97854359

European Commission

Directorate-General for Agriculture

PROSPECTS FOR

AGRICULTURAL MARKETS

AND INCOME

2004 – 2011

FOR EU-25

December 2004

NOTE TO THE READERS

The medium-term perspectives presented in this publication consist of a set of market and sector income projections elaborated on the basis of specific assumptions regarding macro-economic conditions, the agricultural and trade policy environment, weather conditions and international market developments. They are not intended to constitute a forecast of what the future will be, but instead a description of what may happen under a specific set of assumptions and circumstances, which at the time of projections were judged plausible. As such, they should be seen as an analytical tool for medium-term market and policy issues, not as a short-term forecasting tool for monitoring market developments and addressing short-term market issues.

These projections and analyses have been carried out on the basis of the two economic models currently available in the Directorate-General for Agriculture and Rural Development of the European Commission. These modelling tools were already used to produce the impact assessment of reform proposals.

This report is based on the information available at the end of October 2004. The analysis covers the period between 2004 and 2011.

Table of contents

3

Table of contents

Foreword.............................................................................................................................. 7

List of acronyms and abbreviations..................................................................................... 8

Summary of projections ................................................................................................... 11

Chapter I Prospects for agricultural markets and income in the EU....................... 16

1.1. Introduction ................................................................................................... 16

1.2. Arable crops ................................................................................................... 19

1.2.1. Key factors influencing the medium-term prospects for EU arable crop markets............................................................................ 19

1.2.2. Development in area allocation ......................................................... 21

1.2.3. Prospects for cereal markets .............................................................. 22

1.2.4. The perspectives for individual cereal markets ................................. 27

1.2.5. Oilseeds ............................................................................................. 29

1.3. Meat and livestock ......................................................................................... 30

1.3.1. Beef and veal ..................................................................................... 30

1.3.2. Pig meat ............................................................................................. 31

1.3.3. Poultry ............................................................................................... 32

1.3.4. Consumption eggs ............................................................................. 33

1.3.5. Sheep and goat meat .......................................................................... 34

1.3.6. Overall meat consumption................................................................. 35

1.4. Milk and dairy products ............................................................................... 36

1.4.1. Milk ................................................................................................... 36

1.4.2. Cheese................................................................................................ 39

1.4.3. Butter ................................................................................................. 40

1.4.4. Skimmed milk powder ...................................................................... 41

1.5. Agricultural income....................................................................................... 43

Statistical annex ....................................................................................................... 46

Chapter II The impact of enlargement on the main agricultural markets and incomes of the new member states .................................................... 52

2.1. The process of enlargement .......................................................................... 52

2.2. The economic conditions of agriculture in the new Member States ......... 54

2.3. The impact of the EU enlargement .............................................................. 57

Table of contents

4

2.3.1. The cereal markets............................................................................. 58

2.3.2. The meat and dairy markets............................................................... 66

2.3.3. Prospects for income ......................................................................... 74

2.4. Conclusions .................................................................................................... 75

Chapter III Prospects for world agricultural markets .............................................. 79

3.1. Introduction ................................................................................................... 79

3.2. Overview of main trends............................................................................... 79

3.2.1. Overview per sector........................................................................... 80

3.2.2. Underlying factors ............................................................................. 84

3.3. Prospects per sector....................................................................................... 89

3.3.1. Cereals ............................................................................................... 89

3.3.2. Oilseeds and oilseed products ........................................................... 96

3.3.3. Meat ................................................................................................. 102

3.3.4. Milk and dairy products................................................................... 109

3.4. Key issues ..................................................................................................... 116

3.4.1. Economic prospects......................................................................... 116

3.4.2. Growth potential in agricultural supply........................................... 117

3.4.3. Policy and trade environment .......................................................... 118

3.4.4. Sanitary and animal health issues.................................................... 118

References ............................................................................................................... 120

Statistical annex...................................................................................................... 121

Foreword

7

Foreword

The Directorate-General for Agriculture and Rural Development of the European Commission has published in recent years an overview of market trends and medium-term projections of supply and demand for the main agricultural commodities. This publication provides a picture of the likely developments of agricultural markets up to 2011, based on a certain number of assumptions and on the statistical information available in October 2004.

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.

List of acronyms and abbreviations

8


ACP Africa -Caribbean-Pacific countries

Bio Billion

BSE Bovine Spongiform Encephalopathy

CAP Common Agricultural Policy

Cap. Capita

CEECs Central and Eastern European Countries

CIF Cost-Insurance-Freight

CNDP Complementary National Direct Payment

Cwe Carcass weight equivalent

DG AGRI Directorate-General for Agriculture and Rural Development

EBA “Everything But Arms” Initiative

EU European Union

EU-25 European Union after the enlargement on May, 1st 2004

EU-N10 New Member States of the European Union from May, 1st 2004

EU-15 Member States of the European Union before May, 1st 2004

EUROSTAT Statistical Office of the European Communities

FAIR Federal Agriculture Improvement and Reform (US)

FAO Food and Agriculture Organisation of the United Nations

FAPRI Food and Agricultural Policy Research Institute

FMD Foot-and-Mouth Disease

FOB Free-On-Board

FSU Former Soviet Union

GATT General Agreement on Tariffs and Trade

GDP Gross Domestic Product

Ha Hectare

IGC International Grains Council

IMF International Monetary Fund

Kg Kilogram

LDCs Least Developed Countries

LFA Less Favoured Areas

Lw Live weight

Mio Million


9

NAFTA North America Free Trade Agreement

OCT Overseas Countries and Territories

OECD Organisation for Economic Co-operation and Development

OTMS Over Thirty Months Scheme

SAPARD Special Accession Programme for Agricultural and Rural development

SAPS Single Area Payment Scheme

SMP Skimmed Milk Powder

SRM Specific Risk Material

T Metric tonne

TRQ Tariff-Rate Quota

URAA Uruguay Round Agreement on Agriculture

US United States of America

USDA United States Department of Agriculture

WMP Whole Milk Powder

WTO World Trade Organisation

Executive Summary

11

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

Executive summary

12

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

Executive summary

13

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

Executive summary

14

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.

Chapter I Prospects for agricultural markets in the EU

15

PROSPECTS FOR AGRICULTURAL MARKETS

AND INCOME

IN THE EUROPEAN UNION


16

1. PROSPECTS FOR AGRICULTURAL MARKETS AND INCOME IN THE EU

1.1. Introduction

This chapter summarises the main results and underlying assumptions of medium-term projections for the markets of some key agricultural products and for sector income in the European Union for the period 2004 - 2011. The results presented are based on data and other information available at the end of October 2004 and constitute an update of the medium-term projections published in July 20041. In particular the projections take into account the short-term developments foreseen for 2004 and 2005 on domestic and world markets.

These projections are established under a specific set of assumptions. The most important assumptions cover agricultural and trade policies, as well as the outlook for the macro-economic environment and for world agricultural commodity markets. These working hypotheses have been defined on the basis of the information available, which at the time of the analysis were judged the most plausible:

(1) The implementation of the single farm payment scheme as part of the Common Agricultural Policy (CAP) reform decisions2 allows Member States to choose among different options, which will influence the degree of “decoupling” of the payments. By August 2004 a large majority of Member States communicated their preferred option3. Based on this information it has been estimated that in 2011 approximately 90 % of the budgetary transfers in the form of direct payments (including national envelops and top-ups) for the arable crops, milk, beef and sheep sectors will be part of the single farm payment for the EU-25 as a whole. The rate would be higher for the milk (100 %) and arable crops (93 %) sectors than for beef and sheep sectors (78 % and 73 % respectively).

(2) All transitional measures of the CAP in the new Member States, i.e. the phasing-in of direct payments as well as the top-up possibilities and the production quotas, are expected to operate under the rules agreed upon in the 2002 Copenhagen summit. Eight out of the ten new Member States adopt the single area payment scheme, while Slovenia and Malta implement the current EU legislation on direct payments. From 2009 onwards the eight new Member States are assumed to adopt the regionalised system. Slovenia and Malta would implement the regionalised system from 2007 onwards.

(3) After a reduction to 5 % for 2004/05 marketing year, the mandatory set-aside rate returns to the regulatory 10% in 2005/06. The set-aside area is assumed to remain

1 European Commission, Directorate-General for Agriculture Prospects for Agricultural Markets 2004 – 2011 – Update for the EU-25. July 2004. Brussels.

2 It should be mentioned that the decisions to extend the scope of currently available instruments for rural development to promote food quality, meet higher standards and foster animal welfare and those relative to some specific sectors such as the nuts, dried fodder, starch potato, tobacco, olive oil and cotton sectors have not been incorporated in these market analyses.

3 A certain degree of incertitude remains on the detailed implementation rules, especially for the Member States which will introduce the single farm payment in 2006.


17

fixed at that level for the rest of the period. For those new Member States which opted for the single area payment scheme, the set-aside obligations would only apply from 2009 onwards.

(4) It is also assumed that all commitments taken within the Uruguay Round Agreement on Agriculture (URAA), regarding in particular market access and subsidised exports, will be fully respected. Thus, subsidised exports are expected not to exceed the annual URAA limits, whereas imports under current and minimum access are fully incorporated. In addition, the URAA commitments are assumed to remain unchanged over the 2004-2011 period as the framework agreement for establishing modalities reached at the WTO in July 2004 does not contain sufficient details to take it into account in this projection exercise.

The trade agreements that have been concluded by the EU prior to the end of October 2004, notably with the Least Developed Countries, have been included into the projections.

(5) The macro-economic environment in the EU is expected to display a moderate growth in economic activity in the short term as accommodative macroeconomic policy conditions, continuous low inflation, progress in structural reforms, and buoyancy in global growth and trade have increased the confidence of economic agents.

According to the short-term economic forecasts from the Commission released in October 20044, after a mere 0.9 % in 2003, EU-15 average real growth rates would rebound to 2.3 % in 2004, stabilising to around 2.2 % in 2005. Despite the economic downturn observed in the old Member States over the last few years, economic growth has remained strong in the new Member States. Expanding domestic consumption and improving economic conditions in the rest of Europe should further accelerate growth in the new Member States to 4.3 % in 2005. Overall EU-25 real GDP growth would reach 2.5 % in 2004 and 2.3 % in 2005, as the sharp rise in oil prices takes its toll before showing a subsequent rebound in 2006 (2.4 %) as the latter effect tapers off. The international environment should also be supportive as, after an estimated GDP growth of 3.5 % in 2004, the world economy is expected to accelerate and grow by 5 % in 2005, the fastest pace since the seventies.

Table 1.1 Assumptions on macro-economic variables in the European Union, 2001 – 2011

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Population growth (in%) EU25 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

of which EU15 0.4% 0.4% 0.4% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2%of which EUN10 -0.3% -0.1% 0.0% -0.9% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2%

GDP growth (in%)EU25 1.8% 1.1% 1.0% 2.5% 2.3% 2.4% 2.5% 2.5% 2.5% 2.5% 2.5%

of which EU15 1.7% 1.1% 0.9% 2.3% 2.2% 2.3% 2.4% 2.4% 2.4% 2.4% 2.4%of which EUN10 4.2% 2.5% 3.6% 4.0% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%

Inflation (in%)EU25 2.5% 2.1% 1.9% 2.2% 2.1% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9%Exchange rateUS$/€ 0.90 0.95 1.13 1.23 1.22 1.15 1.15 1.15 1.15 1.15 1.15

4 European Commission, Directorate-General for Economic and Financial Affairs. Economic Forecasts, Autumn 2004. European Economy No.5/2004.


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The medium-term prospects for economic growth in the EU should rely on a relatively strong domestic demand. They should also benefit from the sharp growth projected for many emerging economies. In this respect, economic growth would remain rather stable over the medium term at 2.5 %, with growth rates in the new Member States exceeding 4 % per year on average while those in the old Member States would stagnate at 2.4 % over the projection period. Inflation is also assumed to remain stable over the medium-term at around 1.9 %.

Since the beginning of 2004, the $/€ exchange rate dropped to approximately 1.3. The euro is assumed to gradually stabilise over the medium term around 1.15 against the US dollar, as the impact of the short-term factors contributing to the recent weakening of the US dollar (including the swiftly growing current-account and budget deficits in the US) may be expected to give way to more fundamental structural factors.

Graph 1.1 Medium-term development in the $/€ exchange rate ( 1 € = … $ ) and real GDP growth for EU-15, comparison with previous assumptions, 1994 – 2011

0,4

0,6

0,8

1

1,2

1,4

1994 1996 1998 2000 2002 2004 2006 2008 20100

1,5

3

4,5

6

7,5

GDP growth

$/euro exchange rateJuly 2004

GDP growth$/euro exchange rate

December 2004

(6) Short-term developments on world agricultural markets have recently been marked by sharp price increases. Whereas cereal and oilseed markets were affected by unfavourable climatic conditions which led to severe production drops in various parts of the world, meat markets were disrupted by a series of sanitary crises (e.g. mad cow disease in North America and Avian flu in Asia).

A rather abundant 2004 harvest in the northern hemisphere caused a significant fall in grain prices, providing incentives to livestock producers which were also benefiting of relatively high meat prices throughout the year 2004. World dairy markets experienced extremely high prices lately, following firm demand from developing countries and limited supply in most producing and exporting countries.

The medium-term outlook for world agricultural markets is foreseen to remain essentially supported by rising food demand driven by an improved macro-economic environment (with more broadly-based and sustainable growth), higher population, urbanisation and changes in dietary patterns, particularly in many emerging economies. World trade in agricultural commodities is expected to demonstrate sustained growth, as demand for food products should outpace


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production in many developing countries, while commodity prices are projected to display only moderate increases over the medium term.

World cereal prices are projected to remain at relatively high level over the medium term as supply adjusts to global demand growth, with wheat and maize prices reaching up to 150 $/t and 115 $/t respectively by 2011/12. Oilseed prices are foreseen to display a certain stability over the forecast period, with soybean prices projected at 240 $/t in 2011/12.

Meat markets are expected to show some stabilisation over the medium term, with world beef prices declining slightly after a short-term price surge due to trade disruptions related to sanitary crises. World dairy prices are expected to ease down somewhat after the strong increase of 2004, in line with projected rapid expansion of milk production in low-cost producing regions (such as Oceania)5.

1.2. Arable crops

1.2.1. Key factors influencing the medium-term prospects for EU arable crop markets

The medium-term prospects for the EU crop markets are projected to be shaped by a series of factors. The most important can be described as follows:

• The implementation of the 2003 CAP reform: the introduction of the single farm payment and the reduction in the level of support in the cereal sector are expected to lead to a slight decline in cereal area (mainly affecting rye and durum wheat) and to a rise in voluntary set-aside as land with low profitability would move out of production;

• The mandatory set-aside: after a record 2004 harvest characterised by favourable weather conditions and a reduction from 10 % to 5 % in the mandatory rate of set-aside, the return to a mandatory set-aside level equivalent to the regulatory level of 10 % over the medium-term is projected to significantly reduce the EU production potential and improve the cereal market balance, notably in the first half of the projection period;

• Lower prospects for yield growth: the significant slow down in cereal yield growth observed in the EU over the last few years is expected to persist over the projection period;

• Modest growth in the animal sector: contrary to the past decade which was characterised by a steady development of the white meat sector (and the subsequent gains in cereal feed use), the next seven years are projected to exhibit a marked slow down in the production growth of the pig meat, poultry meat and egg sectors. This should then translate into more moderate feed demand prospects;

• Supportive world markets: world market conditions for cereals and oilseeds are forecast by most international organisations to be moderately favourable, with notably an expanding world (import) demand (South East Asia);

5 For more details, c.f. chapter III.


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• The US$/€ exchange rate: the transmission of these favourable world market conditions to EU markets under the current policy conditions does crucially depend on the value of the euro relative to the US$. The current level of 1.3 US$/€ constrains the competitiveness of EU cereal production on both world markets and EU feed markets (where imported cereal substitute products such as oilseeds benefit from lower prices when converted in euro). As a result, domestic producer prices for cereals are projected to face intense short-term pressure. The medium-term perspectives should in turn be positively influenced by the assumed weakening of the Euro to an exchange rate of 1.15 US$/€ from 2006 onwards. The resulting improvement in the competitiveness of the crop sector would enable the EU to benefit from the moderately expanding world demand for cereals6;

• The impact of EU enlargement:

• Importance of the new Member States: in 2004 EU cereal and oilseed production increased by about 28 % and 20 % respectively. The record 2004 harvest in the new Member States impressively demonstrates the production potential for arable crops in these countries;

• Integration of the new Member States into the single market: the 2004/05 marketing year is showing that the price pressure currently experienced in a number of new Member States due to high transport costs and the lack of important storing facilities is a significant limiting factor in the development of the competitiveness of these countries and their access to EU domestic and/or world markets. This situation currently results in a marked geographical separation of cereal (and to a lesser extent oilseed) markets in the EU. Increased investment in transport and storage infrastructure becomes a crucial factor for the competitiveness of the crop sector in the new Member States. Because these investments will take time to effectively influence production and trade patterns, the economic perspectives for crop production as expressed in levels and volatility of producer prices might only gradually improve over the medium to long term. This leads to less positive medium-term perspectives for the new Member States than earlier analyses suggested.

