2024 Prospects for

EU Agricultural Markets

Brussels,

27 April 2015

Benjamin Van Doorslaer

DG Agriculture and Rural Development

European Commission

2

Outline

• Assumptions

• Market outlook

• Arable crops

• Biofuels

• Meat

• Dairy

• Income developments

2

3

Sources and process

• OECD/FAO Agricultural Outlook 2014-2023

• Agricultural commodity markets for the rest of the world

• EU Short Term Outlook

• Recent years and orientation for near future

• Version of Autumn 2014

• Macro-economic forecast

• For the EU: AMECO November 2014 (DG ECFIN)

• Consistent source for main countries and up to 2024 (IHS Global Insight)

• Expert opinion

• In-house expertise and senior staff

• Workshop on EU commodity markets, October, Brussels

• Modelling work and validation (with JRC-IPTS)

• AGLINK-COSIMO (EU-version) & uncertainty analysis

4

Policy assumptions

• CAP 2013 as far as possible

• Voluntary coupled support

• Greening:

- Permanent pasture kept constant,

- Limited effect of ecological focus area (EFA) & crop diversification at EU aggregated level

• Trade agreements only if ratified:

• Concessions to UKRAINE included

• FTA with CANADA not included

• Russian import ban assumed to remain 1 year

4

5

Oil price, a very uncertain assumption

50

70

90

110

130

150

170

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

Bre

nt,

USD

/barr

el

EIA, May 2014 OECD-FAO Baseline 2013 EC outlook

2014 EC outlook IHS, Jan. 2015 World Bank*, Jan 2015

* Based on the development of the average Brent, WTI and Dubai oil price

6

Macroeconomic assumptions

1,00

1,05

1,10

1,15

1,20

1,25

1,30

1,35

1,40

1,45

1,50

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

1 EUR = …USD

USD/EUR exchange rate

Scenario: Stronger EUR depreciation

-6

-4

-2

0

2

4

6

8

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

Annual GDP growth (%)

EU-15 EU-N13

World Scenario: lower growth

The euro in the long-term The economic growth path

7

Prospects for cereals, oilseeds, sugar and biofuels

• Cereals and oilseeds

• Solid world demand leading to large EU exports of cereals

• EU demand driven by feed use and biofuel use

• Prices below 2012 record prices but above historical averages

• Sugar and isoglucose

• Abolition of the quotas end of 2017 leading to EU sugar prices at world level,

• more sugar produced domestically and lower imports,

• a higher share of isoglucose in sweetener use in Europe (12%).

• Biofuels

• Lower growth of first generation biofuels than previously expected

• Biofuels to contribute for 7% towards meeting the 10% target of renewables in transport fuel

7

8

Biofuel use to expand in the EU but less dynamically than expected

• Assumptions:

- Renewable Energy Directive (RED) target of 10% of renewables in energy share by 2020

- Biofuels to contribute to 7% of liquid transport fuels by 2020

- Share of double counted 2nd-generation biofuels (including from waste oils) to grow

• A lower biofuel use expected because:

- Decreasing trend in transport fuel use

- In recent years, only slow increase in biofuel uptake

- Lack of strong policy incentives to invest

• Stable biodiesel production from domestic oilseeds

• Early increase in maize-based ethanol

-5

0

5

10

15

20

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

Million t

.o.e

.

Ethanol (1st gen) Ethanol (2nd gen)

Ethanol net imports Biodiesel (1st gen)

Biodiesel (waste) Biodiesel (2nd gen)

