Prospects for Agricultural Markets and income 2004 - 2011 for EU-25

Market projections for the main agricultural products in the EU-25 were established under a specific set of assumptions. These cover the outlook for the macro-economic environment, with a recovery of EU economic growth and a strengthening of the US$ over the medium-term.
calendar icon 3 June 2005
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This report contains three chapters. The first chapter centres on the market and income prospects by the year 2011 within the EU and covers the following products: cereals, oilseeds, meat, milk and the main dairy products. Chapter II is dedicated to the impact of the 2004 EU enlargement and compares the medium-term perspectives for individual new Member States against a hypothetical counterfactual scenario without enlargement. Finally, a presentation of the medium and long-term prospects of agricultural world markets, based on reports and projections established by various international organisations and institutes, is given in chapter III.

Executive Summary: Projections for the EU-25

Market projections for the main agricultural products in the EU-25 were established under a specific set of assumptions. These cover the outlook for the macro-economic environment, with a recovery of EU economic growth and a strengthening of the US$ over the medium-term. World agricultural commodity markets are assumed to show growing demand and trade. Trade policies are assumed to be governed by the Uruguay Round Agreement on Agriculture and no new multilateral trade agreement has been accounted for. All existing trade commitments are assumed to be met.

In 2003 cereal production dropped to 230 mio t from 263 mio t in 2002 owing to exceptional weather conditions. Lower mandatory set-aside combined with more favourable climatic conditions led to a sharp rebound in 2004 as total cereal harvest is estimated to have reached 279 mio t, with 61 mio t produced in the new Member States. The medium term perspectives for the cereal markets appear moderately positive thanks to the impact of the CAP reform and the return to higher set-aside levels which, combined with more favourable world market conditions should contribute to an improvement of the balance of cereal markets over the medium term. This development would be conditional on an improvement of the exchange rate environment. Specific difficulties could arise for coarse grains, in particular for barley, and on a regional scope for soft wheat and maize. After a rapid decline in the first part of the projection period, cereal stocks would moderately build up leaving domestic prices under less pressure than in the short-term.

Market perspectives for the EU oilseed sector are foreseen to be supported by productivity increases and favourable conditions on world markets. Despite the projected moderate increase in oilseed production, the EU will continue to remain a large net importer of oilseeds. These perspectives remain conditional on the implementation of the biofuel directive in the Member States.

The EU meat sector came back to a more normal situation after the extreme market conditions of the past few years, when it was hit by the second BSE scare and the FMD outbreak in 2001 and the avian flu in 2003.

EU-25 beef and veal consumption recovered rapidly after the BSE crisis and was higher than production in 2003 for the first time in 20 years. It is expected to remain so over the projection period, with production decreasing to around 7.8 mio t by 2011, in line with the structural reduction of dairy herd and the impact of the introduction of the single farm payment. A tight domestic supply and a steady demand are projected to keep beef prices at a relatively high level, attracting more imports entering at full duty, notably from South America.

Pig and poultry production and consumption are expected to keep growing over the medium term, with increased trade flows between the new and old Member States. Sheep and goat production and per capita consumption are projected to decrease in line with past long-term trends and taking into account the possible impact of decoupling of ewe premium.

Overall meat consumption is projected to increase from 87.4 kg/head in 2004 to around 91 kg by the year 2011. Pig meat, with a share of about 50 %, is by far the most preferred meat by EU consumers, followed by poultry, recording a share of around 26 %, which has overtaken beef and veal since 1996.

Milk production in the EU-25 is projected to increase slightly over the medium term, in line with quota increases, to reach the level of 144.9 mio t by 2011. Milk production in the new Member States, which account for around 15 % of total EU production, is projected to remain stable at approximately 22 mio t, as increasing deliveries to dairies - in line with higher quotas- are offset by the reduction in subsistence milk production. Production of butter and SMP in the new Member States would display some short-term growth in response to price increases towards EU levels. However, after the sharp decrease of 2004, EU-25 production of butter and SMP is projected to continue to decrease over the medium-term, as more milk is used for the production of cheese and other high value added dairy products. Cheese production and consumption are expected to keep their sustained growth after the slow down observed in 2002, thanks to the rebound in EU and world economic growth.

These projections result in an overall increase in domestic milk demand in the form of dairy products. As supply remains limited by quotas, butter and SMP exports are projected to shrink and cheese exports to show only a limited increase. Income estimates have been compiled on the basis of these market projections and the financial perspectives for the EU over the period 2004-2011. These medium-term income projections display a rather favourable outlook as the EU-25 agricultural income would grow by 14.2 % between 2003 and 2011 in real terms and per labour unit. This overall gain would however mask marked differences between the EU-15 and the new Member States. Whereas agricultural income in the EU-15 would show a rather modest development with a 5 % growth over the 2003-2011 period, it is foreseen to exhibit a more pronounced and positive trend in the new member States where it would rise steadily by 126.4 % over the projection period.

These developments would be supported by the implementation of the CAP, the integration into the single market and most significantly by the sharp rise in the funds granted to agricultural producers in the new Member States (in the form of direct payments and rural development which aim at facilitating and promoting the restructuring and modernisation of the agricultural sector and the rural areas).