• Currency appreciation in the new Member States: the strengthening against the euro of several currencies of the new Member States is assumed to persist over the medium term as the new Member States grow at a much faster pace than the economies of the Eurozone. Furthermore the continuous inflow of foreign direct investments at significant levels of GDP as well as the transfer of EU funds should also contribute to the further appreciation of currencies in the New Member States. As a result, lower agricultural prices and payments when expressed in domestic currencies might reduce the incentives to use and expand the production potential. Since prices of tradable inputs such as fuel, fertiliser and machinery would equally fall when denominated in domestic currencies, the competitive situation of crop production vis-à-vis that in the Eurozone should not

6 The profitability of cereal, oilseed and protein production is lower than under more favourable exchange rate conditions as observed from 2000 to 2002, when the euro exchange rates were closer to parity with the USD. Nevertheless, some offsetting effects of high exchange rates positively influence their profitability. In particular the current increase in world market prices for energy, fertiliser and pesticides is less felt with an overvalued Euro than it would be with lower levels of exchange rates.


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be significantly affected. However, like prior to membership and despite the positive impact of the CAP on producer income, pressure for structural adjustment will arise from the declining competitiveness of the agricultural sector vis-à-vis other sectors of the economies.

• The biofuel policy: the medium-term perspectives for oilseeds should become increasingly influenced by the biofuel policies of the Member States. This analysis takes the current biofuel policies of Member States as unchanged for the future. The isolated supply effect of the carbon credit instrument for renewable energy should be rather limited since markets are mainly determined by the tax policy and regulations of Member States and their impact on the industry. Therefore, the medium-term perspectives for non-food oilseeds appear rather stable in the EU7.

1.2.2. Development in area allocation

The overall EU-25 area allocated to arable crops, silage and set-aside is estimated to increase slightly in 2004 to 71.2 mio ha after the decline observed in 2003 linked to difficult climatic conditions. In 2004 total area in arable crop production would represent some 66.2 mio ha, whereas set-aside land would fall to 5 mio ha in line with the reduction in the rate of mandatory set-aside adopted in response to the sharp fall in cereal production in 2003 and the consequent drastic drop in stock level.

From 2005 onwards, mandatory set-aside is assumed to remain fixed at its historical level equivalent to the 10 % regulatory level. This represents some 4 mio ha in the old Member States, and will only expand marginally in those Member States which introduce decoupling at a later stage. From 2009 onwards 0.65 mio ha of mandatory set-aside would be added by the new Member States. The biggest contributors to mandatory set-aside in the new Member States should be Hungary, the Czech Republic and Slovakia. In the other new Member States, set-aside obligations would have little impact due to the exemption for small-scale farms.

Voluntary set aside is estimated to have increased from 2.3 mio ha in 2003 to 3 mio ha in 2004. From 2005 onwards, it would expand further to reach 3.4 mio ha in 2011 owing to the introduction of decoupling from 2005 and the declining profitability of arable crop production in real terms. This development would take place at the expense of rye, durum wheat and barley areas, the profitability of which would drop sharply in some regions. It is still however unclear how much additional area would be set-aside in the new Member States, given the relatively large proportion of unused arable land in some of these countries.

As a result, total set-aside area would gradually increase from 5.0 mio ha in 2004 to 7.2 mio ha in 2005 and to 8 mio ha in EU-25 by 2011. The 3 mio ha increase against 2004 would significantly contribute to the balance of cereal markets, especially for those with lower competitiveness.

7 An important factor influencing the medium-term prospects for oilseed production is the implementation of the biofuel directive. Especially relevant is the question if and how Member States will substantiate the directive and how many additional resources will be allocated to this sector. A complete picture could not be drawn at this time.


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Graph 1.2 Development of set-aside in the European Union (mio ha)

0

1

2

3

4

5

6

7

8

9

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Obligatory set aside old MS

Obligatory set aside new MS

Voluntary set aside

EU-15 EU-25

Given the increase in set-aside land, total arable crop area (cereal, oilseed and protein crops) would decline over the medium-term from 61.1 mio ha in 2004 to 58.8 mio ha (with 50.9 mio ha of cereals, 6.5 mio ha of oilseeds and 1.4 mio ha of protein crops). This fall would be linked to the increase in mandatory set-aside, the introduction of the single farm payment and the modest development projected for the profitability of cereals, oilseed and protein crop production over the medium term.

After an initial sharp drop in 2005 to 51.8 mio ha, cereal area would slowly decline to reach 50.9 mio ha in 2011 (i.e. a further 0.9 mio ha fall). Oilseed area would remain stable at 6.6 mio ha in 2005 and then slightly decrease by 0.2 mio ha to stand at 6.5 mio ha in 2011. Non-food oilseed production on set-aside land would increase from 0.5 mio ha in 2004 to 0.7 mio ha in 2005 in line with the increase in mandatory set-aside. It would then remain relatively stable over the medium term. Protein crop area in the EU-25 is projected to stabilise at around 1.4 mio ha, of which 0.2 mio ha would come from the new Member States.

1.2.3. Prospects for cereal markets

In 2003 EU-25 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 sharp rebound in 2004 as total cereal harvest is estimated to have reached 279 mio t, with about 61 mio t produced in the new Member States as compared to 218 mio t in the old Member States.

Domestic use would reach 246 mio t in 2004, which represents an expansion of 6 mio t from 2003, but only of 3 mio t against 2002. In spite of the marked decline in pig meat production, most of this expansion would materialise in feed use thanks to the significantly lower price levels than in the previous year. This would take place to the detriment of cereal substitute products (mainly manioc and corn gluten feed). In 2004 exports are foreseen to return to more normal levels, reaching 27 mio t (compared to 20 mio t in 2003 and 30 mio t in 2002).


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Graph 1.3 Development in cereal markets in the EU (mio t), 1995-2011

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The important harvest would enable to replenish total cereal stocks which would grow by more than 16 mio t to stand at 54 mio t, a level comparable to the 2002 situation. Though most of this stock increase would be found in private stocks, public stocks could reach approximately 10 mio t at the end of the 2004/05 marketing year, i.e. an increase of 6.5 mio t against 2003. Most of these stocks would concern barley (4.8 mio t), rye (2.3 mio t) and soft wheat (2.9 mio t).

Graph 1.4 Development in cereal stocks and exports in the EU (mio t), 1995-2011

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The medium-term projections depict an outlook for the EU cereal markets that would continue to appear moderately positive for most EU cereals, with the noticeable exception of barley. However, the functioning of cereal markets in some producing regions could remain constrained by marketing inefficiencies. The latter could affect in particular the marketing of soft wheat and maize from central European countries.

The medium-term prospects for yield growth in the EU would show a more modest pattern than earlier projections suggested, with an average annual growth estimated at approximately 0.9 %. In the past years, yield growth slowed down considerably and future increases in the intensive cereal production basins of the old Member States now appear more limited. However, maize yields should continue to increase substantially


24

throughout the EU. Some scope for further yield increase are also expected in the new Member States, which are on average at roughly half of the yield levels of the old Member States.

Box 1 The impact of different $/€ exchange rates on the cereal sector

The euro has continued to appreciate against the US $ for a number of months despite basic economic fundamentals that would suggest an overvaluation of the euro. Agriculture is affected by this appreciation since the costs of production rely more on domestic factors such as labour and land than in other sectors of the economy. The costs of these factors would only adjust with a significant time lag, e.g. when a new land lease contract is negotiated. In other economic sectors which are more dependent on tradable inputs, such as energy, the effects of the variability of exchange rates would not be felt as early as in agriculture as the major cost components would vary similarly as the prices of output. A high share of tradable inputs in the cost structure would tend therefore to offset parts of the negative impact of appreciation for output prices.

Since the costs of production tend to remain relatively stable in agriculture as compared to other sectors of the economy, appreciating currencies would affect competitiveness (and depreciating currencies would positively influence competitiveness) more than in other sectors of the economy. This holds in particular for land and labour based production, e.g. crops, cattle and sheep, while pork, poultry and egg production would be less influenced because a larger part of the costs stem from tradable inputs such as feed.

Another factor influencing the ability to compete on world markets are the EU price levels which are denominated in euro. The latter could vary significantly in relation to exchange rate movements when they are put in relation to world market prices. Finally, the sectors with a high share of exports or imports relative to production would be relatively more affected than those with a largely domestic base.

This text box aims at illustrating the sensitivity of the market projections to different assumptions on the exchange rate developments over the medium term. Therefore, in comparison to the central assumption of a medium-term exchange rate of 1.15 US$/€ from 2006 onwards, two alternative scenarios are calculated: (1) a medium term exchange rate of parity with the US$ and (2) a medium term exchange rate of 1.4 US$/€.

The sensitivity of cereal production to exchange rates is relatively limited when comparing the different scenarios. As compared to the baseline, the assumed parity with the US $ would result in an increase of cereal production of around 0.5 % to 1 %. Oilseeds would benefit even more with a production increase of 6 % to 7 %. World market prices would be attractive when denominated in euro. Cereal consumption would grow by some 0.2 % to 0.3 % thanks mainly to higher feed use linked to a slight expansion of livestock production. Moreover, the overall profitability of crop production would be higher and would reduce voluntary set-aside by 0.2 mio ha.

Likewise the ability to export at competitive conditions would be improved under the parity exchange rate. In 2006 the EU would be able to increase its cereal export by 4.8 mio t against the baseline scenario. Over the medium term, the expansion in the oilseed production sector would limit somewhat the availability of cereals for the export market and total cereal exports would decline by 1 mio t as compared to baseline level.


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Public stocks would be significantly reduced and would disappear also in regions with high transport costs. Stock levels in the EU would fall significantly to 25 mio t in 2011, leading to high domestic prices.

Graph 1.5 Development in total cereal stocks under different exchange rate assumptions (mio t)

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Under the exchange rate conditions of 1.4 US $/€ over the medium term, markets conditions would deteriorate as compared to the baseline and the parity assumption. Production of cereals would be -0.6 % to -0.8 % lower than in the baseline, whereas the relative decline in consumption would stand around -0.4 %. This would indicate that feed consumption and cereal-intensive livestock production would not change significantly. Oilseed production on the other hand would react more sensitively and decrease by 10 %, because cereal prices would become more attractive and imports of oilseeds would tend to substitute to domestic oilseed production. The overall crop profitability would decline and voluntary set aside would increase by 0.3 mio ha in the EU to reach 3.6 mio ha (as compared to 3.3-3.4 mio ha in the baseline).

The ability to sell on world markets at competitive conditions would however decrease and export levels would drop by 4 to 5 mio t against the baseline indicating a higher use of export refunds as compared to baseline. Public and private stocks would accumulate to stand at 70 mio t in 2011 (against a relative stabilisation of total stocks at about 45 mio t in the baseline). Public stocks would be significantly higher and could reach 35 mio t in 2011 as compared to 17 mio t in the baseline.

The projected rise in cereal yields would more than offset the decline in cereal area and entail a gradual expansion in cereal production over the medium term. After a pronounced short-term fall in 2005 at 263 mio t due to the increase in mandatory set-aside, EU-25 cereal production would resume expanding to reach 274 mio t in 2011.

Domestic consumption of cereals would exhibit a modest 5 mio t increase over the projection horizon to stand around 251 mio t in 2011. Contrary to the previous decade when it displayed a robust and sustained growth, cereal feed demand would stagnate over the next seven years at about 157 mio t. By contrast, industrial and human consumption would demonstrate a slight increase.

Several factors would contribute to the stagnation in cereal feed use:


26

(1) The increase in feeding efficiency will continue, in particular in the new Member States, resulting in lower feed use per ton of meat and livestock products than seen in the past;

(2) The overall increase in white meat and egg production in the EU is projected to be lower than in the last decade. This is mainly due to increasing constraints on production in the traditional production areas of the EU and a slow down in the growth of domestic consumption. The new Member States are foreseen to significantly expand production in the medium term due to favourable production and investment conditions. This expansion however would have only a limited impact on additional cereal feed use;

(3) Feed cereals gained competitiveness in the 1992 and 1999 reforms and largely replaced cereal substitutes. Future additional gains in cereal consumption in this respect appear more limited.

Changing price relations over the medium term would result in a significant change in the composition of cereal feed use in the medium term.

During the first half of the projection period, the impact of higher mandatory set-aside and the implementation of decoupling would combine to limit production growth and generate a gradual fall in stock levels. However total stocks would resume increasing slightly towards the end of the decade as the modest yield growth would still outpace the absorption capacity of the domestic market and the limited export opportunities. Total cereal ending stocks would then stand at 47 mio t in 2011, some 7 mio t lower than in 2004.

The gradual reallocation of stocks between private and public stocks would however provide for slightly increasing public stocks which are expected to rise over the medium term from 10.0 mio t in 2004 to 17.2 mio t in 2011. Most of these stocks would be made of barley which would suffer from significant loss of competitiveness, and of soft wheat. The appearance of maize public stocks would most probably only constitutes a temporary phenomenon, whereas rye public stocks would vanish over the medium term.

Graph 1.6 Composition of public stocks in the EU (mio t), 1995-2011

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In summary, the medium-term prospects for cereal markets for the EU-25 should remain moderately positive thanks to the impact of the CAP reform and the return to higher set-aside level which, combined with more favourable conditions on world markets, should contribute to the improvement of the balance of cereal markets. Despite a worsening of the exchange rate environment in the short-term, the assumed return to a slightly weaker euro over the medium term should also help to restore a moderate level of competitiveness for cereals. Specific difficulties could only arise for coarse grains, in particular for barley, and on a regional scope for soft wheat and maize. Cereal stocks would only moderately build up leaving domestic prices under less pressure than in the short-term.

1.2.4. The perspectives for individual cereal markets

The prospects for EU wheat markets should remain relatively favourable over the medium term. After a marked fall projected for 2005, linked to the introduction of decoupling and higher set-aside, common wheat production would resume growing over the medium term to stand at 122.9 mio t in 2011 (a similar level to that of 2004) as common wheat area would benefit from the declining profitability of barley. Its competitive prices would further stimulate its domestic use, not only for feed demand, but also for industrial use. From 2007 onwards, common wheat market would benefit from supportive world markets and more than 19 mio t of common wheat could be exported8. With imports limited on average at 4.5 mio t, stocks would slowly increase to levels around 25 mio t, of which some 5 to 6 mio t in public stocks.

The prospects for the durum wheat sector are expected to be characterised by a decline in harvested area due the introduction of the single farm payment and the specific reduction in the level of support of the sector. As a consequence, durum wheat area would fall by approximately 6 % against 2004 to stabilise at levels close to 3.7 mio ha. Domestic consumption of durum wheat should further increase to 10.4 mio t, whereas feed use would fall to 1 mio t (against 1.4 mio t in 2003 and 1.8 mio t in 2004). The EU-25 would remain an overall net importer of durum wheat for about 0.7 to 0.9 mio t annually.

Prospects for maize markets would also remain positive over the medium term. EU-25 production would stabilise around 51 mio t, of which some 10.5 mio t would be produced in the new Member States. Marketing difficulties (high transport costs) are projected to largely separate maize deficit regions in the Western parts of the EU from the maize surplus regions in the Eastern parts of the EU. They would also constrain export possibilities so that price expectations in the Eastern surplus regions would be lower than previously anticipated. As a consequence, the projected production surplus in the new Member States would gradually decline as production would stagnate at 10.4 mio t while feed use increases. The EU-25 would export some 2.7 mio t of maize on world markets whereas 3 mio t would still be imported in the Western and Northern parts of the EU.

8 The projections for cereal exports remain conditional upon the assumption of the full use of the URAA limits.


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Graph 1.7 Development of soft wheat markets in the EU (mio t), 1995-2011

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The market prospects for barley are projected to be more difficult as the adjustment potential of the EU market should remain largely constrained by the relatively high support price of this cereal. Over the medium term, production would stagnate around 55-56 mio t owing to the limited profitability prospects of this cereal. Barley would also lose competitiveness on the feed market against feed wheat and maize so that total fed use of barley would fall by more than 3 mio t to 34 mio t in 2011. A stagnating production combined with a declining domestic demand and constrained export opportunities of about 7-8 mio t would generate an accumulation of stocks, with public stocks reaching 12 mio t in 2011.

