Conditions of present and future income from agricultural production in European Union member states

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Conditions of present and future income from

agricultural production in European Union member states

BartosH MiTSkeVicH

The paper present the state and possibility of further development of European agriculture in context of agricultural income increase. There were presented the basic statistical data about present financial conditions of agriculture and foreseen for Common Agriculture Policy future (up to 2015). The main fact influencing from presented data is that the medium - term projections for income display a rather favorable outlook as EU-27 agricultural income would grow in real terms and per labor unit. However, this overall gain would mask marked differences between EU-15 and EU-12 (new Member States).

В статье проанализированы состояние и возможность дальнейшего развития европейского сельского хозяйства в контексте увеличения сельскохозяйственного дохода. Мы представили основные статистические данные о нынешнем финансовом положении в сельском хозяйстве и спрогнозировали будущее Общей Сельскохозяйственной Политики (до 2015 г.). Главный вывод, вытекающий из представленных данных, - это довольно благоприятный прогноз для доходов, составленный на основе их среднесрочной проекции в будущее. Он предполагает, что в 27 странах-членах ЕС сельскохозяйственный доход будет расти как в реальных деньгах, так и в расчете на одного работника. Однако, этот общий рост доходов не отразит довольно ощутимую разницу между 15 основными странами ЕС и 12 новыми членами.

european agriculture production

Introduction

The latest reform of the EU Common Agricultural Policy (CAP) that started in June 2003 refers to making European farming more competitive in a global world and more sustainable by meeting the expectations of the public, as well as to developing rural areas from the environmental, social and economic point of view. Farmers and other rural businesses should improve their capacity to respond to new challenges. For the new Member States the accession to European Union represents a major economic and social opportunity and a pressure for fundamental changes in micro and macro management. It is also a new step in reconsidering the agriculture and rural areas in the process of sustainable development.

The main factor that determines the farmersґ income is productivity, which depends on the intensification of agricultural production and the number and quality of the labor force. In less developed agriculture the weather plays also an important role, being often a cause for instability of agricultural output. Productivity levels of labor and land (hence total factor productivity) are strongly responsive to capital endowments per worker with current technology and are associated with the average density of employment per hectare. The macroeconomic environment is projected to be shaped over the short term by the consequences of the financial and economic crisis, which is expected to put severe pressure on the real economy that has entered into the deepest crisis for more than 60 years.

The economic and financial crisis is expected to weigh heavily over the short-term perspectives of most agricultural sectors in the EU and at global level, even though the agricultural sector is generally more resilient to economic crises than other sectors. Whereas food demand will be directly negatively affected in the higher value-added sectors, the economic crisis would also be felt indirectly in other parts of the agricultural economy: in the arable crop sector through feed demand, in the energy crop sector in the wake of lower oil prices, as well as in the upstream and downstream industries.

Despite the significant short-term setback in the wake of the economic recession, the medium-term prospects for EU agricultural income remain positive with the aggregate income in real terms and per labor unit exceeding the very favorable 2007 year by 7.5% in 2015. While agricultural income in the EU-27 would show a very moderate development, it is foreseen to display a more pronounced picture in the EU supported by the continuous increase in CAP payments.

The aim of the article is to present the main and basic factors influencing on income in European agriculture, which also create living standards of rural population. The research work was done in 2009 basing on analytic data source from Ministry of Agriculture, domestic and international agricultural publications and data from Main Statistic Bureau.

Results of studies

The medium-term perspectives for the income of the agricultural sector have been compiled on the basis of the medium-term projections for the main agricultural markets and of the economic accounts for agriculture, which constitute the statistical basis of the income measure. Agricultural income is defined as the factor income of the agricultural sector (formerly the net value added at factor cost), expressed in real terms and per annual work unit.

Whereas the medium-term changes in the price and volume components of the arable crops and most animal sectors have been established in line with the market projections, those of the other agricultural sectors -mainly fruit, vegetables, wine and olive oil- have been assumed to follow historical trends.

Indicator A is the real net value added at factor cost of agriculture per annual work unit (AWU). The net value added at factor cost (factor income) is calculated by subtracting the consumption of fixed capital from gross value added at basic prices and adding the value of (other) subsidies less taxes on production. The AWU is defined as the work volume corresponding to one full-time worker. Output of the agricultural industry comprises output from agricultural production and output from non-agricultural secondary activities that are inseparable from the main agricultural activity.

