land 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 85 80 but now growing without increasing capital inflow 3-year moving average (2005=100) 15

2. EU and world agriculture: trends, drivers and challenges 16

17 Drivers of the agricultural outlook Macroeconomic and trade environment Population, diets and the food chain EU food supply and demand interaction Climate, energy and natural resources Price and income prospects: more uncertain than before

18 The trend in real commodity prices observed till 2011 200 (2010 = 100) 180 160 140 120 100 80 60 40 20 0 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 Source: World Bank. Agriculture Fertilizers Energy Metals & minerals

19 has dramatically changed in recent years (incl. 2016) Source: World Bank.

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

21 The macroeconomic picture Main uncertainties 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

22 The uncertain world of crude oil prices Diverging crude oil assumptions and alternative scenarios 140 IHS 9/16 120 100 80 60 40 20 0 OECD FAO, 2016 EC,2015 WB, 7/16 IMF, 8/16 EIA medium term, 5/16 EC 2016 assumption 140 120 100 80 60 40 20 0 EC 2016 assumption 97.5th percentile 2.5th percentile

23 The macroeconomic picture Main uncertainties 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

9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Population assumptions (million, annual growth rate 2017-2026) EU-28 Rest of the World Africa Other Asia India China +0.1% +0.8% +2.5% +1.0% +1.1% +0.2% 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 Yearly +75 million (2026) Source: Preliminary DG AGRI Outlook 24

Milk consumption 500 450 400 350 300 250 200 150 100 50 0 1961 1963 1965 1967 1969 Million t 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: DG AGRI based on FAOSTAT Milk (developed) 25 Milk (developing)

The macroeconomic picture Main uncertainties 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 26

20 18 16 14 Diverging world natural gas prices US Europe Japan (LNG) ( USD per mmbtu ) 12 10 8 6 4 2 0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Source: World Bank. 27

Data from EM-DAT The international Disaster Database 28 30 25 20 15 10 5 Frequency of extreme weather events extreme temperatures, droughts, storms and floods in the EU 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

29 The new market environment Main macro conclusions 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 outlook what, how and why 30

31 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

32 How is the EU Agricultural Outlook done? Starting point: OECD-FAO Outlook (model, baseline 2016-2025) Incorporation of Short-Term Outlook Update of macroeconomic & policy assumptions Zero-Draft of the EU Outlook Checking results, model debugging New model development s Numerous repetitions and model adjustments

33 How is the EU Agricultural Outlook done? Starting point: OECD-FAO Outlook (model, baseline 2016-2025) Incorporation of Short-Term Outlook Update of macroeconomic & policy assumptions Zero-Draft of the EU Outlook Checking results, model debugging Baseline week New model development s Discussions between AGRI / JRC modellers and AGRI market experts and hierarchy; iterative process to obtain a preliminary outlook

34 How is the EU Agricultural Outlook done? Starting point: OECD-FAO Outlook (model, baseline 2016-2025) Zero-Draft of the EU Outlook Baseline week => Preliminary 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

35 How is the EU Agricultural Outlook done? Starting point: OECD-FAO Outlook (model, baseline 2016-2025) Baseline week JRC/DG AGRI Outlook workshop Incorporation of comments, final model adjustments This year: 6-7/12/2016 Final EU Agricultural Outlook Publication & DG AGRI Outlook Conference

36 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

37 2016 EU Agricultural Outlook: main market results Main cereals more dominant in area, but yield growth low Increase of production and use of main cereals mainly driven by feed use Meals more important in oilseed complex World dairy demand to expand, especially in Africa and Asia The EU to become first world exporter, just in front of NZ A moderate production increase in the EU Stable meat consumption in EU but growing world demand by 2026 EU meat production to grow moderately 88-95% of EU meat production goes to domestic consumer

38 2016 EU Agricultural Outlook: main market results World sugar market deficit resulting in higher prices EU to increase production after quota expiry in 2017 Competition from isoglucose and lower biofuels use Most of EU biofuels demand remains policy driven EU still a biodiesel market but ethanol shows some increase Recent policy proposal for after 2020 compatible with outlook Wine, olive oil, fruit and vegetables: important sectors but diversity of situations Relative stagnation/decline of domestic consumption but exports keep growing. Adding value is key.

39 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, FAO 260 240 Possible price paths for soft wheat in the EU ( /t) 220 200 180 160 140 120 100 97.5th percentile 2.5th percentile

40 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

41 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

42 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 Evidencebased policy Culture

Need to modernise and simplify the EU Common Agricultural Policy 43

44 Addressing challenges for EU agriculture Economic Coping with volatility and price uncertainty, and their impact on competitiveness Environmental Better managing natural resources and addressing climate change Social Promoting generational renewal to foster rural jobs and growth

45 80 70 60 50 40 30 20 10 The CAP reform path points to future challenges billion EUR % GDP 0.8% EU-10 EU-12 EU-15 EU-25 EU-27 0.7% outlook 2015-2020 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 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 2017 2018 2019 2020 Export subsidies Coupled support of which direct payments Rural development - environment/climate Other market measures Decoupled support of which green payments Rural development - other measures 0.0% Source: DG AGRI.

46 Different ways to address similar challenges Agriculture 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

47 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!

EU's farm cost and revenue structure changes 100% Cost Structure 100% Revenue Structure 80% 80% 60% 60% 40% 40% 20% 20% 0% Taxes Interest Labour Energy Fertilisers 2000-2002 EU-27 2013-2015 Other costs Rents Feedingstuffs Plant/animal protection Seeds 0% 2000-2002 2013-2015 EU-27 Other subsidies Product subsidies Non-agricultural secondary Agricultural services output Animal output Crop output Source: AGRI calculations based on ESTAT data. 48