Graph 1.8 Development of barley markets in the EU (mio t), 1995-2011

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Limited adjustments are expected over the medium term in the rye sector as producers largely anticipated the implementation of the CAP reform decisions with a drastic reduction in rye area over the most recent years. However, the high level of rye intervention stocks that would still exist at the end of the 2004/05 marketing year (2.3 mio t) would weigh heavily on the short-term prospects for the rye market. As these public stocks are assumed to be gradually released on the domestic and external markets over the next three years, producer prices would remain under substantial pressure over


29

the short-term. As a result, rye area would fall further from 2.8 mio ha in 2004 to 2.7 mio ha in 2006. Over the longer run, the export market will increasingly clear a domestic market characterised by a stagnant domestic use (linked to declining feed use) and a slightly increasing production fuelled by yield growth.

Graph 1.9 Development of rye markets in the EU (mio t), 1995-2011

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1.2.5. Oilseeds

The medium-term prospects for EU oilseed market are expected to be supported by productivity increases and the favourable developments projected for the world markets (fuelled by continuous positive trends for global demand of vegetable oil). These perspectives would nevertheless remain conditional on the US$/€ exchange rate as the recent strengthening of the euro is constraining the profitability of oilseed production in the EU.

Total food oilseed area, which bottomed out in 2002 at 6.3 mio ha, and increased to 6.9 mio ha in 2004 is foreseen to stagnate at around 6.6 mio ha over the medium term. About 1.9 mio ha of oilseeds would be grown in the new Member States. The set-aside obligation in the new Member States would further reduce oilseed area by 0.2 mio ha from 2009 onwards. The transmission of supportive world market conditions to EU domestic markets would trigger a slight expansion in oilseed area from 2009 onwards. On the basis of the assumption that the current energy and tax policies in Member States remain unchanged over the medium term, total non-food (energy) oilseed area would stagnate at around 0.7 mio ha on set-aside land.

After a short-term fall in 2005, total food oilseed production in the EU-25 would display a slight increase over the medium term to reach 19.1 mio t in 2011. Non-food oilseed production on set-aside land is projected to expand from 2.2 to 2.4 mio t over the medium term.

Despite the projected moderate increase in oilseed production, the EU will continue to remain a large net importer of oilseeds (notably of soybeans and sunflower seed) in order to meet a total domestic demand of around 39 mio t.


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1.3. Meat and livestock

1.3.1. Beef and veal

In recent years the EU beef and veal market has been strongly influenced by the BSE scares and by the measures that were taken in response to these crises. It is estimated that in the period between 1996 and 2004 more than 8 mio animals were withdrawn in the framework of the slaughter schemes and around 6 mio calves were subject to emergency supply-side schemes9, in an effort to keep supply as close as possible to falling consumption.

The impact of these measures reinforced the structural reduction of the EU cattle herd due to the constant reduction of the dairy herd linked to the joint effect of constant milk quotas and increasing milk yields10. Suckler cow herd, which strongly developed during the nineties, has been slightly declining since the year 2000, as the Agenda 2000 CAP reform introduced more stringent stocking density constraints. Since then the number of suckler cows has decreased by around 0.5 mio heads which, cumulated with the structural decline of the dairy herd, has brought the total cow herd down by more than 2 mio animals in 4 years. All these factors had a profound impact on beef production which decreased by nearly 10 % between 1999 and 2003.

After an expected further reduction in 2004, beef production is projected to increase somewhat in the short term, following the assumed phasing out of the Over Thirty Months Scheme (OTMS) in the UK from the beginning of 200611 and given a limited de-stocking of breeding animals linked to the introduction of decoupling of beef direct payments in 2005. In this respect, the introduction of the decoupled single farm payment is expected to have a significant impact on the beef sector. Combined with a relative slight increase in cereal feed prices, it is projected to reduce the incentives toward intensive beef production system and reduce production from unprofitable production systems, generating an overall reduction in EU beef production12. Over the medium term beef production is therefore expected to decrease to around 7.8 mio t by 2011, a reduction of more than 360 000 tons from the peak expected for 2006.

EU beef consumption almost fully recovered after the second BSE scare and in 2003 consumption was higher than production for the first time in more than 20 years. This market development, which is expected to persist over the whole 2004-2011 period, allowed for the clearing out of intervention stocks during 2004.

9 Furthermore the culling linked to the outbreaks of Foot and Mouth disease (FMD) in the UK and to a much lesser extent in the Netherlands, France and Ireland in 2001 concerned around 850 000 cattle, essentially in the UK.

10 It is estimated that between 1990 and 2004 the EU dairy cow herd decreased by nearly 30%.

11 On the 1st of December 2004 the UK Government announced the start of a managed transition towards the lifting of the OTM rule for animals born after the reinforced feed ban in August 1996 and its replacement with a system of testing of cattle for BSE. Any changes in the domestic OTM rule are unlikely to come into effect until the latter half of 2005, meaning that beef from over-thirty months’ animals would possibly enter the food chain only in 2006.

12 For more information on the impact of the CAP reform on beef production see European Commission, Directorate General for Agriculture, CAP reform - medium-term prospects for agricultural markets and income in the European Union 2003-2010, December 2003, Brussels


31

The enlargement of the EU is not projected to influence to a great extent these projections as the new Member States only contribute for around 8 % to the EU-25 beef and veal production and 7 % of EU-25 consumption. Beef production in the new Member States originates almost completely from the dairy herd. Even if a limited growth in suckler cow numbers was observed in the past few years, this is expected to remain a limited share of total beef herd (below 5 %) throughout the projection period.

Beef and veal consumption in the new Member States is projected to remain rather stable at low level13 over the medium term as the potential increase fuelled by rising income level would be broadly offset by the sustained price increase14for beef linked to enlargement and the low consumer preference for beef.

Graph 1.10 Outlook for the EU beef market (mio t), 1991-2011

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A tight domestic supply and a steady demand are projected to keep prices at a relatively high level, attracting more imports entering at full duty, notably from South America. Total beef imports are expected to reach 0.6 mio t by the end of the projection period. Extra-EU25 exports will be more and more constrained by low domestic availability and lower competitiveness15 and are projected to continue their declining trend, down to 170 000 tons by 2011.

1.3.2. 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

13 During the last ten years beef consumption fell dramatically in the new Member States (up to 50 %) in line with the strong reduction in beef production.

14 Beef market prices have increased substantially in the new Member States upon enlargement, with increases ranging between 10 and 50 %. It is expected that the tight market within the EU could result in firm prices throughout the projection period.

15 High domestic prices and a strong euro are expected to weaken further the competitiveness of EU beef exports.

16 Pig farmers in the new Member States were strongly affected by the low prices of 2002 and 2003 and their herd decreased by more than 10% in 2 years (with breeding sows down by more than 15%).


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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

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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.

1.3.3. Poultry

Poultry production has been gradually recovering after the outbreak of avian flu in the Netherlands during spring 2003, which reduced EU production in 2003 by more than 2 %.

The medium-term outlook for poultry production is relatively positive as competitive prices with respect to other meats, strong consumer preference and increased use in food

17 Japan introduced a ban on US beef after the appearance of BSE in December 2003. As a consequence, Japanese pig meat consumption and imports strongly increased, with a beneficial effect for EU exports (pig meat exports from the EU-15 increased by more than 10% in 2004).


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preparations should continue to play in favour of poultry. Per capita consumption is projected to increase from around 23 kg/year in 2003 to about 24.8 kg/year by 2011, with a steeper growth in the new Member States.

The growth rate for both production and consumption are expected to be lower than in the nineties, in line with the slow down observed in most recent years (1999-2004), when production only grew on average by 1.9 % per year as compared to average growth rates of 2.3 % per year over the period 1995-1998.

Graph 1.12 Outlook for the EU poultry meat market (mio t), 1991-2011

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Poultry imports, which have strongly increased between 1997 and 2001, are projected to decrease sharply in 2004 following the impact of avian flu on South East Asian poultry exporters (e.g. Thailand, which is the second largest poultry exporter to the EU) and of improved custom controls on salted meat. Imports are however expected to resume growing over the longer term, with increased imports of frozen fillets and mainly cooked and processed poultry meat, which are gradually replacing the imports of salted poultry meat.

Extra EU-25 poultry exports are projected to stagnate in line with strong competition on the world markets by low cost producers and unfavourable US$/€ and Brazilian Real/€ exchange rates18. The slow down in extra-EU-25 poultry imports observed since 2002, which has been partially replaced by an increase in intra-EU25 imports, notably from the new to the old Member States, has led to a substantial revision of our previous projections, which envisaged the possibility for the EU to become net importer of poultry meat.

1.3.4. Consumption eggs

In recent years egg production has seen increasing investments in some regions of the EU. Production of consumption eggs peaked in 2001 at 6.35 mio t and then slowly declined during the three following years. Production is expected to resume growing from 2005 onwards to reach 6.2 mio t in 2011. Whereas production growth would be

18 It has been assumed that, after the sharp devaluation of the last few years, the Brazilian Real would gradually depreciate by a further 30 % between 2004 and 2011.


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constrained in some old Member States by higher production costs and lower margins, it is expected to gather pace in the new Member States thanks to relatively favourable production conditions related to a good environment for investment, proximity to important consumer markets –currently supplied by a high production cost sector- and a strong domestic market.

Egg consumption would increase over the medium term due to higher income and changes of dietary patterns in some regions of the EU. Consumption would stand around 6.2 mio t in 2011. Imports would remain relatively constant at 30 000 t, while exports would gradually decline to 90 000 t in 2011.

1.3.5. Sheep and goat meat

The weak recovery in sheep/goat production after the Foot and Mouth Disease epidemic of 2001 was halted by the draught of 2003 and its severe impact on pasture availability.

A slight downward trend both for production and per capita consumption is expected over the medium term, in line with past long-term trends and taking into account the potential impact of decoupling of ewe premiums in major producing countries (UK19, with 30% of EU production, and Ireland have chosen to fully decouple ewe premiums while other key players like Spain, with 25% of EU production, and France are expected to keep a part of these payments coupled to animal numbers20).

Production and consumption of sheep and goat meat in the new Member States are very small and not projected to develop over the medium term. Sheep and goat meat imports are foreseen to increase slightly in response to a somewhat better use of market access commitments granted to some third countries.

Graph 1.13 Outlook for the EU sheep and goat meat market (mio t), 1991-2011

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19 According to the Meat and Livestock Commission (UK) the ewe premia represents on average 30 % of gross margins of sheep farms.

20 Within defined national ceiling.


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1.3.6. Overall meat consumption

Compared to the 1996 crisis which led to a short-term stability in total meat consumption, the 2000/2001 BSE scare caused a much more marked reduction in EU beef consumption (-12 %), resulting in an overall reduction in meat consumption of 2 %. Both pig and poultry were in a low production phase and were not ready to fully benefit from the drop in beef consumption.

In terms of overall per capita meat consumption the 2004 enlargement to 10 new Member States results in a reduction of the total EU-25 meat per capita consumption. Much less beef is consumed in the new Member States (8 kg/head compared to nearly 20 kg/head in the EU15 in 2004). Beef and veal consumption in the new Member States is projected to remain rather stable at low level as the possible increase due to the rising income level would be broadly offset by the strong price increase linked to the enlargement and the low consumer preference for beef. Pork and poultry consumption levels in the new Member States are comparable to those of the old Member States. Pig meat is by far the preferred meat in the new Member States, where it represents on average nearly 60 % of total meat consumption. On the contrary sheep and goat consumption remains at extremely low levels with less than 300 grams per head per year21.

The following graph shows the evolution of per capita meat consumption in the EU over the period 1973-200322 and presents the medium-term projections for the years up to 2011.

Graph 1.14 Meat per capita consumption in the EU, 1973 – 2011 (kg/head)

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As it can be seen from this graph, there is a long-term trend towards higher per capita consumption of meat that slowed down at the beginning of the 1990s. The large increases in meat consumption in 1998 and 1999 and in 2002/2003 appear to be in contradiction with the view that meat consumption, in general, is saturated.

21 Sheep and goat consumption is higher in the islands of Malta and Cyprus.

22 All figures before 2004 are referring to EU 15. In order to allow a graphical long-term view, the EU 15 figures for the years before 1995 have been recalculated as weighted average of figures available for EC9, EC12 and the individual country figures for Austria, Sweden and Finland.


36

The forecasts for overall EU meat consumption that are presented in this document have been established without imposing any overall constraints and reflect the projected evolution for the individual types of meat as presented above. According to these projections by individual sectors, total meat consumption in the EU-25 is set 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, with a share of around 26 %, which has overtaken beef/veal since 1996. The projections up to the year 2011 imply a further consolidation of poultry consumption with corresponding decline for the other types of meat.

1.4. Milk and dairy products

1.4.1. Milk

Milk production in the EU broadly follows the milk reference quantities, first introduced in 1984 to limit excess milk production. The increasing milk yields linked to improved genetics and feeding together with fixed production levels (limited by quotas) allowed for a dramatic reduction of the dairy herd, which shrunk by around 40 % in 20 years.

Fat content increased as well for all Member States and has reinforced the trend towards lower number of dairy cows, as the increase in fat content reduces the margin for milk deliveries to dairies if the historical reference fat content is exceeded. A stabilisation in fat content (and even a slight decrease in some Member States) has been observed in the past few years, as producers responded to the price signals sent by the dairy processors, who required less fat and more proteins23. Technical progress concerning protein content in milk has been less remarkable, with protein content growing slightly and reaching 3.35 % in 2003.

According to the provisional estimates for the milk quota year April 2003/March 2004, milk deliveries exceeded by 0.5 mio t the total EU reference quantities for deliveries (representing a 0.45 % overshoot). The lower overshoots observed in 2000-2003 compared to the previous years is partly attributed to the fact that milk reference quantities for certain Member States were increased in the years 2000 and 2001 as part of the Agenda 2000 CAP reform decisions.

Over the projection period, milk production in the EU-25 is expected to broadly follow the evolution of the milk reference quantities, with total production close to 145 mio t by 2011. Milk deliveries are assumed to fully respect the milk reference quantities, in line with increasing quotas as from 2006, as well as ongoing enhanced enforcement in Member States responsible for most of past overshoots and the underlying micro-economic rationale which makes it unprofitable to produce an extra litre of milk when the superlevy (associated fine) is higher than the price of milk24.

23 However, preliminary statistics for the calendar year 2004 have shown a marked resumption in the growth rate in fat content, as quantities of milk delivered to dairies remain below quota level in many Member States and the margin for delivering more fat content increases.

24 To have an order of magnitude of the impact of a possible overshoot in milk deliveries, please refer to the box 2 (Milk quota overshoots: sensitivity analysis)


37

In the old Member States production remains closely linked to milk quotas, as on farm consumption (which is not governed by quotas) only plays a minor role. The quota increases decided within the 2003 CAP reform are likely to slow down somewhat the long-term decline of the dairy herd. Assuming a further increase in milk yields of around 1.5 % per year on average over the forecast period, the number of dairy cows in the old Member States is projected to decline from 19.3 mio animals recorded in 2003 (December survey) to around 17.5 mio animals by the year 2011.

On-farm use of milk and direct sales are still very important in the new Member States, accounting for more than 20 % of total production. Over the projection period, subsistence production is expected to gradually decline due primarily to the projected positive development of rural economies and social security systems after enlargement, which should provide viable economic alternatives to subsistence farmers. These developments are expected to offset the foreseen milk quota increases in the new Member States. For the 10 new Member States total milk production, i.e. subsistence and market production, would remain relatively stable at approximately 22 mio t. Market production in the new Member States however would increase according to the quota increases agreed upon in the accession Treaty.

Graph 1.15 Outlook for the EU milk production, deliveries and dairy herd, 1991-2011

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1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

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Dairy cow herd

Milk Deliveries

EU-12 EU-15 EU-25

Average milk yield in the enlarged European Union is expected to reach 6.7 t/year in 2011 compared to the 5.9 t/year in 2003 (with yields more than 30 % lower in the new Member States, though projected to grow at a faster pace than in old Member States).


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Box 2 Milk quota overshoots: sensitivity analysis

Since their first publication in 1996, these medium term perspectives were based on the assumption that future milk deliveries would respect quota level throughout the whole projection period. This assumption contrasted with historical data which showed a more or less regular overshoot in milk deliveries (cf. table 1.2).

Table 1.2 Summary of quota overruns on milk deliveries, 1995-2004 (‘000 t) Average

95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 1995-2004Deliveries overrun 1218 1226 1240 1147 1058 819 775 853 1078 1046Compensated overrun* 866 863 1045 932 943 -17 469 482 532 679 * When subtracting sub-uses.