In most EU Member States, the trend in income Indicator A has been positive the last 10 years. However, recent data show that this overall trend may be about to change. The average increase in income per work unit since 2000 is significantly higher in the new Member States than in the EU-15.

Graph.Agricultural income indicator, 1999-2008.

Source: Statistic data, Brussels, 2009.

For the EU-27, the recent fall brings Indicator A down to 115.2 (2000 = 100), after a significant 9.3% rise in 2007. For the EU-15, Indicator A was slightly lower in 2008 than in 2000 (-0.2%), after a rise to 104.2% in 2007. Member States can be divided into two groups according to the trend in Indicator A. The first group includes countries whose agricultural income in 2008 was above the level recorded for 2000. This group comprises sixteen Member States, in which real agricultural income per labor unit has more than doubled in the Baltic States, Hungary and the CzechRepublic. The second group includes the other eleven Member States, where agricultural income in 2008 was below the level recorded for 2000. Within this group of countries, the sharpest falls were recorded in Belgium, Italy and Greece. Indicator A is estimated to have decreased by 3.5% in the European Union (EU-27) in 2008, following a 9.3% rise in 2007. Agricultural income in 2008 developed differently in the north and south of the EU-27. The largest increases were recorded in Bulgaria (+28.9%), Romania (+28.4%), Hungary (+18.6) and the United Kingdom (+16.5%). The largest decreases were in Denmark (-24.7%), Estonia (-23.0%), and Belgium (-22.6%). The value of agricultural output in producer prices has increased by 4.1% in real terms. This rise is due to increases in the output values of both crop production (+3.1%) and animal production (+5.6%). For crop production, the increase in the average output volume (+6.9%) is offset by the fall in average prices (-3.6%). For animal production, the average output volume remained stable, while producer prices increased by 5.6%.

The output value of agricultural services grew by 4.0% while the value of inseparable non-agricultural secondary activities increased by 2.0% compared to 2007. The value of intermediate consumption of goods and services increased by 10.3% in 2008. This is explained mainly by higher prices (+8.3%). Steep increases in prices were observed for fertilizers (+42.8%), energy (+12.2%) and feedstuffs (+9.7%). Consumption of fixed capital («depreciation») was higher (+2.5%) than in 2007. The value of overall subsidies (product-specific subsidies and other subsidies on production) increased by 0.3%, while taxes fell by 1.1%. As a consequence, agricultural factor income, an Indicator A component, decreased by 5.7% compared to 2007. With the continuous reduction in agricultural labor input (-2.3%), Indicator A fell by 3.5%.

In 2008, the gross value added (GVA) at producer prices amounted to €143 billion in the EU-27. More than 80% of this value is generated in the 15 old Member States (EU-15), although the share has declined since 2000. Around 70% of the GVA of agriculture in the EU-15 is produced by France, Italy, Spain and Germany. The value of all agricultural subsidies (product-specific subsidies and other production subsidies) recorded in 2008 amounted to €53 billion in the EU-27. The share of new Member States (which joined the EU in 2004 and 2007) of the total value of subsidies paid to agricultural producers increased from 3% to 15% between 2000 and 2008.The type of subsidies has changed over time. In 2000, product subsidies accounted for 69% of total subsidies, while the share in 2008 was 16%.

The subsidy component of agricultural income has been established on the basis of:

- the estimated direct payments for the period 2009-2015 (single payment scheme and other direct payments as provided following the Health Check decisions);

- the rural development component from the EAFRD as adopted for the 2007-2013 period for the EU-27. Only the current transfers to agricultural producers as other subsidies on production have been accounted for in the income calculation (thus excluding all the capital grants and investment aids as well as the support to operators outside agriculture). Member States have been assumed to fully use the rural development funds available to them (including the co-financing component of rural development funds);

- the main provisions of the Act of Accession regarding direct payments for the EU-10 and EU-2 (progressive introduction, SAPS and the complementary national direct payments (CNDPs or «top-ups»)) have been accounted for. The possibility for financing the CNDP from the national budget or from co-financing with rural development EU funds has also been taken into account where relevant. In this context Member States respect the upper limit on the financial envelopes.