Biodiesel net imports

9

More maize in EU ethanol production

0

2

4

6

8

10

12

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

Billion liters

Wheat Sugar Beet

Other cereals Other sources

2nd Generation

9

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

Other cereals SugarbeetWheat Vegetable oil

40% of vegetable oils used for EU biofuel production

10

EU cereal market developments

0

20

40

60

80

100

120

140

160

180

2010-14 2024 2010-14 2024 2010-14 2024 2010-14 2024

Total Wheat Maize Barley Other cereals

Million t

Food and industrial use Feed use Bioenergy use Exports

11

EU cereal producer prices above historical averages

over the medium term

80

100

120

140

160

180

200

220

240

260

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

EU

R/t

Wheat Maize

Barley Intervention price

11

120

140

160

180

200

220

240

260

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

EU

R/t

10th percentile

90th percentile

WB-scenario

IHS-scenario

Baseline

Uncertainties surrounding EU maize price developments

Note: Uncertainty analysis prepared by JRC-IPTS, based on partial stochastic analysis

12

Oilseeds: limited production growth in the EU

• Limited production growth:

- Lower demand for biodiesel production

- Agronomic constraints

• In the EU, mainly rapeseed and sunflower seeds

• Strong imports of soybeans and meals

• Livestock sector driving demand for meals

• Decrease in vegetable oils use (olive oil not accounted)

- Less demand for biodiesel production (use of waste oils)

- Decreasing food use

0

0,5

1

1,5

2

2,5

3

3,5

0

2

4

6

8

10

12

14

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

t/ha

Million h

a

Rapeseed area Sunflower area Soybean area

Rapeseed yield Sunflower yield Soybean yield

13

A changing sweeteners EU market environment

0

100

200

300

400

500

600

700

800

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

0

10

20

30

40

50

60

70

80

Sugar beet Out of quota sugar beet

World white sugar EU white sugar WB-scenario

Sugar, EUR/t

Sugar beet, EUR/t • EU sugar price getting closer to

world prices at around 400 EUR/t

• A slight increase in sugar beet production

- Channelled in sugar production

- Ethanol production from sugar beet to decrease

• Less sugar imports

• Isoglucose use to increase significantly to about 12% of sweetener use

• Close to covering the domestic market

14

Prospects for meat

• Good exports prospects

• for pig meat and poultry,

• driven by a steady growing world consumption,

• supporting firm or even increasing world and EU prices.

• An increase in EU meat production

• driven by a sustained increase in poultry meat production and lower feed costs,

• while, after a recovery in the short-run, beef production should decline at a slow pace

• and pig meat production should stabilise.

• An EU per capita meat consumption on a declining trend

• after a recovery in the short-run,

• back to declining consumption

• except for poultry benefitting from a lower price and a good image close to consumers

14

15

A slowly declining EU meat consumption

54

56

58

60

62

64

66

68

70

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

kg p

er

capita in r

eta

il w

eig

ht

Economic crises

BSE and FMD

Low meat supply (new welfare rules for pig meat, cow

herd dev.)

Highest ever beef imports from South

America

Recovery of pig meat prod.

and more beef from dairy herd

16

Change in EU meat production and consumption 2024 compared to 2014

-200

0

200

400

600

800

1.000

Beef Pig meat Poultry meat Sheep meat

1000 t

Production Consumption

17

EU pig meat export developments

0

500

1.000

1.500

2.000

2.500

3.000

2005 2010 2013 2014e 2020-Base 2020-IHS 2020-WB 2024

1000 t

Total Russia Ukraine China and Hong Kong Japan S. Korea Other

18

Uncertainties surrounding EU pig meat price

developments (EUR/t)

800

1.000

1.200

1.400

1.600

1.800

2.000

2.200

2.400

2.600

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

90th percentile Baseline

10th percentile WB scenario

IHS scenario

2.000

2.500

3.000

3.500

4.000

4.500

5.000

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

90th percentile Baseline

10th percentile WB scenario

IHS scenario

Uncertainties surrounding EU beef price

developments (EUR/t)

19

Uncertainties surrounding EU poultry price developments (EUR/t)

1.000

1.200

1.400

1.600

1.800

2.000

2.200

2.400

2.600

2.800

90th percentile Baseline 10th percentile WB scenario IHS scenario

20

Prospects for milk and dairy products

• Milk remains the white gold for the next decade

• despite the difficult current market situation,

• because world demand is steadily growing,

• prices to stay firm around 350 EUR/t.