On the other hand the projected future respect of quota level can also be explained by the impact of the 2003 CAP reform (with an increase in quota foreseen for the period 2006-2009 and the cut in support price for butter and SMP which will decrease the production incentives), the ongoing enhanced enforcement of the milk quota system in Member States responsible for most of past overshoots and the underlying micro-economic rationale which makes it unprofitable to produce an extra litre of milk when the superlevy (associated fine) is higher than the price of milk. For all these reasons the medium term prospects published in this report will continue to assume a perfect respect of quotas over the whole projection period.

However, in order to better evaluate the potential impact of a possible overshoot of reference quantities, a simulation has been carried out assuming a yearly overrun of 0.8 mio t of milk reference quantities over the period 2005-2011 (i.e. greater than the average overshoot of the last decade). All others assumptions and parameters were left unchanged and results compared to the medium term projections presented in this section (c.f. Table 1.3).

The additional 0.8 mio t of milk (i.e. around 0.6 % of total EU milk production) are expected to result in an increase in production of the main dairy products ranging from a mere 0.1% increase for WMP to up to 3.2% for SMP. In relative terms, bulk products like butter (+0.8 %) and SMP (+3.8 %) would increase more than higher value-added products like cheese (+0.5 %), in line with their role as residual, directly supported products. However the biggest part of the additional milk availability would be absorbed for the production of cheese (around 30 % of milk) and butter (nearly 40 % of additional deliveries).

Table 1.3 Summary impact of an annual quota overshoot of 0.8 mio t (deviation from baseline in 2011 in %)

Cheese Butter SMP MilkProduction 0.5% 0.8% 3.2% 0.6%Consumption 0.1% 0.1% 1.7% -Exports 5.9% 6.1% 10.2% -Price -0.8% -0.9% -1.5% -1.5%

Increasing production of dairy products is expected to exert pressure on prices, with SMP prices 1.5 % lower than in the baseline in 2011 and butter and cheese prices projected to decrease by 0.9 % and 0.8 % respectively.


39

Lower prices would have a positive impact on consumption, which is foreseen to increase by around 1.7 % in the case of SMP, whereas butter and cheese consumption show a more modest increase.

Increased availability of cheaper dairy products would allow for more exports than those projected in the baseline (butter and SMP exports were projected to decrease in the baseline in line with the contraction in their production). SMP exports are expected to be on average 9 % higher than in the baseline, while butter and cheese exports would rise by 4 % and 5 % respectively against the baseline on average over the whole 2005-2011 period.

Butter intervention stocks may not clear out completely as projected in the baseline, and stabilise at around 40 000 t over the forecast period.

The above mentioned changes are expected to have a negative overall impact on the price paid to milk producers, which is projected to be 1.5% lower than in the baseline, but still well above the level previously known as “target price”.

1.4.2. Cheese

Over the last 20 years, the EU cheese sector has been characterised by a strong and steady growth, both for production and consumption. Between 1990 and 2003 cheese production increased by nearly 30 %, with per capita consumption growing at a rate of 1.5 % per year on average. Cheese production is concentrated in 4 Member States (Germany, France, Italy and the Netherlands, which represent more than 75 % of EU cheese production) and absorbs more than 40 % of EU milk deliveries25. Intra-EU cheese trade also increased by more than 30 % between 1990 and 2002.

Record increases in cheese production in 2000 and 2001 (more than 6% in 2 years) were followed by a slow down26 in 2002 and 2003, which was reflected in more milk being channelled into bulk products like butter and SMP. Available statistics for 2004 show a marked increase in cheese production, confirming a recovery in cheese consumption and exports, in line with the expected rebound in the EU and world economic growth.

The medium and long-term outlook for the EU-25 cheese consumption is in general positive, although the rate of increase is expected to be lower than in past years, notably for the old Member States, with per capita consumption in the EU-25 rising from 17 kg in 2003 to about 18.6 kg by 2011. This increase will be faster in the new Member States where cheese consumption is projected to grow by more than 30 % over the projection period, in line with increasing disposable income and expected changes in dietary patterns towards branded dairy products and processed food products (where cheese is an important ingredient).

25 The French organisation Institut de l’élévage estimates that cheese production in 2002 absorbed 42 % of protein and 35 % of fat content of EU deliveries.

26 A clear correspondence between the increase in cheese consumption in 2000-2001 and the dramatic decrease in beef consumption due to the BSE scare has not been proved. However, even if the recovery in beef consumption corresponded also to a slow down or even a stabilisation in cheese consumption, other factors like a less favourable economic environment may have played a role in the slow down in cheese consumption growth.


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Graph 1.16 Outlook for the EU cheese market (mio t), 1991-2011

0.0

1.0

2.0

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4.0

5.0

6.0

7.0

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9.0

10.0

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

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The steady growth in domestic consumption is expected to absorb most of the increase in cheese production, limiting somewhat the growth in cheese exports, which are projected to stabilise above 600 000 t. The majority of cheese exports are expected to be exported without export refunds in view of the increased competitiveness of EU cheese due to the projected price decrease following the implementation of the CAP reform as well as thanks to increased world demand towards high value-added, branded, European cheeses.

1.4.3. Butter

The slow down in cheese production growth of 2002 and 2003 resulted in more milk being channelled into butter production (creating a situation of weak prices and relatively high intervention stocks). Available statistics for 2004 show a contraction in butter production as more milk is being used for the production of cheese and other high value-added dairy products, responding to a strong increase in consumption for these products. This is also due to slightly lower milk deliveries compared to previous years and to the first step of the reduction in butter intervention price decided under the 2003 CAP reform that reduces the attractiveness of intervention purchases of bulk dairy products. Upon enlargement it has been observed that, contrary to what many expected, only a slight increase in butter production took place, and up to the end of October 2004 no quantities were offered into butter intervention. Additional milk production in the new member States was principally directed towards products like cream, which were in strong demand in the old Member States, notably Germany. Butter prices in the new Member States increased by around 10 % on average in the first four months after enlargement.

Butter production is projected to continue to decrease over the medium term in response to lower market and intervention prices. The quota increases decided for the period 2006/07-2008/09 are not expected to change this downward trend as the production of other dairy products is projected to absorb most of the additional deliveries.

Butter consumption still tends to decline despite some signs of stabilisation which were observed in recent years. A growing share of butter benefits from aid to consumption (e.g. butter destined to the pastry industry), rising from 20 % in the beginning of the nineties to nearly 30 % nowadays. Projections for per capita consumption are set at around 3.8 kg by 2011, compared to the current level of about 4.2 kg (3.3 kg in the new Member States), i.e. -1.1 % per year on average, in line with the expected reduction of the


41

aid to butter consumption in the framework of the implementation of the 2003 CAP reform.

EU-25 butter exports increased in 2003 and during most of 2004 in response to increasing world butter demand and lower product availabilities in other major exporting countries. Butter exports, which are expected to continue to rely on export subsidies, are however projected to decrease over the medium term, in line with decreasing EU butter production, to the benefit of other exporters like New Zealand and Australia. Imports, most of which fall within the New Zealand import quota (76 700 t), are projected to grow slightly over the medium-term, in line with increased market access in the framework of preferential trade agreements.

Graph 1.17 Outlook for the EU butter market (mio t), 1991-2011

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1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

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The projected balance sheet for butter shows that decreasing production resulting from the lower attractiveness of butter should ease somewhat the pressure on intervention stocks, which are expected to continue to decrease in the next few years. Domestic prices are projected to decrease substantially following the introduction of the support price cut of the 2003 CAP reform and to stabilise at a level above support level as supply decreases at a faster rate than consumption. The gap between domestic price and world market prices is therefore projected to remain substantial and will not allow for exports to take place without export refunds.

1.4.4. Skimmed milk powder

The long-term downward trend in SMP production was interrupted in 2002 and 2003, in response to lower cheese production. Available statistics for 2004 show a dramatic fall in SMP production, as more milk proteins are being channelled to the production of cheese and other high value-added dairy products. The lower milk deliveries of 2004, the impact of the first step of the reduction in SMP intervention price decided under the 2003 CAP reform and the decrease in SMP production as by-product of a decreasing butter production may explain this contraction. Germany and France produce more than 55 % of total EU SMP production.


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Graph 1.18 Outlook for the EU SMP market (mio t), 1991-2011

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1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

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Over the medium term the downward trend for both production and consumption of SMP should continue as growing production of higher value-added dairy products will absorb an increasing share of EU milk. SMP aided consumption27, which still represents nearly 50 % of total consumption (from nearly 70 % in the beginning of the nineties), is also projected to decrease as the 2003 CAP reform price cuts gradually reduce the ground for such aid.

The projections suggest a strong reduction in SMP production from an expected 1.2 mio t in 2003 to around 0.9 mio t by 2011. Production in the new Member States, which currently contributes to less than 20 % of the total EU production, is forecast to increase slightly over the short term to reach 290 000 tons in 2005, before declining gradually as cheese production expands.

EU-25 SMP exports increased in 2003 and during most of 2004 in response to increasing world SMP demand, notably from oil exporting countries which experienced a dramatic increase in cash receipts due to high oil price, and to lower product availabilities in other major exporting countries. SMP exports are however expected to decrease over the medium term, in line with decreasing production. Australia and New Zealand are the main producing countries which are expected to benefit from the gradual withdrawal of the EU from the world SMP markets.

The fall in production recorded in 2004 combined with sustained exports is expected to nearly clear intervention stocks already in 2004. Over the medium term the reduction in production would outpace the slow decrease in consumption (that would benefit from lower prices following the implementation of the CAP reform price cuts), thus constraining exports and leaving intervention stocks empty. Domestic prices are projected to decrease in line with CAP reform price cuts but to stabilise from 2009 onwards, remaining above intervention price levels, as SMP supply decreases at a faster rate than consumption. Under the assumption of a US$/€ exchange rates of 1.15 over the medium term, the gap between domestic price and world market prices is projected to remain substantial and should not enable the EU to export without export refunds.

27 For the use in calves feed.


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1.5. Agricultural income

The medium-term perspectives for the income of the agricultural sector has been compiled on the basis of the medium-term projections for the main agricultural markets and on the economic accounts for agriculture, which constitute the statistical basis of the income measure28.

Whereas the medium-term changes in the price and volume components of the arable crop 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.

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

• the estimated direct payments for the period 2005-2013 (single payments scheme and other direct payments as provided for in Reg. 1782/2003 as amended after the enlargement and the second reform package);

• the rural development component covers the EAGGF (Guidance and Orientation) as given for the 2000-2006 period for the old Member States, for the 2004-2006 period for the new Member States and in the financial perspectives as proposed by the Commission for the 2007-2011 period for the EU-25. Only the current transfers to agricultural producers as other subsidies in production has 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 new Member States (progressive introduction, SAPS and the complementary national direct payments (CNDPs or “top-ups”) have been accounted for). As regards the CNDPs, it has been assumed that Member States will maintain their CNDP option adopted in 2004 and announced for 2005 over the whole projection horizon (2004-2011) provided that they respect the conditions attached to their granting, notably the upper limit on the financial envelopes. In this respect the possibility for financing the CNDP from the national budget or from co-financing with rural development EU funds has been taken into account where relevant.

On the basis of these hypotheses, the medium-term projections for income display a rather favourable outlook as EU-25 agricultural income would grow by 14.2 % between 2003 and 2011 in real terms and per labour unit. However, this overall gain would mask marked differences between EU-15 and the new Member States.

Agricultural income in the EU-15 would show a more moderate development with a 5 % growth over the 2004-2011 period. After a short-term increase until 2005, agricultural income would stagnate and even fall in 2008 before resuming growing from 2009 onwards. The less favourable developments between 2006 and 2008 would mainly correspond to the implementation of the reduction in price support in the milk sector (as

28 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.


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part of the 2003 CAP reform), whereas the income recovery towards the end of the period would be mainly supported by the small increase in milk prices.

Table 1.4 Outlook for agricultural income for EU-25, 2003 - 2011

2003 2005 2006 2007 2008 2009 2010 2011

Factor income in nominal terms

EU-25 100 106,7 106,6 106,1 105,6 105,9 106,1 106,9 EU-15 100 103,1 102,5 101,9 101,0 100,9 100,7 101,4 EU-N10 100 179,7 187,2 189,2 198,0 205,1 215,0 216,0

Labour input

EU-25 100 95,6 92,8 90,1 87,5 84,9 82,5 80,1 EU-15 100 96,0 93,8 91,7 89,6 87,5 85,5 83,5 EU-N10 100 94,8 91,0 87,4 83,9 80,5 77,3 74,2

Agricultural income in real terms per labour unit

EU-25 100 107,0 108,0 108,7 109,4 110,9 112,3 114,2 EU-15 100 103,2 103,2 103,2 102,8 103,3 103,6 104,9 EU-N10 100 173,6 183,2 187,3 198,9 209,1 222,7 226,4

Over the medium term, the rise in the value of cereals (supported by productivity growth), beef and pork (fuelled mainly by price increases) would slightly outweigh the decline in the value of milk production triggered by the fall in milk prices. The resulting modest growth in gross value added of the whole EU-15 agricultural sector (which would also benefit from the projected increase in the value of fruit and vegetables) would translate into a slightly more marked increase in agricultural income in nominal terms thanks to the introduction of the single farm payment, notably the granting of the dairy premium.

Graph 1.19 Outlook for agricultural income for EU-15 (in % and with 1980 = 100)

-9%

-6%

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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

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Cumulative growth

Annual growth Cumulative growth

The reduction in total agricultural labour input for EU-15 is assumed to stabilise at the historical trend of around 2.3 % per year on average over the projection period owing to the slow down recorded over the last few years. Consequently, agricultural income, when


45

expressed in real terms and per labour unit (i.e. full-time equivalent), is projected to increase by 4.9 % between 2003 and 2011 for the EU-15.

Agricultural income in the new Member States is foreseen to display a more pronounced picture with agricultural income steadily rising to exhibit a 126.4 % increase by 2011. Although the value agricultural production is expected to rise by 14 % over the projection horizon (with almost all sectors benefiting) thanks to the implementation of the CAP and the access to and integration into the single market, this significant rise in income will be triggered to a very large extent by the sharp rise in the funds granted to agricultural producers in the new Member States.

The latter will be directed to the agricultural sector in the form of direct payments (around 55-60 %), national CNDPs and rural development funds (around 25 %, including the co-financing element) as far as they are transferred to agricultural producers as current payments, without little compensatory elements and do not correspond to capital transfers such as investment grants29. The large increase in public support in the new Member States, which is largely decoupled, would aim at facilitating and promoting the restructuring and modernisation of the agricultural sector and the rural areas30.

The agricultural labour input in the EU-N10 countries is assumed to fall by 4 % on annual average over the next decade in line with the restructuring of the agricultural sector. This rapid fall in labour force would boost the rise in agricultural income: whereas farm income in real terms would increase by 68 % from 2003 to 2011, it would expand by 126 % between 2003 and 2011 when expressed per labour unit.

The contribution of the EU-N10 countries to the overall EU-25 farm income would nevertheless remain rather limited at around 7 % in 2004 and 10 % in 2011 in line with the low productivity level in the new Member States. By contrast, the projected increase in agricultural income in these countries would be remarkable when assessed against the prospects for the rest of the economy in these countries and average wages outside agriculture.

29 These projections assume that the funds available for rural development under the financial perspectives will be fully used by the new Member States.

30 In this framework it should be mentioned that these projections do not fully take into account the multiplier effect of the funds granted as capital transfers on the future growth of the rural and agricultural economies.


