Global challenges, CAP prospects:an EU perspective

EU Centre for Global Affairs, U. Adelaide - CEDAAdelaide, 4 March 2016

Tassos HaniotisDirector

Economic analysis, perspectives and evaluations; communicationDG Agriculture and Rural Development

European Commission

Outline

1. The shifting environment of agricultural markets…

2. …its impact on existing trends, drivers and challenges…

3. …and the role of the Common Agricultural Policy

2

What a difference two years make…

GDP slowdown (especially in emerging economies) and oversupply…

…lead to a generalised decline in commodity prices…

…including in prices of all major agricultural markets

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Trends in real commodity prices – ABARES 2014

Source: World Bank

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(2010 = 100)

Agriculture Fertilizers Energy Metals & minerals

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Trends in real commodity prices – ABARES 2016

Source: World Bank

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(2010 = 100)

Agriculture Fertilizers Energy Metals & minerals

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Annual change in real commodity prices, 1961-2015

-60%-40%-20%

0%20%40%60%80%

100%120%140%160%180%200%

1961

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% annual change

Agriculture Fertilizers Energy

Source: DG AGRI calculations on World Bank data.

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Monthly change in nominal commodity prices, 2007-15

Source: DG AGRI calculations on World Bank data.

-30%

-20%

-10%

0%

10%

20%

30%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

% monthly change

Agriculture Fertilizers Energy

Commodity price changes during specific periods

Period Agriculture Fertilisers Energy Metals/Minerals

2008/1997 29% 336% 298% 107%

2009/2008 -7% -45% -34% -29%

2011/2009 21% 20% 43% 47%

2015/2011 -24% -31% -48% -39%

2015/2008 -15% -54% -51% -36%

2015/1997 10% 100% 95% 32%

Source: AGRI calculations on World Bank data.

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Main uncertainties

The macroeconomic picture

• The persistence of sluggish GDP growth – now also expanding to emerging economies• The exchange rate volatility – leading to price declines appearing as price increases for others • The long-term price level of crude oil - will disinvestment hit supply post-2020?

The demand side picture

• Population dynamics are characterised by significant asymmetries in trends• Dietary patterns also reflect different, often counter-intuitive developments• Diverging trends and cross-cutting effects exist within the 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 (and not just in yields…, e.g. RTD, innovation, etc.)

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Main conclusions

The new market environment

• Commodity markets seem to have returned to more “fundamental” drivers• The commodity “super-cycle” effect of China seems to be over• The impact on price level is more clear than impact on co-movement or on volatility

The new trade environment

• Trade in both food commodities and food products will remain 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, but lost a lot…• Where in-between the highs and lows of the post-2008 situation does the likely price path lie?

CAP reform path and CAP budget, 1980-2020

Source: DG AGRI.

0.0%

0.1%

0.2%

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0.8%

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% 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-28actual expenditure 1980-2014

EU-10 EU-12 EU-15 EU-25 EU-27outlook 2015-2020

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Long-term trends in EU-world price gap

Source: AGRI calculations based on European Commission AGRI and OECD data.

0%

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350%

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Percentage gap between EU and world price

Wheat Milk Beef Sugar

EU28 agri-food trade, 2005-15

Source: COMEXT

150,000

100,000

50,000

0

50,000

100,000

150,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

1 Commodities 2 Other primary 3 Processed (incl. wine) 4 Food preparations

5 Beverages 6 Non-edible Balance

Export

million Euro

Import

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Dairy price challenges…

Source: DG Agriculture and Rural Development calculations

100

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15/0

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€/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

Cumulative change in milk production, 2007-15

0%

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40%

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4

8

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EU USA New Zealand Australia Argentina

Million t % change

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Main short-term dairy market challenges…

•Jan-Nov 2015 world consumption -1.1% (first decline since 2008) •Jul-Nov 2015 global demand picking up again + 3 %

Demand

•Main producing regions increase supply by 1.6% in 2015•EU supply up stronger, by 2.5% in 2015 (multiple reasons)

Supply

•Expected future world import growth of roughly + 2 % annually•EU exports + 5.2 % Jul-Non 2015 (despite Russian ban)

Trade

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…placed in a broader perspective

Multiple causes lie behind the recent dairy crisis – opinions for their weight differ

• World oversupply coincides with slowdown in Chinese imports and the Russian embargo• Broader macro developments (exchange rate, oil) push all commodity prices down• Recent increase of the EU dairy herd reverses a very long downward trend

The EU's main policy response focused on targeting income

• By addressing immediately the cash-flow difficulties farmers were facing• By attempting to stabilise markets, maximising the use of existing measures• By aiming to improve the functioning of the supply chain (setting of Ag Markets Task Force)

The EU's policy response refrained from replacing market signals

• Higher price signals in the context of oversupply will amplify price pressures• Long-term competitiveness and market orientation of CAP need to continue• Similar price pressures exist also under very different farm policy regimes

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EU and US nominal farm income (2010 = 100)

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 net cash income US net cash income

EU entrepreneurial income US net farm income

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The bottom line – CAP for which agriculture?

Agriculture as the 2 % sector

• Narrow focus on sectorial interests exposes agriculture's low GDP share and overall economic weight • Product-driven concerns are real and justified; yet product-driven responses divide policy objectives• Policy is driven on the defensive to justify its spending, instead of justifying its broader objectives

Agriculture as the 40 % sector

• Land use, as the new focus of the CAP, addresses both environmental and climate challenges• Wider territorial policy scope brings wider growth and employment links to the forefront • Addressing the supply chain functioning is also relevant for land-use and food waste

Agriculture as the 100 % sector

• Food demand-driven policy concerns unify 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

http://ec.europa.eu/agriculture/trade-analysis/index_en.htm

Thank you for your attention!

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