• EU deliveries to increase by 12 Mt in 10 years

• Further concentration of milk production in regions with lower production costs

• EU production expansion limited by increasing competition on the world market and by the small potential for higher EU consumption

• Environmental constraints to play a major role.

• More milk channelled into cheese and powders

• Cheese domestic use to continue growing and more exports

• More SMP for the export market thanks to additional drying capacities

• Whey powder exports getting always higher

20

21

Steady growth in world consumption

• +2.1% per year in world imports

• A slightly lower increase in traded volumes compared to the last decade

• But most of the extra demand to be supplied by the EU

- NZ production and exports limited by natural constraints

- US dom. consumption to grow faster

• China to contribute less to the extra demand

- Africa and other Asian countries to absorb more dairy products

EU

EU

NZ

NZ

US

US Arg.

Arg.

-2

0

2

4

6

8

10

12

14

16

2014 vs

2004

2024 vs

2014

Exports

Cumulative change in world trade of dairy products million tonnes of milk equivalent

China

China

MLE

MLE

O.

Asia

O. Asia

Russia Russia

Africa

Africa

-2

0

2

4

6

8

10

12

14

16

2014 vs

2004

2024 vs

2014

Imports

22

Higher milk collection in the EU

100

120

140

160

180

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

Million t

Milk deliveries Quota*

Milk production

WB-scenario

23

Concentration of milk production in the Northern part of the EU

-0,5 0,5 1,5 2,5 3,5 4,5

DE

FR

PL

NL

UK

IE

DK

AT

RO

BE*

LT

EE

BG

LV

SK

PT

EL

FI

HU

SE

IT

CZ

ES

Change in m

ilk d

eliveries in m

illion t

2024 vs 2014

2014 vs 2004

Most expanding MS (in % or tonnes)

MS where a decrease in deliveries is likely

Stable deliveries in SI , CY, HR, LU, MT

• Highest increase in milk deliveries to be expected in:

- DE, FR, PL, NL, UK, IE, DK, where

- farmers and the processing industry have invested most

- production costs are lower.

• A moderate increase expected compared to other projections because:

- world demand expansion is not infinite and potential for higher EU cons. is limited

- milk price will be lower than in 2013-14,

- not all farmers are willing to expand,

- environmental constraints,

- competition with other sectors.

• A decrease expected in particular where:

- production (feed and labour) costs are higher

- competition from neighbour countries is strong

24

Firm EU milk producer price

24

200

250

300

350

400

450

500

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

EU

R/t

90th percentile

10th percentile

EU support price in milk equivalent

Farm gate milk price Baseline

WB-scenario

IHS-scenario

* Farm gate milk price in real fat content, weighted EU average

1.500

1.700

1.900

2.100

2.300

2.500

2.700

2.900

3.100

3.300

3.500

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

EU

R/t

EU price

World price

Intervention price

The EU is competitive for SMP

25

Most of the extra milk channelled into cheese

0

1

2

3

4

5

6

7

Prod. Exp. Prod. Exp. Prod. Exp. Prod. Exp. Prod. Exp. Prod. Exp.

Cheese Butter Whey SMP WMP Fresh dairy p.

2024 v

s 2

014,

in m

illion t

onnes o

f m

ilk e

q.

Expected increase in domestic use

26

A slight increase in real income/AWU

Value of production

-10%

Total costs

-6%

Subsidies

-21%

Real factor income

-23%

Total labour

-27% Income / AWU

+9%

27

Summary

• Arable crops and biofuels

• Cereal prices below 2012 record prices but above historical averages

• Less biofuel demand than previously anticipated

• Abolition of the sugar quotas leading to EU sugar prices at world level

• Meat

• Good export prospects for pig meat and poultry, driven by world demand

• A small increase in meat production thanks to poultry

• Meat consumption oriented downwards, except for poultry

• Dairy

• The dairy sector remains the 'white gold' despite the current market difficulties