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Table A.1 Total cereals market projections for the European Union, 2002-2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Usable production 263.3 230.1 279.2 263.4 265.9 268.9 271.0 271.2 272.6 273.8of which EU-15 210.0 185.1 218.4 206.6 208.8 211.1 213.4 214.7 215.7 216.5

EU-N10 53.3 45.0 60.8 56.8 57.1 57.8 57.6 56.4 56.9 57.4Consumption 242.8 240.2 245.7 248.3 248.4 248.9 249.5 249.9 249.9 250.8of which EU-15 192.4 192.1 194.2 194.7 194.5 194.6 194.9 195.2 194.9 195.6

EU-N10 50.4 48.1 51.5 53.6 53.9 54.3 54.6 54.8 55.0 55.2Imports 16.4 14.2 9.4 9.6 9.0 9.0 9.5 9.2 8.9 9.0Exports 30.4 19.8 27.3 29.5 29.6 30.7 30.5 30.4 30.7 30.7Beginning stocks 47.1 53.7 38.0 53.6 48.6 45.5 43.7 44.2 44.3 45.2Ending stocks 53.7 38.0 53.6 48.6 45.5 43.7 44.2 44.3 45.2 46.6of which intervention 8.9 3.5 10.0 11.8 11.5 12.2 13.9 13.5 15.6 17.2EU-N10: Ten new Member States

Table A.2 Total wheat market projections for the European Union, 2002-2011 (mio t)




Table A.3 Total coarse grain projections for the European Union, 2002-2011 (mio t)




Table A.4 Soft wheat market projections for the European Union, 2002-2011 (mio t) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Usable production 114.7 97.9 122.2 116.5 118.4 120.4 122.4 122.4 122.8 122.9of which EU-15 94.0 81.9 98.6 94.6 96.3 97.9 99.5 100.1 100.0 99.7




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Table A.5 Barley market projections for the European Union, 2002-2011 (mio t) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Usable production 56.1 54.5 59.7 55.5 55.6 55.7 55.7 55.3 55.6 55.9of which EU-15 47.8 46.4 50.4 46.9 47.1 47.2 47.3 47.2 47.5 48.0


EU-N10 8.4 8.4 8.6 9.3 9.4 9.6 9.5 9.4 9.3 9.2Imports 0.8 0.9 0.5 0.4 0.4 0.4 0.4 0.4 0.4 0.4Exports 8.0 6.5 7.5 7.7 7.7 7.9 7.9 7.9 8.0 8.0Beginning stocks 12.5 12.6 9.4 15.4 14.8 14.7 14.9 15.6 16.5 18.5Ending stocks 12.6 9.4 15.4 14.8 14.7 14.9 15.6 16.5 18.5 21.0of which intervention 1.0 0.0 4.8 6.5 6.5 6.7 7.5 8.5 10.2 12.1EU-N10: Ten new Member States Table A.6 Maize market projections for the European Union, 2002-2011 (mio t)



EU-N10 8.2 7.9 9.2 9.3 9.3 9.5 9.6 9.8 9.9 10.1Imports 2.8 5.6 3.0 2.9 3.2 3.0 3.5 3.2 3.0 3.1Exports 2.4 2.0 2.7 2.7 2.7 2.7 2.5 2.5 2.3 2.1Beginning stocks 9.0 11.7 9.8 9.6 8.7 8.2 7.7 7.3 7.3 7.3Ending stocks 11.7 9.8 9.6 8.7 8.2 7.7 7.3 7.3 7.3 7.8of which intervention 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0EU-N10: Ten new Member States Table A.7 Total oilseed market projections for the European Union, 2002-2011 (mio t)


EU-N10 3.5 3.0 3.6 4.0 4.0 4.1 4.1 3.9 4.0 4.0of which non-food 2.4 2.3 1.8 2.2 2.2 2.3 2.3 2.3 2.4 2.4

Consumption 37.6 37.9 38.4 38.4 38.5 38.5 38.6 38.6 38.7 38.7of which EU-15 35.1 35.1 36.1 36.2 36.2 36.3 36.3 36.3 36.4 36.4

EU-N10 2.6 2.8 2.2 2.2 2.2 2.2 2.3 2.3 2.3 2.3Imports 19.0 21.1 21.2 21.4 21.3 21.3 21.3 21.2 21.1 20.9Exports 1.0 0.1 2.3 0.5 0.6 0.3 0.4 0.3 0.4 0.4Beginning stocks 8.9 7.0 7.2 8.0 8.7 9.5 10.2 11.0 11.8 12.5Ending stocks 7.0 7.2 8.0 8.7 9.5 10.2 11.0 11.8 12.5 13.3EU-N10: Ten new Member States Table A.8 Area under arable crops and set aside in the EU, 2002-2011 (mio ha) Table A.8: Area under arable crops and set aside in the EU, 2002-2011 (mio ha)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Cereals 52.8 51.4 52.7 51.8 51.8 51.8 51.7 51.1 51.0 50.9of which EU-15 37.4 36.4 37.1 36.0 36.2 36.2 36.1 36.0 36.0 36.1

EU-N10 15.4 15.0 15.6 15.4 15.4 15.4 15.4 14.8 14.8 14.8Oilseeds (1) 6.3 6.6 6.9 6.6 6.6 6.6 6.6 6.4 6.4 6.5of which EU-15 4.6 4.8 5.1 4.7 4.7 4.7 4.7 4.6 4.6 4.7

EU-N10 1.7 1.7 1.8 1.9 1.9 1.9 1.9 1.8 1.8 1.8Protein crops 1.4 1.6 1.5 1.4 1.4 1.4 1.4 1.4 1.4 1.4Flax and Hemp 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2Silage (2) 5.0 5.0 4.9 4.9 4.8 4.9 4.9 4.9 4.8 4.8Total arable crops 65.6 64.7 66.2 64.9 64.9 64.9 64.8 64.0 63.9 63.9Compulsory set-aside 3.9 4.0 1.9 4.0 4.0 4.0 4.0 4.6 4.6 4.6of which EU-15 3.9 4.0 1.9 4.0 4.0 4.0 4.0 4.0 4.0 4.0

EU-N10 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6 0.6 0.6of which non-food oilseeds 0.8 0.9 0.5 0.7 0.7 0.7 0.7 0.7 0.7 0.7Voluntary set-aside 2.1 2.3 3.0 3.2 3.3 3.3 3.3 3.3 3.4 3.4Total set aside 6.0 6.3 5.0 7.2 7.3 7.3 7.4 8.0 8.0 8.0Total COP 71.6 71.0 71.2 72.1 72.2 72.2 72.1 72.0 71.9 71.8(1) on non-set aside area including linseed and other minor oilseeds(2) excluding grass silage EU-N10: Ten new Member States


48

Table A.9 Beef/veal market projections for the EU-25, 2002 – 2011 (‘000 t cwe) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Gross Indigenous Production 8 173 8 094 8 141 8 075 8 238 8 181 8 088 8 008 7 929 7 875

Live Imports 5 7 4 4 4 4 4 4 4 4Live Exports 112 93 91 91 91 91 91 91 91 91

Net Production 8 065 8 008 8 053 7 988 8 150 8 093 8 001 7 920 7 841 7 788EU 15 7 466 7 359 7 400 7 364 7 541 7 489 7 404 7 329 7 255 7 208EU N10* 599 650 653 624 610 604 596 591 586 581

Import 424 440 481 520 530 536 546 557 568 581Exports 522 391 340 320 371 308 262 226 211 170

Stocks changes - 43 - 232 - 34 0 0 0 0 0 0 0

Consumption 7 990 8 289 8 228 8 187 8 309 8 321 8 285 8 251 8 199 8 200

Per Capita Consumption 17.6 18.2 18.0 17.9 18.1 18.1 18.0 17.9 17.7 17.7EU 15 19.6 20.1 19.9 19.8 20.0 19.9 19.8 19.6 19.5 19.4EU N10* 7.1 8.0 8.1 7.9 8.3 8.4 8.4 8.4 8.5 8.5

Ending stocks (Intervention) 266 20 0 0 0 0 0 0 0 0

Table A.10 Pig meat market projections for the EU-25, 2002 – 2011 (‘000 t cwe) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011



Net Production 21 170 21 458 21 172 21 479 21 570 21 691 21 986 22 192 22 274 22 421EU 15 17 730 17 793 17 886 18 027 18 013 18 056 18 229 18 354 18 358 18 452EU N10* 3 440 3 666 3 286 3 452 3 557 3 635 3 756 3 838 3 916 3 969

Import 22 33 13 14 19 24 28 32 35 38Exports 1 223 1 323 1 393 1 256 1 253 1 250 1 293 1 339 1 380 1 375

Stocks changes 25 - 135 - 90 0 0 0 0 0 0 0

Consumption 19 943 20 304 19 883 20 237 20 335 20 466 20 720 20 885 20 929 21 084Per Capita Consumption 43.8 44.5 43.5 44.1 44.3 44.5 44.9 45.2 45.2 45.5

EU 15 43.4 43.7 43.3 44.0 44.0 44.1 44.4 44.6 44.6 44.8EU N10* 46.0 48.5 44.2 45.1 45.8 46.5 47.6 48.2 48.3 48.9

Table A.11 Poultry meat market projections for the EU-25, 2002 – 2011 (‘000 t cwe) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011



Net Production 11 109 10 880 11 063 11 184 11 321 11 420 11 404 11 478 11 610 11 716EU 15 9 376 9 062 9 217 9 264 9 280 9 296 9 288 9 296 9 319 9 339EU N10* 1 733 1 818 1 846 1 920 2 041 2 124 2 117 2 182 2 291 2 377

Import 547 650 489 534 581 616 651 679 696 715Exports 1 133 969 1 008 963 960 950 950 950 950 950

Consumption 10 522 10 562 10 543 10 755 10 942 11 086 11 106 11 207 11 357 11 480Per Capita Consumption 23.1 23.1 23.1 23.5 23.8 24.1 24.1 24.3 24.5 24.8

EU 15 23.3 23.2 22.9 23.4 23.7 23.8 23.8 23.9 24.1 24.1EU N10* 22.0 22.7 23.8 23.8 24.5 25.6 25.7 26.1 27.1 28.1

Table A.12 Sheep/Goat meat market projections for the EU-25, 2002–2011 (‘000 t cwe) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Net Production 1 054 1 044 1 054 1 055 1 060 1 063 1 063 1 061 1 057 1 050EU 15 1 035 1 024 1 034 1 035 1 040 1 042 1 043 1 042 1 038 1 031EU N10* 19 19 20 20 20 20 19 19 19 18

Import 253 256 259 263 264 265 265 265 265 265Exports 3 4 3 3 3 3 3 3 3 3

Consumption 1 304 1 296 1 310 1 315 1 321 1 325 1 324 1 323 1 318 1 311

Per Capita Consumption 2.9 2.8 2.9 2.9 2.9 2.9 2.9 2.9 2.8 2.8EU 15 3.4 3.3 3.4 3.4 3.4 3.4 3.4 3.3 3.3 3.3EU N10* 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

* EU N10: Ten new Member States


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Table A.13 Meat per capita consumption projections in the EU, 2002 – 2011 (kg/head) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

EU-25Beef and Veal 17.6 18.2 18.0 17.9 18.1 18.1 18.0 17.9 17.7 17.7Pork 43.8 44.5 43.5 44.1 44.3 44.5 44.9 45.2 45.2 45.5Poultry 23.1 23.1 23.1 23.5 23.8 24.1 24.1 24.3 24.5 24.8Sheep Goat 2.9 2.8 2.9 2.9 2.9 2.9 2.9 2.9 2.8 2.8Total EU-25 87.4 88.6 87.4 88.3 89.0 89.5 89.8 90.2 90.3 90.8

of which EU-15Beef and Veal 19.6 20.1 19.9 19.8 20.0 19.9 19.8 19.6 19.5 19.4Pork 43.4 43.7 43.3 44.0 44.0 44.1 44.4 44.6 44.6 44.8Poultry 23.3 23.2 22.9 23.4 23.7 23.8 23.8 23.9 24.1 24.1Sheep Goat 3.4 3.3 3.4 3.4 3.4 3.4 3.4 3.3 3.3 3.3Total EU-15 89.8 90.4 89.5 90.5 91.0 91.2 91.3 91.5 91.5 91.7

of which EU-N10*Beef and Veal 7.1 8.0 8.1 7.9 8.3 8.4 8.4 8.4 8.5 8.5Pork 46.0 48.5 44.2 45.1 45.8 46.5 47.6 48.2 48.3 48.9Poultry 22.0 22.7 23.8 23.8 24.5 25.6 25.7 26.1 27.1 28.1Sheep Goat 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3Total EU-N10* 75.3 79.4 76.4 77.1 78.9 80.7 82.0 83.0 84.1 85.8

Table A.14 Consumption egg market projections for the EU-25, 2002 – 2011 (mio t)


EU-N10 1.1 1.0 1.1 1.1 1.1 1.1 1.1 1.2 1.2 1.2

Consumption 6.2 6.1 6.0 6.1 6.1 6.1 6.1 6.1 6.1 6.2Imports 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Exports 0.2 0.1 0.1 0.0 0.0 0.1 0.1 0.1 0.1 0.1Per capita consumption 13.6 13.4 13.1 13.4 13.3 13.3 13.3 13.3 13.3 13.3

EU-15 13.5 13.4 13.0 13.0 13.0 13.0 12.9 12.9 12.9 12.9EU-N10 14.2 13.2 13.7 14.1 14.4 14.7 15.0 15.3 15.6 15.9

EU-N10: Ten new Member States

Table A.15 Milk production, deliveries and dairy herd in the EU-25, 2002 – 2011

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Total production (mio t) 143,2 143,7 143,4 143,8 144,3 144,7 145,1 145,0 144,9 144,9 EU 15 121,2 122,0 121,4 121,8 122,2 122,6 123,0 122,9 122,9 122,9 EU N10* 22,0 21,7 22,0 22,0 22,1 22,1 22,1 22,1 22,0 22,0

Deliveries (mio t) 130,0 130,9 130,2 131,5 132,1 132,8 133,5 134,1 134,4 134,7

Delivery ratio (in %) 90,8 91,1 90,9 91,5 91,6 91,8 92,0 92,5 92,7 92,9

Fat content (in %) 4,06 4,06 4,06 4,07 4,07 4,08 4,08 4,08 4,08 4,09

Protein content (in %) 3,35 3,35 3,35 3,36 3,36 3,36 3,36 3,36 3,37 3,37

Milk yield (kg/dairy cow) 5798 5940 6073 6199 6304 6420 6504 6567 6636 6707 EU 15 6131 6287 6388 6505 6612 6742 6818 6866 6921 6977 EU N10* 4461 4536 4773 4922 5013 5076 5179 5285 5397 5514

Number of dairy cows (mio heads) 24,4 23,9 23,3 23,1 22,7 22,4 22,2 22,0 21,7 21,5 EU 15 19,5 19,3 18,7 18,7 18,3 18,1 18,0 17,8 17,7 17,5 EU N10* 4,9 4,7 4,5 4,4 4,4 4,3 4,2 4,1 4,0 3,9Note: Dairy cow numbers refer to the end of the year (historical figures from the December cattle survey)

Table A.16 Cheese market projections for the EU-25, 2002 – 2011 (‘000 t) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Total production (1) 8 143 8 203 8 322 8 522 8 662 8 766 8 816 8 922 9 010 9 081 EU 15 7 228 7 306 7 408 7 603 7 736 7 827 7 844 7 928 7 992 8 038 EU N10 915 897 913 920 926 939 971 994 1 018 1 043

Imports 128 138 141 143 146 149 152 155 158 162Exports 543 573 578 584 598 602 606 609 611 611

Consumption 7 728 7 769 7 885 8 082 8 211 8 312 8 361 8 467 8 556 8 632

Per capita consumption (kg) 17,0 17,0 17,2 17,6 17,9 18,1 18,1 18,3 18,5 18,6 EU 15 18,1 18,3 18,4 18,9 19,1 19,3 19,2 19,3 19,4 19,4 EU N10 11,1 10,7 11,1 11,1 11,3 11,6 12,2 12,9 13,7 14,6(1) Including cheese used for processed cheese. Excluding farm cheese


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Table A.17 Butter market projections for the EU-25, 2002 – 2011 (‘000 t) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Total production 2 168 2 149 2 096 2 016 1 969 1 923 1 897 1 873 1 854 1 828 EU 15 1 880 1 867 1 811 1 728 1 685 1 648 1 632 1 615 1 597 1 571 EU N10* 288 281 285 288 285 276 264 258 257 256

Imports 93 93 112 114 115 115 115 115 115 115Exports 232 322 351 277 240 225 195 185 179 178

Total consumption 1 927 1 901 1 910 1 914 1 891 1 853 1 825 1 813 1 793 1 767

per capita consumption (kg) 4.24 4.16 4.18 4.18 4.12 4.02 3.96 3.92 3.87 3.81 EU 15 4.41 4.33 4.32 4.32 4.25 4.14 4.07 4.03 3.97 3.91 EU N10* 3.33 3.34 3.43 3.44 3.40 3.41 3.37 3.34 3.34 3.32Intervention StocksEnding stocks 192 223 170 110 64 25 17 8 5 3Stock changes 139 31 -53 -61 -46 -39 -8 -9 -3 -2Note: The figures on imports and exports are referring to total trade, i.e. including inward processing.

Table A.18 SMP market projections for the EU-25, 2002 – 2011 (‘000 t) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Total production 1 376 1 375 1 166 1 157 1 083 1 027 982 956 939 923 EU 15 1 140 1 110 888 868 801 750 709 689 678 674 EU N10* 236 265 278 289 282 277 273 267 261 249

Imports 41 58 61 61 63 63 63 63 63 63Exports 264 342 308 252 201 170 165 161 158 156

Total consumption 1 049 1 036 1 094 975 955 920 880 858 844 830 EU 15 945 935 984 867 850 815 780 760 750 738 EU N10* 104 101 111 108 106 104 101 98 94 92

Stock changes 104 55 - 175 - 10 - 10 0 0 0 0 0Intervention StocksEnding stocks 141 195 20 10 0 0 0 0 0 0Stock changes 141 54 -175 -10 -10 0 0 0 0 0Note: The figures on imports and exports are referring to total trade, i.e. including inward processing.