Impact of EU enlargement

The new Member States have joined the EU and the single market since May 2004. Despite some regional difficulties or those of specific sectors, developments since accession show the overwhelmingly positive effect of EU membership on agriculture. In general investments in agriculture have significantly increased alongside income perspectives in most new Member States and induced a small boom in rural areas. Over the last decade, the economies in the new Member States expanded at about double the rate than the economies in the old Member States. This has had positive effects for the agri-food sectors, in particular in the area of consumer demand for meat and dairy products. This trend is expected to continue over the medium term.

During the last decade a high level of integration of markets and policies of the EU-25 was achieved prior to enlargement. On average 65 % of all agricultural exports of the new Member States and 69 % of all imports went to EU-25 destinations over the 1999- 2003 period. Moreover, agricultural policies aligned substantially over the last three years. Therefore, many of the gains in trade already materialised before enlargement. The new Member States contribute in 2004 to about 20 % of the cereals production, 17 % of the oilseed production, 10 % to 17% of the meat production and 15 % of the milk production. The intensity of production and the productivity are relatively low as compared to the old Member States. About 7 % of the factor income in EU-25 agriculture originates from the new Member States. It is expected that the agricultural potential would be only gradually used and structural adjustment would continue.

The market impact of enlargement is very positive for the new Member States. Agricultural production would stabilise or even increases in the area of cereal and meat production. Agricultural markets would benefit from the trade creation effects of the integration into the single market and from the support of the CAP. Agricultural income is expected to significantly increase. In particular, the agricultural sectors of the Czech Republic, Hungary, Lithuania, and Poland would benefit most from the integration as compared to a non-enlargement situation.

Without accession market and income prospects would be less positive. Agricultural income would stagnate and decline alongside with the market prospects in this hypothetical scenario. Particularly vulnerable would be the agricultural sectors of Hungary, Lithuania, and Poland owing mainly to a limited access to EU-25 markets in a non-accession scenario.

World agricultural markets

Short-term developments on world agricultural markets have recently been marked by a stabilisation after the wide price fluctuations of 2003/2004. Over the medium-term, world agricultural markets are projected to be essentially supported by rising food demand driven by an improved macro-economic environment, higher population, urbanisation and changes in dietary patterns.

After the relatively low harvest of 2002 and 2003 the cereal sector is projected to recover its production growth. Widespread economic growth and an expanding livestock sector are projected to combine to set the stage for a strengthening of world demand and maintaining a low stock-to-use ratio. Cereals trade would also expand, particularly in developing economies, driven by rising income, diet diversification and higher demand for livestock products and feeds, allowing for a gradual, albeit moderate, price increase over the medium term. The medium-term prospects for the oilseed sector are expected to be relatively stable. After the high prices of 2003 and the subsequent drop, short term developments are still foreseen to exhibit a slow and gradual supply adjustment in the oilseed sector owing to a combination of policy and macro-economic factors.

Meat markets are projected to be characterised by an expansion in production, consumption and trade with world meat prices showing moderate strength. Prospects for rising meat demand would mainly emerge from a favourable macro-economic environment of sustained income growth, notably in Asia and Latin America. World meat trade would increase and prices remain firm over the medium term as growing consumption is mostly expected to take place in countries that are net importers with limited possibilities to proportionally and competitively increase domestic supply (in quantity and quality). Recovering meat demand and strengthening feed prices would support world meat prices.

The medium-term outlook for the dairy sector is expected to remain dominated by a strong expansion in global demand for dairy products. The latter would reflect not only income growth in many regions of the world, but also changes in consumer preferences towards dairy products (as meat substitutes). Population growth, changing diet towards more “western” style, urbanisation and rising disposable income are forecast to stimulate the consumption of dairy products in many developing countries, in particular in Asia and Latin America, triggering further price rises for dairy products over the medium term.

Pig meat

After the increase of 2003, EU-25 pig meat production is expected to decrease in 2004 due to the strong contraction of the pig herd in the new Member States16. Over the medium term pig meat production, which is assumed to be driven mostly by demand (internal and external), is expected to increase but at a slower rate than in the nineties, due to the competition of poultry meat which is foreseen to capture most of the increase in overall meat consumption. EU25 pig meat production is projected to reach around 22.4 mio t by 2011.

The medium and long-term outlook for pig meat consumption is, in general, positive since pig meat is likely to continue to be favoured by consumers, although clearly less than poultry. Per capita pork consumption is projected to increase from 44.5 kg/year in 2003 to 45.5 kg/year by 2011, with a marked increase in the new Member States (supported by sustained economic growth).

Graph 1.11 Outlook for the EU pig meat market (mio t), 1991-2011

The contribution of the new Member States is more relevant for pig meat, which represents slightly less than 20 % of EU-25 pig meat production and consumption. Since the enlargement producer prices have been steadily growing in the new Member States and are currently above the EU-25 average.

The strong increase in pig meat exports of 200417 is expected to be followed by a return to more normal exports levels in 2005. Over the medium term there is a scope for a slight increase in extra-EU25 exports, while the intra community trade is projected to show strong developments.

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Source: European Commission - December 2004

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