• An increase in the EU milk production driven by the steady increasing world demand and further increases in domestic use

• Most of the additional milk to be channelled in cheese, whey powder and SMP

27

28

Report and data available at: http://ec.europa.eu/agriculture/markets-and-prices/medium-term-outlook/index_en.htm

29

Uncertainties Scenarios prepared by JRC-IPTS

30

A lower growth in Russia

• Structural factors and geopolitical choices could hamper Russia's economic growth in coming decade

• Less demand for agricultural goods leading to lower prices

• Although the EU is a key trading partner impacts remain small (-1% cheese and -0.5% pig meat exports)

• In case the economic downturn in Russia would create changes in the energy markets, the impacts on world and EU prices would be much stronger.

-0,9%

-0,8%

-0,7%

-0,6%

-0,5%

-0,4%

-0,3%

-0,2%

-0,1%

0,0%

Butt

er

Cheese

Beef (A

tlantic)

Pig

meat

(Atlantic)

Poultry

Wheat

Coars

e g

rain

s

Oilseeds

Vegeta

ble

oil

Pro

tein

meals

Sugar

(Raw

)

Change in w

orld m

ark

et

price

31

Shale gas in the US and Canada

• Shale gas takes an increasingly important role as an energy source in the US, reducing energy prices.

• Agriculture is linked through energy markets on both the input side (energy and fertilizer) and the output side (biofuels)

• Lower energy prices reduces production costs significantly in both the US and Canada

• The US expands cereal and ethanol exports and contracts the exports of soybeans which are replaced by Canadian rapeseed exports

• Effects on the EU market are limited with a slight decrease in net trade of coarse grains and a slight increase for pig meat

-8%

-6%

-4%

-2%

0%

2%

4%

Change in p

roduction c

ost

US producer price US cost of production

US production

32

El Niño/La Niña and world agricultural markets

• Potential yield effects of a strong El Niño/La Niña in 2015/16 and a weaker version in 2020/21.

• During El Niño world cereals production decreases while oilseed production increases. The effect of La Niña is less pronounced.

• Lower oilseed revenues lead to a production reduction in the next year while the positive effect on cereal prices increases the incentive for next year's production

• The change in world oilseed markets are transferred to the EU prices which fluctuate with -10% in a El Niño phase and +10% the following year. Effects in other sectors are limited

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Change in w

orld p

rice

Coarse Grains Wheat Oilseeds

Protein Meals Vegetable Oils

33

Report and data available at: http://ec.europa.eu/agriculture/markets-and-prices/medium-term-outlook/index_en.htm

DISCLAIMER: While all efforts are made to reach robust market and income prospects, uncertainties remain. This publication does not necessarily reflect the official opinion of the European Commission.

© European Union, 2014 - Reproduction authorized provided the source is acknowledged

34

Annexes

35

Agricultural land use developments in the EU

• Total UAA declining trend to go on at a slower pace

• Following the new CAP greening measures:

- a constant share of permanent pasture

- alt in the decrease of fallow-land due to the 'ecological focus area' measures

- small increase in protein crops area

• Increase in production via limited growth in yield and land re-allocation

0

20

40

60

80

100

120

140

160

180

200

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

Million h

a

cereals (excl. rice) oilseeds

other arable fodder

fallow permanent crops etc.

permanent grassland

36

Annual changes in area and yields 2024 vs. 2010-14

Barley 17,4%

Maize 13,3%

Other cereals 6,3%

Oats 3,8%

Rapeseed 9,5%

Rye 3,5%

Sugar beet 2,3%

Durum wheat 3,6% Common wheat

33,3%

Soybeans; 0,7%

Sunflower seed 0,8%

Rice 0,6%

0,0%

0,5%

1,0%

1,5%

-1,5% -0,5% 0,5% 1,5%

Annual change in y

ield

betw

een

2010-2

014 a

nd 2

024

Annual change in area harvested between 2010-2014 and 2024

Note: the bubble size refers to the average share in area in the years 2009-13