* EU N10: ten new Member States

Chapter II Impact of enlargement

51

THE IMPACT OF ENLARGMENT ON

AGRICULTURAL MARKETS AND INCOME

IN THE NEW MEMBER STATES


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2. THE IMPACT OF ENLARGEMENT ON THE MAIN AGRICULTURAL MARKETS AND INCOMES OF THE NEW MEMBER STATES

2.1. The process of enlargement

On 13 December 2002, the Heads of State and Government from the EU and the ten Candidate Countries reached agreement on a formula for enlarging the EU to encompass ten new member states as from 2004. On 1 May 2004 Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovakia and Slovenia joined the EU. This enlargement finalises a long-term development of integration which started in the early 1990s with the conclusion of the Europe Agreements.

The new Member States have joined 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. EU funds have become available to farmers and contributed to the available resources (c.f. box 3 The short-term market developments after enlargement).

The first few months of membership also show that disruptive developments, like e.g. destabilising levels of trade flows between old and new Member States, have not occurred. As anticipated trade creation effects were observed in a number of areas where previously barriers to trade existed, in particular between the new Member States themselves but also between old and new Member States. In fact, bilateral trade liberalisation took place thanks to mutual efforts undertaken within the framework of the Europe Agreements and between the new Member States themselves (CEFTA, BAFTA). These trade agreements led to a significant integration of agricultural trade and markets prior to membership (c.f. box 4 Development in the agricultural trade of the new Member States).

The significantly increasing bilateral trade in agricultural commodities over the last decade is one important factor for the high level of market integration prior to membership. Another important factor arises from the implementation of the acquis communautaire, which led to largely harmonised rules and standards prior to enlargement. The third component is the alignment of many aspects of the national agricultural policies to that of the CAP in anticipation of membership. This effect has been particularly strong in the last three years.

Therefore, most of the chances and challenges of membership have already been anticipated by farmers, the food industries and governments in the new Member States prior to membership as shown by the high level of investments into agriculture and the food industry and the national SAPARD plans.

This does not prevent however that in the medium term further adjustments of production and consumption will take place in the EU-25 as a result of enlargement. One of these adjustments will come from the development of sufficient export infrastructure in the grain basins of the new Member States. Another currently less visible but nevertheless important determinant for the medium term is the standards and competitiveness of the pork and milk production as well as that of the meat processing industries in a number of new Member States.


53

The actual size of these challenges to the agricultural sector and the food industry is significantly smaller than was anticipated a few years earlier and are seemingly outweighed by the chances offered by the single market to agriculture and food industry in the old and new Member States.

Box 3. The short-term market developments after enlargement

This box summarises a series of interviews with independent experts from the new Member States on the situation of agriculture and food markets after the May 1, 2004. This information was complemented by some of the market and price information DG AGRI has received since May 2004 from the new Member States.

The situation in the new Member States four months after enlargement can be considered as largely positive. Opportunities seem to outweigh the challenges on the single market. Most countries have been able to expand trade with the EU both on the import and export side. None of these developments can be seen as overly critical or destabilising. There are strong indications that membership has been a very positive factor for the trade integration between the new Member States.

The precise level of direct payments for the marketing year 2004/05 constitutes one of the main concerns of farmers. Investment activities appear to be very high and the request for national and EU funds far outstrip the availability in most countries. This development is stronger than expected before enlargement.

Land prices have increased in the new Member States, particularly in the Baltic countries, despite the fact that land purchases by foreigners are generally restricted. This is in line with expectation of increasing profitability of agriculture after enlargement and the prospect of receiving direct payments as well as LFA premiums. However in some countries (Czech Republic, Hungary, and Slovakia) land owners are not necessarily part of the rural population or the farming community. The experts reported cases where strong increases of land prices hampered investments and restructuring.

Producer prices have increased generally for livestock, meat and dairy products. Pork prices have especially benefited from the market situation in Germany which has driven prices up throughout the region. High quality beef prices increased significantly because of sustained demand from the old Member States. By contrast, low quality beef prices have continued to decline. On average, beef prices are significantly higher than before enlargement. Domestic demand for beef continues to be very weak. Poultry prices have increased up to 30 % in a number of new Member States due to strong export opportunities to the old Member States.

Milk markets are still characterised by a strong competition for high quality milk, which is in short supply, in particular in Poland, Lithuania, Latvia and Hungary. The spread between low and high quality milk prices is very high in these countries. Milk producers face some of the burdens of adjustment in the dairy sector (like in Slovakia, Slovenia, Hungary and Poland).

Cereal prices tend to be at a similar level or lower than those of last year. Contributing to this is the fact that national intervention systems were in place much earlier than the CAP measures. Prices declined significantly in Hungary and partly also in the Czech Republic


54

and Slovakia as a result of a record harvest and high transport costs to markets in the EU and third countries.

Market prices have exhibited a similar trend to that observed in the EU on average. However, livestock and dairy prices have increased more strongly in the new Member States. Among the largest agricultural producers, prices in Poland have developed particularly well, while Hungarian prices have remained rather weak or very volatile. Cereal prices in Hungary have been significantly lower than in the other main net exporting Member States. Czech and Slovak prices have developed more smoothly but have increased less than in other countries. Farmers in countries with limited competition in the wholesaling, processing and retailing sectors have benefited least from the introduction of the CAP.

The situation of the food industry in the new Member States is rather mixed. In most countries consolidation and concentration are ongoing at an increasing pace due to foreign direct and domestic investments. Challenges appear particularly strong in the dairy industry, where low standards and marketing difficulties seem to be important issues in a number of countries. Favourable market opportunities in the EU, in particular for live animals, have helped to reduce the negative impact of diverging competitiveness of meat processors.

Consumers in Central Europe do not seem to have been significantly affected by the CAP. In most countries only a limited number of products have experienced significant price increases. These are mainly sugar, beef (which is not important in the food diet), pork, poultry, bananas and oranges. Other prices, like imported high value added dairy products, have fallen. Consumer prices increased mostly in those countries with limited competition among retailers and processors. In these countries the relatively high retail margins were generally maintained. The Czech Republic and Slovakia seem to be the counter-examples where price increases have been rather moderate due to the strong competition among retailers.

2.2. The economic conditions of agriculture in the new Member States

The new Member States add about 38 mio ha of utilised agricultural area to the 130 mio ha of the old Member States representing an increase of 30 %, while production in the EU-25 increases by about 10 % to 20 % for most products. The new Member States add 52 % to the agricultural work force of the EU. These numbers illustrate a significant production potential and at the same time a low productivity as compared to the old Member States.

Since the mid 1990s the use of this potential has only slightly increased as the agricultural sectors and food industries of the EU-N10 have restructured and experienced increasing economic stabilisation and growth. These underlying economic trends have been positively and negatively influenced by agricultural policies. The latter succeeded in particular in providing a certain stability over time and the ability to foster structural change. The ongoing trends of restructuring suggest that the use of the agricultural production potential will only be gradually increased.


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Box 4 Development in the agricultural trade of the new Member States

The relative importance of agricultural trade slowly declined in the new Member States over the 1999-2003 period to stand at approximately 8 % of total trade. The agricultural trade balance of the EU-N10 remained negative with the world and the EU-15. Whereas Hungary maintained its position as a net exporter over the whole period, Poland turned from one of the largest net importer in 1999 to a net exporting position in 2003 thanks to a steady growth in its agricultural exports to the world and particularly to the EU-15. By contrast, all other EU-N10 countries continued to exhibit a trade deficit. The main products contributing to this trend were processed foods, especially processed fruit and vegetables, poultry meat and dairy products which benefited from the improvement of the competitiveness of the EU-N10 food industry.

Graph 2.1 Development in EU-N10 agricultural trade with EU-25

Share of EU-N10 trade with EU-25

60

62

64

66

68

70

72

1999 2000 2001 2002 2003

EU

-N10

agr

icul

tura

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wor

ld=1

00

Export Import

EU-N10 agricultural trade with EU-25

0

2000

4000

6000

8000

1999 2000 2001 2002 2003

mio

Eur

o

Export Import

The EU-N10

The EU-N10 agricultural trade was dominated by two major players, Poland and Hungary, with particularly high shares for some meat products and cereals: Poland exported 56 % of EU-N10 beef meat exports; Hungary traded 57 % of pig meat and 57 % of poultry meat exports. Furthermore, 57 % of EU-N10 cereal exports to the world came from Hungary. As regards dairy products, the export shares were more evenly distributed among the EU-N10 countries, with the Czech Republic, Poland and Lithuania as major exporters.

A significant rise in agricultural trade between the EU-N10 and the EU-15 was found over the last five years (+52 % in EU-N10 exports and +36 % in EU-N10 imports) thanks to an increased competitiveness, particularly for processed products, and the implementation of the “double zero” and “double profit” agreements which led to a more liberalised trade environment between EU-15 and EU-N10 before enlargement. The EU-N10 intra-trade also rose by nearly 50 % over the same period.

The degree of integration between EU-N10 and EU-15 increased substantially over the last decade. Trade integration also increased between the EU-N10 countries, but to a lesser extent than with EU-15. On average 65 % of all EU-N10 agricultural exports and 69 % of all EU-N10 agricultural imports went to/came from EU-25 destinations over the 1999-2003 period. There was little change as regards the share of agricultural exports which rose from 65 % in 1999 to 66 % in 2003. By contrast, the share of imports coming


56

from EU-25 destinations increased from 66 % in 1999 to 71 % in 2003 mainly due to the slower growth of imports from non-EU-25 countries (+10 %) as compared to that from EU-25 imports (+38 %). The most integrated EU-N10 countries with the EU-25 market were Czech Republic, Slovakia, Estonia and Latvia with imports and exports shares of about 70-80 %.

The EU-15

Likewise, the EU-15 countries increased their trade with EU-N10 from 1999 to 2003 even though imports (+55 %) were growing faster than exports (+30 %). Germany accounted for the highest share of EU-15 exports to and imports from EU-N10 countries (29 % and 44 % respectively). The leading net exporters were Netherlands, Spain and France while Germany, Austria, United Kingdom showed negative trade balances with EU-N10. The most integrated EU-15 countries as regards agricultural trade with the EU-N10 were Austria and Finland with export shares of 7.3 % and 5.2 % as well as import shares of 12.9 % and 7.3 % respectively.

Commodity markets

In general, the integration of EU-N10 to the EU-25 agricultural trade is more advanced on the import side (cf. Graph 2.2). For the cereals, meat and dairy sectors, about 80 % of all EU-N10 imports came from EU-25. By contrast, the export situation of these sectors showed less integration between EU-N10 and EU-25. In general, the EU-N10 share of exports to EU-25 was more diverse across countries and products.

Graph 2.2 Integration of the EU-N10 in the EU-25 market (selected products)

EU-N10: Share of product export to EU-25

Beef

Pork Milk

Poultry

SMP

ButterCereals

Cheese

0

20

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100

0 10Product (average 1999/2003)

EU

-N10

indi

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EU-N10: Share of product import from EU-25

Pork

PoultryCereals

Butter

SMP

Milk

Beef

Cheese

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0 10Product (average 1999/2003)

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-N10

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=100

Conclusions

Agricultural trade developed very dynamically over the last years, fuelled notably by the “double zero” and “double profit” agreements. Consequently, the trade impact of enlargement can be considered to have already started before 2004. It can reasonably be expected that, after accession, the flows of agricultural products will further intensify between the EU-15 and the new Member States. This may be especially the case for agricultural products which were subject to relatively more trade restrictions before accession.


57

Over the last decade, the economies of 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 products31. However, the rural economies benefited less from the high economic growth which took predominantly place in the urban centres and high rural unemployment persisted.

The duality of agriculture between market-oriented and subsistence farmers is an important phenomenon in a number of countries, in particular in Poland, Latvia and Lithuania32. The small farms in the new Member States contribute significantly to employment in agriculture, which stands on average at 12.4 % of active employment as compared to 4.3 % in the old Member States.

Subsistence farmers obtain little alternative income from social security systems and from employment outside agriculture. They basically produce for their own consumption and, to a lesser extent, for direct sales. Alongside the market-oriented agriculture, subsistence farmers contribute significantly to the production and the use of resources in the milk, pig, poultry and egg production sectors. In this context, the social insurance element of agriculture has to be taken as an important regional dimension to the multifunctionality of European agriculture.

Restructuring of the subsistence sector depends on the revival of rural economies and responds only marginally to agricultural policy measures directed to markets and income. The main elements which would trigger structural change among subsistence farms are alternative employment in rural areas and the introduction of a sustainable level of social security coverage. With EU accession, funds have become available to contribute to the revival of rural economies. This could lead, if well managed and targeted, to accelerating rural growth in the new Member States.

2.3. The impact of the EU enlargement

During the last decade a high level of integration of markets and policies of the EU-25 was achieved prior to EU enlargement. This poses challenges to an analysis of the impact of enlargement since it is unclear whether national policies and trade integration would have been the same over the 2000-2003 period in the absence of the prospects of membership.

The general notion that part of the trade-related effects of integration into the single market already materialised prior to enlargement is certainly valid for the food industries but also for the agricultural sectors in the EU countries. The only new, yet significant aspect brought by this analysis is the effect of the full implementation of the CAP and of the integration of those markets which were still segregated. Therefore the full economic effects of integration into the EU are certainly much larger than those identified in this section as a large part of the significant developments observed over the last ten years would have had to be accounted for as an effect of enlargement as well.

31 Network of Independent Agricultural Experts in the CEE Candidate Countries (2004), Consumption Trends for dairy products and livestock products and the use of feed in production in the CEE Accession and Candidate Countries. European Commission, DG Agriculture and Rural Development.

32 Small farms in the other new Member States are generally run by part-time and hobby farmers because of the significant alternative income sources available to rural households.


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This section compares the market developments over the medium term in the EU-N10 with those under a non-accession scenario. The national policies in the new Member States as found in 2002 have been assumed to remain unchanged over the 2004-2011 period in this hypothetical counterfactual scenario.

2.3.1. The cereal markets

The new Member States contribute to about 20 % (55 mio t) of the cereal production on 30 % (15.5 mio ha) of the cereal area of the EU-25. Poland is the largest producer with 28 mio t, followed by Hungary with 13 mio t, the Czech Republic with 7 mio t, and Slovakia with approximately 3.5 mio t. Of these countries, Hungary has been the only significant exporter of cereals with 3 to 4 mio t per year. The other new Member States have remained close to self-sufficiency. Exports increased only in recent years, in particular in Poland but also in Lithuania and Latvia.

Graph 2.3 Development of cereal markets in the EU-N10 with and without enlargement (mio t) (dashed lines = non-accession)

0

10

20

30

40

50

60

70

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Exports Imports

Production

Domestic use

Over the last decade EU-N10 exports stagnated at around 3 to 5 mio t depending on the harvest, with a similar level of imports. In 2004 exports are projected to reach 9 mio t after a record harvest of 60 mio t. Cereal consumption displayed a slight decline from 1997 to 2000 and a stagnating trend around 50 mio t from then onwards.

The EU-N10 market situation is projected to improve over the medium term under the CAP. Markets are projected to expand due to the integration into the single market. In particular feed demand is projected to increase by 8 % or 2 mio t from 2004 to 2011 despite the gradual improvement in the feeding efficiency in the new Member States. Its impact should be more than offset by the increased feed demand from higher poultry, egg and beef production after enlargement as well as the more intensive dairy production.

For each tonne of meat produced, about 50 % to 80 % more cereals are used in the new Member States than in the EU-15 on average. In 2002 about 5.4 t of cereals were used for the production of 1 tonne of meat and eggs in the EU-15, while this ratio was as high as 8 in the new Member States. This difference of nearly 50 % is projected to decline to 40 % thanks mainly to changing prices, increased use of protein feed and higher feed technology. Nevertheless, the higher level of cereal use for feeding as compared to the


59

old Member States should remain an important base for cereal markets in the new Member States.

The integration of cereal markets in the new Member States is quite advanced. Most of the imports of the new Member States came from countries of the EU-25. Over the 1999-2003 period, the Czech Republic, Hungary, Slovenia, Poland and Slovakia imported more than 80 % of their cereals from EU-25 countries. Cyprus and Malta showed the lowest trade integration with less than 30 % of their imports from EU countries. Latvia, the Czech Republic, Estonia and Slovakia had their main markets in the EU-25 countries and exported more than 70 % of their cereal exports to these destinations. The lowest level of trade integration on the export side was found in Slovenia, Lithuania, Poland, Cyprus, Hungary and Malta with less than 45 % of their exports destined to EU countries. Over the medium term, more trade integration can be expected in particular on the export side. The net exporting countries with low trade integration would benefit from these developments. The net importing countries of Central Europe should gain from lower feed cereal prices.