On the basis of these hypotheses, the projections for income display a recovery from the 2008 decline over the medium term to exceed the high 2007 level by 7.5% in 2015 in real terms and per labor unit. However, this overall gain would mask marked differences between EU-15 and the EU-12.

The fall in real agricultural income in 2008 results mainly from the strong and significant deterioration of the terms of trade of the agricultural sector in the EU as the cost of production rose by 11% on average in real terms driven by the sharp growth in the real prices of feeding stuffs, energy, fertilizers and seeds (estimated at 10%, 13%, 48% and 4% respectively). The rise in production cost is estimated to have more than offset the significant growth in the value of agricultural output (of around 4%). This strong decline should be examined in the light of the sustained income growth recorded over the last two years, notably in 2007.

Relative to the EU-12, agricultural income in the EU-15 would show a more moderate development over the period 2007-2015. In terms of agricultural output, the short-term decline will be followed by a continuous increase driven by the increasing value of crops and meat production and supported by the expected continuation of the growth in the value of fruit and vegetables. On the other hand, the evolution of input costs particularly that of energy, fertilizer and feed costs will result in a further decline of EU factor income over 2011 and 2012, driven by the impact of the assumed increase in crude oil price. The reduction in total agricultural labor input for EU-15 is assumed to stabilize at the historical trend of around 2.3% per year on average over the projection period. Consequently, agricultural income in real terms and per labor unit (i.e. full-time equivalent), is projected in 2015 to be 2.9% lower than the 2007 level.

Agricultural income in the EU-12 is foreseen to display a more pronounced picture with agricultural income steadily rising to exhibit a 49.8% increase by 2015 driven by higher value of agricultural production and supported by a continuous rise in the funds granted to agricultural producers in the EU-12 (with the available funds being directed to the agricultural sector in the form of direct payments and national top-ups and rural development funds, which would aim at facilitating and promoting the restructuring and modernization of the agricultural sector and the rural areas8). The agricultural labor input in the EU-12 countries is assumed to fall by 3.5% on annual average over the forecast period in line with the restructuring of the agricultural sector. This rapid fall in labor force would boost the rise in agricultural income: whereas farm income in real terms would show an increase of 14.3% over 2007-2015, it would expand by 49.8% by 2015 when expressed per labor unit.

Table. Agriculture income in European Union states in 2006-2015.

Source: Statistic data, Brussels, 2009.

The contribution of the EU-12 to the overall EU-27 farm income (in real terms) would increase from 2008 but nevertheless remain rather limited at around 19% in 2015, in line with the low productivity levels in these Member States.

Conclusions

The economic outlook for agricultural income in EU Member States in particular faces great uncertainty as it is subject to a number of (mainly downside) risks that could alter the scenario assumed for these market projections. These risks include the length and breadth of the crisis and the scale of the negative feedback-loop between the financial and real sectors of the economy and the ensuing impact on the real economy. Existing global imbalances could trigger disruptive exchange-rate developments and trade-distorting policy measures cannot be ruled out. A further deterioration of the economic outlook would alter the current projections with its impact on asset values, access to credit and energy prices. On the other hand, lower growth prospects could lead to a further decline in inflation rates with positive impact on real disposable income as well as lower input costs.

In the period 2009-2015 all Member States of the EU could benefit from important financial allowances coming from the European Union for agriculture and even more for rural development and environmental protection. There is essential to prepare the administration and the farmers for accessing these amounts. For this purpose, the farmers should respect the conditions of quality and environment negotiated with the financing organisms. They should elaborate eligible projects and ensure co-funding as well. Considering this financial support, the productivity is expected to increase and also the agricultural income. Rural development gives the chance to income diversification of households and absorption of excess employment from agriculture.

Bibliography

1. Agricultural statistics. Main results 2007-08. Eurostat.European Commission.Brussels, 2009.

2. Agriculture in 2008. Department of Agriculture and Environment Statistics.Main Statistical Bureau.Warsaw, 2009.

3. Prospects for agricultural markets and income in the European Union 2008-2015. European Commission.Directorate-General for Agriculture and Rural Development.Brussels, 2009.

4. The European Model of Agriculture - Challenges Ahead. Ministry of Agriculture.Warsaw, 2007.

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