Graph 2.4 Trade integration of cereal markets in the new Member States

EU-N10: Share of cereals export to EU-25

Estonia

Latvia

Lithuania

PolandCyprus

MaltaHungary

Slovenia

Slovakia

Czech Republic

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EU-N10: Share of cereals import from EU-25

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Policy alignment and bilateral trade integration left cereal prices in the new Member States close to comparable levels with EU markets prior to May 1, 2004. The difference in prices between the old and the new Member States was less related to the effect of market price support than to transport costs and the size of the markets. Moreover, prices in the EU have become increasingly determined by world market developments due to the Agenda 2000 reforms. Besides the expansion of domestic markets through gains in feed demand linked to higher livestock production, EU membership does influence markets by fully integrating them. Specific gains in cereal trade between new Member States could be expected, giving farmers in the new Member States more favourable medium-term perspectives than under the non-accession scenario.

However, market prospects in the short to medium term appear somewhat clouded for Hungary, the Czech Republic and Slovakia as high transport costs are expected to prevent the competitively produced cereals in these regions to reach markets in the EU as well as in third countries. Particularly in Hungary producer prices are foreseen to remain lower than intervention prices as farmers would be prevented to fully benefit from higher prices for, e.g. wheat and maize, projected in the rest of the EU. These cereals, however, would gain regional market share because Hungarian cereals appear to be regionally very competitive. The expected low level of regional cereal feed prices would then contribute to the stabilisation of cereal markets by the expansion of a cereal-fed intensive livestock production. Low feed prices would mask some of the underlying comparative disadvantages in particular for pork production in these regions.


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Without accession, production of cereals would have been about 3 mio t lower due mainly to the constraints of domestic markets. In spite of lower prices cereal domestic use would have stagnated slightly below the level under the membership scenario as different price relations between cereals in the non-accession scenario would have changed the composition of cereals in feed and as the limited integration of markets would have constrained the development of cereal intensive livestock products (and with that the level of feed demand).

Prospects for wheat

The production of soft wheat in the new Member States is expected to expand due to favourable price conditions. Production reached 24 mio t in 2004, which is about 3 mio t higher than the average harvest between 2000 and 2002. Under normal weather conditions and the projected stronger yield trends than in the EU-15, the production level in the new Member States should reach 23 mio t in 2008. The introduction of mandatory set-aside after the running out of the SAPS should reduce production by 0.6 mio t owing to a decrease in area in Hungary, the Czech Republic and Slovakia.

Between 2004 and 2011 domestic use would increase by 9 % (1.6 mio t) to 19.7 mio t. Typically soft wheat use in the new Member States would benefit from a stronger component of human consumption and industrial use, as compared to the old Member States. Exports of the new Member States could stabilise at approximately 5 mio t and about 2 mio t would be imported.

Graph 2.5 Development of soft wheat markets in the EU-N10 with and without enlargement (mio t) (dashed lines = non-accession)

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Graph 2.6 Development of the soft wheat market in Poland with and without accession (mio t) (dashed lines = non-accession)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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Graph 2.7 Development of the soft wheat market in Hungary with and without accession (mio t) (dashed lines = non-accession)

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The largest soft wheat producing country in the new Member States is Poland with a production of 9 mio t on average. Poland emerged as a net exporting country only recently. Should the favourable market conditions for soft wheat be persistent in the future, Poland could expand its production to more than 10 mio t over the medium term and develop an export potential of around 1.4 to 1.7 mio t, with imports at about 0.5 mio t. Poland would only be marginally affected by mandatory set-aside from 2009 onwards and production would display a continuous expansion.

Hungary would continue to export around 2 mio t, which would then decline by 0.2 mio t in 2009 due to the introduction of mandatory set-aside. Hungary would remain the largest exporter of soft wheat in the new Member States. Medium term production levels in Hungary could reach 4 mio t, with a domestic consumption of 2.5 mio t (of which 0.8 mio t for feed use). The expansion of feed wheat would be somewhat constrained by the increasing competitiveness of maize.


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Over the medium term similar developments would take place in the other new Member States. The production of soft wheat would also slightly increase in all these countries. A particular contribution to higher production and use should come from the Czech Republic, Slovakia and Latvia and Slovenia, whereas further expansion is expected to be rather limited in Lithuania and Estonia.

The development of markets under a non-accession scenario would have been less favourable, with production some 2 mio t lower in the new Member States. This would have been in particular the case in Poland, the Czech Republic and Slovakia where production and domestic use would have declined, turning these countries into net importers.

Prospects for barley

Barley production in the new Member States peaked in 1997 at 10.5 mio t, declined afterwards and increased again in 2004 at 9.3 mio t. Domestic use generally followed production and in most years it exceeded production by 0.4 to 0.8 mio t.

In the single market production would resume its decline to reach 8 mio t in 2011 from 9.8 mio t in 2004. At the same time, imports would increase to 1.9 mio t, mainly from the old Member States.

Domestic use would be affected by increased availability of feed maize and feed wheat, partly from domestic production and from imports. Between 2004 and 2011, feed demand for barley is expected to decline by 0.6 mio t to 6.2 mio t.

Graph 2.8 Development of barley markets in the EU-N10 with and without accession (mio t) (dashed lines = non-accession)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Domestic use

Production

Exports Imports

Poland is the largest barley producer and user among the new Member States. Many of the medium term developments of the EU-N10 are determined by the developments in Poland. Production in Poland is projected to decline to 3 mio t in 2011 as compared to 3.5 mio in 2004. Domestic use would decrease from 4 mio t to 3.7 mio t over the same period. Feed use would account for the decline as the consumption of malting barley would slightly increase. Under a non-accession scenario, barley feed use would have increased by 1.4 mio t to the detriment of feed wheat and maize (for 1.1 mio t and


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0.3 mio t respectively). Similar developments with regard to barley feed use could also have been seen in Lithuania, Latvia and Estonia.

Graph 2.9 Development of the barley market in Poland with and without accession (mio t) (dashed lines = non-accession)

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The medium-term prospects for barley in the Slovak Republic would develop along similar lines to other parts of the region. Slovakia produced about 1.0 mio t of barley in 2004, i.e. the highest harvest since 1995. Domestic use increased steadily from 0.8 mio t in 2000 to 0.7 mio t in 2004. Since 2000 Slovakia has exhibited a trade surplus and has been able to export around 0.2 mio t. Over the medium term production is projected to decline to 0.7 mio t in 2011. Slovakia would continue to export barley for around 0.2 mio t over the projection period.

Graph 2.10 Development of the barley market in Slovakia with and without accession (mio t) (dashed lines = non-accession)

0.0

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0.4

0.6

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Production

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Imports

Under a non-accession scenario, feed use would have increased by 0.2 mio t to the detriment of maize which would have shown an equally lower feed use. Similar developments with regards to feed use would have been observed in the Czech Republic, Hungary and Slovenia.


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Increasing market access and stronger competition from soft wheat and maize would constitute the main elements influencing the medium-term developments for barley markets in the new Member States. In a non-accession scenario the combined effect of national policies and border measures in place prior enlargement would have led to a slightly higher barley production as domestic barley markets would have remained protected. In this scenario, barley would have been equally imported, largely from the EU-15.

Prospects for maize

In 2004 about 12 mio t of maize were produced in the new Member States. With domestic use at 8.8 mio t, exports could reach about 3.7 mio t. These exports will be destined to both EU countries and world markets. This year shows the highest level of production, use and exports in the new Member States since 1995. The relatively high transport costs in the maize production basins could leave producer prices significantly below those price observed in other Member States. Production therefore would stabilise at around 10.8 mio t from 2005 and slightly increase afterwards. The pace of production growth would be reduced from 2009 when set-aside is implemented, leaving production at around 10.2 mio t. Export opportunities would still exist for approximately 2 mio t, while imports from within the region and other countries would increase as well.

Over the medium term competitive maize prices would stimulate domestic use from 8.8 mio t in 2004 to 10 mio t in 2011. Feed maize would particularly benefit from the increase in livestock production and from increasing substitution of barley in total feed demand. Accession would generally lead to an expansion of markets: production, domestic use as well as exports and imports would expand. Higher trade would take place with both EU and third countries.

Graph 2.11 Development of maize markets in the EU-N10 with and without accession (mio t) (dashed lines = non-accession)

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Hungary is the largest producer of maize among the new Member States. In 2004 about 8 mio t were produced, which represented 66 % of production in the new Member States. The second largest producer is Poland with 2.2 mio t. Hungary is also the largest consumer of maize with 4.8 mio t in 2004, followed by Poland with 2.1 mio t. Slovakia and the Czech Republic are the third and fourth largest producer and user of maize with around 0.7 mio t and 0.6 mio t of production and consumption respectively.


65

Hungary would remain the main exporter of maize over the medium term. After a short-term fall to 6.7 mio t in 2005, maize production would trend upward to 7 mio t in 2008. Set aside would then reduce Hungary’s production by 0.45 mio t in 2009. Domestic use would continue to expand from 4.8 mio t in 2004 to 5.3 mio t in 2011. Hungary’s production would benefit from the opening of regional markets and better export conditions due to accession. In the non-accession scenario, barley production and consumption in Hungary would have been some 1.8 mio t and 0.3 mio t lower respectively as that country would not have been in a position to have access to these new market opportunities.

Graph 2.12 Development of the maize market in Hungary with and without accession (mio t) (dashed lines = non-accession)

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The Czech Republic as a traditional net importer of maize would also display an expansion in maize feed use due to the opening of markets. Maize imports would benefit from the expansion of poultry and pork production in the Czech Republic over the medium term. Domestic use would increase by 0.1 mio t from 0.7 mio t in 2004 to 0.8 mio t in 2011. In spite of a strong yield increase maize production would stagnate at around 0.6 mio t as area would be increasingly allocated to the more profitable soft wheat production.

Graph 2.13 Development of the maize market in the Czech Republic with and without accession (mio t) (dashed lines = non-accession)

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Like in Hungary, set-aside would trigger a reduction in production from 2009 onwards. The Czech Republic is projected to increase its maize imports to 0.2 mio t in 2011.

Prospects for rye

The production potential of rye has doubled in the EU thanks to the enlargement. However, the new Member States have added an equally strong consumption basis. In the past the new Member States saw a decline of rye production from 7 mio t in 1995 to 3.7 mio t in 2003. In 2004 production increased to 4.9 mio t. The market situation however has always been relatively balanced. Poland is the largest producer of rye followed by the Baltic countries. In these countries the dietary patterns largely support market clearance.

Integration into the EU would lead to a stabilisation of rye production in the new Member States since some limited additional trade opportunities would arise in the old Member States, notably in Germany. However, with the introduction of the single farm payment and the reform of the common market organisation of rye, price levels in the EU would not substantially differ from those projected under a non-accession scenario. Therefore no significant changes linked to a non-accession scenario could be expected on these markets.

Graph 2.14: Development of rye markets in the EU-N10 with and without accession (mio t) (dashed lines = non-accession)

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2.3.2. The meat and dairy markets

A strong growth in per capita consumption of meat and milk products led to a significant market growth in the last decade. Meat demand expanded by 15 % between 1995 and 2004. Per capita consumption of meat and eggs in the new Member States is at approximately 80 % of that in the old Member States. Until 2011 meat and egg consumption would increase by 12 % mainly due to the very favourable developments assumed for household incomes. These developments for domestic consumption constitute the market fundamentals in the new Member States and provide for a dynamic outlook.


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The cereal-fed livestock production would benefit from favourable regional feed cereal prices as well as from opportunities to expand market share on EU markets. The latter would in particular be important for poultry and egg production. Milk production and dairy markets would further stabilise and new opportunities would arise from the integration into the single market.

Prospects for beef

The new Member States showed a decline in beef production during the last decade. In 2002 production reached 0.6 mio t, i.e. a reduction of 0.3 mio t since 1997. In anticipation of membership and the expected more favourable market conditions, production shifted up to 0.65 mio t in 2004.

Consumption of beef declined substantially during the last decade. Beef was not the preferred meat in the new Member States and consumers substituted it by poultry and pork. However, the assumption is taken that income levels and a better availability of quality beef meat go alongside with a change in consumer preferences and dietary patterns. Therefore, beef meat consumption would discontinue to decline and stabilise at 0.6 mio t.

The strengthening of consumption would provide domestic markets with a solid base and a lower dependency on exports. Production is expected to slowly decrease again and reach 0.6 mio t in 2011. This would still be some 0.2 mio t higher than under the continuation of national policies of 2002. Over the medium term the new Member States would become net importing countries of beef from 2007.

Graph 2.15 Development of beef markets in the EU-N10 with and without accession (mio t) (dashed lines = non-accession)

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The new Member States already reached a high level of market integration prior to enlargement. Imports almost exclusively came from EU-25 countries. This integration is lower on the export side. In particular Poland, the largest exporter of beef among the new Member States, should benefit most in quantitative terms from the increasing export opportunities in the old Member States. However, strong relative gains in exports should also be observed for Lithuania, Hungary and the Czech Republic.


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Graph 2.16 Trade integration of beef markets in the new Member States

EU-N10: Share of beef meat export to EU-25

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The development of beef markets in Poland would depend crucially on the export opportunities to EU countries and the subsequent expansion of market share since domestic consumption would stagnate. Market and producer prices of beef in Poland would be mainly driven by export markets. The development in the Baltic countries would be broadly similar to that projected for Poland.

Graph 2.17 Development of the beef market in Poland with and without accession (mio t) (dashed lines = non-accession)

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The medium-term developments in the Czech Republic would be similarly positive for beef producers. Beef demand would stabilise like in Poland. Some export opportunities would arise. However, domestic consumption would continue to be the sustainable basis for beef production. A similar development would be observed in Slovakia, Hungary and Slovenia.

The impact of accession on the beef markets in the new Member States appears very favourable. Under the continuation of domestic policies, beef production would have continued to decline strongly over the medium term to reach 0.4 mio t in 2011 (i.e. 0.2 mio t lower than the projections with enlargement). In a non-accession scenario, consumer prices for beef would have been lower, particularly between 2004 and 2006. As a result consumption would have been some 0.1 mio t higher. However, beef consumption would have declined over the medium term.


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Graph 2.18 Development of the beef market in the Czech Republic with and without accession (mio t) (dashed lines = non-accession)

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The strong decline in beef production under the non-accession scenario and a relatively high level of consumption would have turned the new Member States into strong net importing countries.

Prospects for pork

Pork markets in the new Member states were relatively volatile over the last decade, though domestic consumption expanded significantly from 3 mio t in 1995 to 3.6 mio t in 2004. Production which served mainly domestic consumption followed closely. The significant reliance on domestic markets and the strong competition faced on non-EU-25 markets led governments to introduce stabilising measures. Exports and imports amounted to about 0.3 mio t in recent years.

Graph 2.19 Development of pork markets in the EU-N10 with and without accession (mio t) (dashed lines = non-accession)

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The trade integration of pork markets in the new Member States shows wide divergences. Like in most other agricultural markets imports came predominantly from EU-25 countries. Most countries imported more than 80 % from these destinations. The export side however appears less integrated than many other markets. The Czech Republic, Lithuania and Slovakia had already between 1999 and 2003 more than 80 % of their pork exports destined to EU-25 countries. The largest pig meat producer of the new Member States, Poland, exported on the other hand just 20 % to EU-25 destinations and depended heavily on the Russian markets. Hungary another large pork producer exported about 55 % of its exports to EU-25 countries.

Graph 2.20 Trade integration of pork markets in the new Member States

EU-N10: Share of pork meat export to EU-25

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The attractive market conditions in the EU-25 should lead to further trade integration on the export side over the medium term, if the expansion of production takes place at competitive conditions. This increased market integration should reduce the volatility of producer prices recorded prior to accession and improve market conditions.

Similar to developments in the poultry sector a few years ago, investments in pork production, in particular in Poland, the Czech Republic and Slovakia have started to significantly change the competitiveness of the sector. Favourable investment conditions and growing domestic markets should continue to trigger investments over the medium term. This ongoing pace of investments and the favourable conditions as regards feed prices over the medium term suggest that pork production could significantly expand and the competitiveness of the production and processing sectors could increase. This would however crucially depend on the investments reaching the majority of producers in the countries.

Under these optimistic conditions, production of pork in the new Member States could increase substantially from 3.3 mio t in 2004 to 4.0 mio t in 2011. New production technologies would also lead to lower production costs thanks notably to improved feeding efficiency. Under these assumptions the higher market share gained in the new Member States could also expand to the old Member States.

Compared to the non-enlargement scenario, production could develop some 0.4 mio t higher over the medium term thanks to improved market access and changed production technologies. In particular Poland, Estonia and, if stronger investments materialise, Hungary should benefit from these developments. Consumption would also gain from market integration and more efficient production over the medium term. Between 2004 and 2011 consumption is expected to rise from 3.3 mio t to 3.6 mio t. Under a non-accession scenario pork consumption would have been some 0.3 mio t lower.


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Graph 2.21 Development of the pork market in Poland with and without accession (mio t) (dashed lines = non-accession)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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Prospects for poultry

During the last decade the demand for poultry meat increased more than that of any other meat as it nearly doubled (from 0.9 mio t in 1995 to 1.7 mio t in 2004). These market as well as good investment conditions led on average to significant gains in productivity and competitiveness as compared to the old Member States. Production followed the increase in consumption and some export markets were found in the old Member States.

Graph 2.22 Development of the poultry market in the EU-N10 with and without accession (mio t) (dashed lines = non-accession)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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Exports

Trade integration of markets prior to enlargement was already very high. More than 80 % of EU-N10 exports went to EU-25 countries. The import markets were similarly but slightly less integrated on average between 1999 and 2003. Therefore further gains in trade share in the EU-25 would not be expected via a redirection of trade but rather by trade creation effects.


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Graph 2.23 Trade integration of poultry markets in the new Member States

EU-N10: Share of poultry meat export to EU-25

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00EU-N10: Share of poultry meat

import from EU-25

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The full access to the large EU markets, the favourable production and investment conditions in many countries and the continuously increasing human demand should further stimulate the growth in production capacities. Over the medium term, production should further expand from 1.7 mio t in 2004 to 2.5 mio t in 2011. Consumption would equally increase and benefit from the household income growth. Consumption would reach 2.1 mio t in 2011, a 16 % rise against 2004. Market access and investments should allow the new Member States to gain market shares in the old Member States, in particular in those that are the closest to the EU-N10, such as Germany, Austria and Italy. Exports could expand to 0.6 mio t over the medium term.

The main exporting countries such as Poland and Hungary would show an expansion of their production fuelled by improved prices linked to export demand. Higher prices on the other hand could lead to slightly lower domestic poultry consumption. In Poland, for example, production would further expand from 0.8 mio t in 2004 to 1.0 mio t in 2011. Exports could amount to 0.2 mio t over the medium term.

Graph 2.24 Development of the poultry market in Poland with and without accession (mio t) (dashed lines = non-accession)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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Production

Other new Member States however could face stronger competition for their poultry industry, for example Slovakia and the Czech Republic. Production would expand but not as steadily as in Poland.


73

Poultry markets are another example of the effects of market integration and investments. Under a non-accession scenario, production in most countries would have been significantly lower due to the restricted access to EU markets. For the new Member States this factor would have contributed to a production fall of up to 0.3 mio t in 2011.

The development of milk production

Production of milk in the new member States peaked in 1998 at 21.7 mio t, before declining gradually to 20.4 mio t in 2004. Deliveries and registered direct sales accounted for 17.1 mio t in 2004, whereas subsistence production and on-farm consumption stood at 3.3 mio t. In 2004 the largest producer of milk in the new Member States was Poland with 11.5 mio t, followed by the Czech Republic with 2.8 mio t, Hungary with 2 mio t, Lithuania and Slovakia with 1.7 mio t each.

A closer look to the milk production of the new Member States reveals that the structure of production varies significantly between countries. In a number of new Member States the subsistence sector represents an important part of milk production, reaching in particular 23 % of total production in 2004 in Poland and 10 % in Latvia. Small-scale milk farms, though more market-oriented, are also important in Lithuania and Slovenia. In the countries where it holds a high share, the subsistence milk production sector captures a substantial part of the resources available for milk production and covers a significant part of the fresh milk consumption in rural areas. Market-oriented milk producers have to operate and compete for markets and resources alongside this subsistence sector. Other countries like Hungary, the Czech Republic, Estonia, and Slovakia are characterised by commercial milk production in larger units.

Graph 2.25 Development of milk production in the EU-N10 with and without accession (mio t) (dashed lines = non-accession)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Total production

Market production

The medium-term perspectives for milk production in the new Member States would be determined by the introduction of the milk quota which is applied to the market oriented production, and by the prospects of restructuring of the production sector.

The short-term developments since May 2004 demonstrate that in a number of countries milk quality is still an issue and dairies compete for the highest quality. This appears to be the case in Hungary, Poland, and less so in the Czech Republic, Slovakia, Slovenia


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and in Estonia. An encouraging perspective for the medium term could however develop with the ongoing pace of investments.

Market-oriented milk production could expand over the medium term with the help of the restructuring reserves agreed for the new Member States. Subsistence production would continue to decline however, at a pace largely independent from agricultural policies. The decline of the subsistence sector from 3.3 mio t in 2004 to 2.6 mio t in 2011 would leave additional markets of liquid milk for domestic production. However, this additional market production of liquid milk would rather take place at the expense of the production of bulk dairy products such as butter and skimmed milk powder.

The markets for dairy products appear well integrated into EU-25 markets and particularly dominated by the old Member States. On the export side, trade integration is not very high. The large milk producers, i.e. Poland, Hungary, Lithuania, the Czech Republic, and Slovakia exported to other destinations than EU-25 countries. Further increase in market integration on the export side will depend on the competitiveness of products such as cheese. The integration and stabilisation of markets for dairy products in the new Member States should contribute to stabilise milk production even with constant policies.

Graph 2.26 Trade integration of dairy markets in the new Member States

EU-N10: Share of milk and milk products export to EU-25

Cyprus Estonia

Hungary

Latvia

Lithuania

MaltaPoland

Slovenia

Slovakia

Czech Republic

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EU-N10: Share of milk and milk products import from EU-25

Estonia

Cyprus Czech Republic

Lithuania Slovenia

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Poland

MaltaLatviaHungary

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=100

Under a non-accession and constant 2002 policies scenario, the competitiveness of milk production in the new Member States would have further worsened as exchange rate conditions and cost increases would have undermined the level of support of national agricultural policies. With unchanged national policies, milk production would have declined by about 2.5 mio t between 2004 and 2011. This important decline of milk production would have affected the production of dairy products as a whole, except the part of fresh dairy products and liquid milk. In particular, prices of bulk dairy products would have been significantly lower over time and tight export markets would have added to price pressure on domestic markets as compared to the situation with membership. Against this decline and without the perspective of membership, dairy markets would certainly have seen a significant increase in protection level in order to secure this important part of agriculture.

2.3.3. Prospects for income

The market impact of enlargement is very positive for the new Member States. Agricultural production would stabilise, e.g. milk and dairy production, or increase, notably in the cereal and meat sectors. Agricultural markets would benefit from the trade creation effects of the integration into the Single Market and from the decoupled support


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through the CAP. Over the medium term agricultural income would continue to develop very positively with membership to stand in 2011 some 226 % higher than in 2003.

Under the non-accession scenario income prospects would have been less positive. Agricultural income would have continued to increase slightly until 2006 and then would have started to decline as the impact of national agricultural policies would decline due to appreciating exchange rates and productivity increases which would outpace the growth of domestic markets. The most negatively affected areas would be the cattle and milk production sectors. In 2011 agricultural incomes would be 5 % below the 2003 level or 231 % below the projected level with enlargement (c.f. Graph 2.26).

A number of countries would have experienced a serious deterioration of agricultural income under the non-accession scenario: Hungary because of its dependency on cereal and white meat export markets, Lithuania owing to its dependency on export markets for milk products and Poland due to its dependency on pork and milk export markets.

These countries together with the Czech Republic, which has a very cost efficient agricultural sector, would record the highest income gains among the new Member States in the accession scenario.

Graph 2.26 Development in the agricultural income of the ten new Member States under the non-accession and the accession scenarios (2003=100)

0

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150

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250

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Non-accession

Accession

2.4. Conclusions

The analysis of the markets in the new Member States shows a wide diversity of agriculture and conditions under which agriculture had operated. The alignment of polices and the market integration prior to enlargement led to a significant integration, in particular among the old and the new Member States. Despite the increasing integration over time, markets in the new Member States appeared to be limited as regards the ability to absorb and stabilise a volatile agricultural production. This had a particular effect on Hungary as the largest exporter and on Poland as the largest producer of agricultural commodities of the new Member States.

The main impact of enlargement on agriculture is certainly the full access to the single market and the integration of trade among the new Member States themselves. The projections show that the new Member States would be able to gain additional market


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shares in the EU-25 in the area of cereals, white meat and beef. However, some market inefficiencies still exist as regards infrastructure and standards of production.

The additional gains for the market-oriented part of agriculture resulting from the implementation of the CAP appear also significant. Further effective integration into the single market should depend partly on the development of production and marketing infrastructure and partly on the compliance of production with EU standards in a cost efficient manner. This would create in turn substantial additional benefits in the longer term.


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Annex: Impact of Non-Enlargement

Table A.19 Impact of enlargement on crop markets in 2011 (% deviation of baseline from non-accession)

Crops

EU-15 EU-10 EU-15 EU-10cereals 2.7% 3.6% 2.0% 1.8%soft wheat 3.6% 13.2% 2.4% 4.6%barley 4.2% -8.1% -2.9% -10.7%maize 6.1% 1.7% 7.5% 14.7%rye -17.8% -1.2% 8.4% -0.1%other cereals -2.3% -1.4% 1.8% -1.1%oilseeds 4.5% -12.6% 0.0% -0.3%rapseed 4.2% -14.7% 0.0% -0.2%sunseed 5.6% -9.1% 0.0% -0.5%soybeans 5.2% -7.6% 0.0% -0.9%

Production Domestic use

Table A.20 Impact of enlargement on meat and dairy markets in 2011 (% deviation of baseline from non-accession)

Meat and dairy

EU-15 EU-10 EU-15 EU-10beef and veal -1.9% 44% 2.3% 13.9%pork -3.1% 11% -0.3% 5.5%poultry -2.1% 31% 2.0% 15.5%eggs 1.1% -5% 3.1% 1.5%milk 0.0% 6%butter -0.4% 29% 0.8% -8.1%smp -0.7% 25% -1.3% -10.6%cheese 0.4% 23% -0.2% -17.8%

Production Domestic use

Chapter III Prospects for world agricultural markets

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PROSPECTS FOR

WORLD AGRICULTURAL MARKETS


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3. PROSPECTS FOR WORLD AGRICULTURAL MARKETS

3.1. Introduction

This chapter is aimed at giving an overall picture of the long-term prospects of world markets for some key agricultural products. While the Commission has developed its own set of market projections for the EU, the outlook of world markets is mainly assessed on the basis of reports and projections released by different international organisations, experts and foreign institutions, and mainly on the basis of two sets of medium-term projections for international agricultural markets.

The first comes from the Food and Agricultural Policy Research Institute (FAPRI), with units at the University of Missouri-Columbia and Iowa State University, which provides analysis and economic forecasts to the US Congress (FAPRI Outlook). The second set of projections consists of the medium-term outlook from the Organisation for Economic Co-operation and Development (OECD) which reflects information provided by its members as well as independent analysis by the OECD Secretariat. In some cases reference is made to the results of the USDA baseline, produced by the US Department of Agriculture through its interagency World Agricultural Outlook Board.

These forecasts constitute the most recent and comprehensive set of long-term agricultural projections available to date. However, it should be stressed that these forecasts were carried out at the end of 2003 and/or at the beginning of 2004 on the basis of information available at the end of 2003. Therefore, they do not all take full account of the most recent developments in the general economic situation and on agricultural markets, like for example the dairy price surge of the first half of 2004. Whereas these projections take into account the 2003 CAP reform in the EU and the 2002 FSRI Act in the US, they assume the mere continuation of the current WTO agreement. In this perspective, some issues related to key underlying assumptions and forecast results will be briefly addressed in the light of the latest information available and our own assessment.

3.2. Overview of main trends

The FAPRI and OECD provide for a short-term outlook marked by the stabilisation of agricultural markets after the wide price fluctuations of 2003/2004. The medium-term prospects for agricultural markets would be mainly driven by an improved macro-economic environment with more broadly based, robust and sustainable growth. Combined with higher population, urbanisation and changes in dietary pattern, particularly in many emerging economies, these prospects for stronger economic growth would support a steady increase in food demand.

Strong growth in world trade in agricultural commodities would take place even in an environment where in most cases demand for food products would be broadly matched by production.

Notwithstanding the relative improvement in the market fundamentals of most agricultural sectors that is projected over the medium term, a prudent interpretation of these perspectives is deemed necessary. These projections remain subject to many uncertainties that can be expected to moderate the relatively positive pattern forecasted for future trade and price growth. The most important include the new round of multilateral trade negotiations, the future course of agricultural policy in many regions,


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the future macro-economic perspectives and the scope for further productivity growth in some regions.

3.2.1. Overview per sector

The main features of the medium-term prospects per main agricultural commodity can be summarised as follows:

Cereals

World cereal trade is anticipated to continue to recover from the downturn of the period 1999-2002. An improved economic environment, population growth as well as changes in the dietary pattern in some major importing countries are foreseen to generate a strengthening of world demand and a tightening of stock-to-use ratios. Higher demand would stimulate domestic supply in many developing countries, including China, North Africa and Latin America, and trigger a sustained expansion in global cereal trade. Total cereal trade would increase by around 45 mio t by 2011/12, i.e. at a much quicker pace than in the 1980s and 1990s.

Graph 3.1 Outlook for wheat net imports – comparison with the 2003 outlook, 1998 – 2011 (mio t)

30

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105

120

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201130

40

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OECD - 2003

FAPRI - 2004

FAPRI - 2003

FAPRI OECD

OECD - 2004

Ref.: FAPRI (world net imports) and OECD (OECD zone).

Global trade in wheat would strengthen with annual growth averaging about 4.5 %-5.2 %, whereas coarse grain trade would exhibit a similar pattern with an annual average of 1.7% over the 2003/04-2011/12 period.

After having bottomed out at the turn of the century and after the sharp rise and fall of 2002/03, world prices are projected to remain at a relatively high level over the medium term as supply adjusts to global demand growth. HRW wheat prices would reach approximately 145-154 $/t by 2011/12 according to the FAPRI and OECD projections33. Maize prices would exhibit a similar trend, standing at 107-114 $/t at the end of the projection period. Barley prices would also stabilise after the sharp rise of the period 1999-2002 to reach 93$/t in 2011/12 (Canada feed reference) in FAPRI projections and 92 $/t in 2011/12 in the OECD outlook.

33 The SRW wheat, which broadly corresponds to EU wheat quality, generally quotes around 10 % below the HRW wheat reference.


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Graph 3.2 Outlook for wheat world prices – comparison with the 2003 outlook, 1991 – 2009 ($/t)

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220

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Projections - 2004

Projections - 2003

OECD

FAPRI

Ref.: US FOB Gulf, HRW.

Oilseeds

The medium-term prospects for the oilseeds sector are foreseen to demonstrate a stabilisation after the price peak of 2003. The vigorous growth in demand for oilseed and oilseed products anticipated over the medium term by most agencies is forecast to stimulate a rapid increase in supply. Global demand would benefit from the recovery in world economic growth which is projected to generate increased human consumption of vegetable oils as well as higher use of oilseed meals for the livestock sector. Trade in oilseeds is anticipated to increase faster over the projection period than in the 1980s, but more slowly than in the early 1990s.

The prices of oilseeds would display a slight decrease in the short term, after the price surge of 2002-2003 and then stabilise as several factors including the sustained yield growth, the large production potential in South America and the continuation of a production-inducing policy in the US are expected to moderate future price trends. The OECD projections provide for average oilseed prices (i.e. soybean, rape seed and sunflower seed) at 253 $/t by 2011/12, whereas the FAPRI forecasts soybean prices at 241 $/t. Rape seed and sunflower seed would benefit from more favourable long-term vegetable oil demand -in comparison to meal- and would accordingly exhibit a stronger price pattern than soybean, with prices at 247 $/t and 256 $/t in 2011/12 respectively in the FAPRI projections.

Oilseed meal prices are also expected to weaken in the short term, before stabilising over the rest of the period, and ranging between 179 $/t and 202 $/t.

Prospects of rising incomes drive the solid expansion in vegetable oil consumption. Palm oil and soybean oil would capture the greatest share of an expanding demand for and trade of vegetable oil. Growth in soybean oil trade would average between 2.8 % and 3.4 % per annum, i.e. a much lower rate than in the 1990s when it reached growth rates of 9 % per year. The strong dependence of trade in vegetable oil from developing countries, notably China and India, makes the outlook very sensitive to the economic prospects in these countries.


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Meat

The medium-term perspectives for the meat markets would exhibit higher production, consumption and trade. The increase in meat consumption would be mainly supported by a favourable macro-economic environment of sustained income growth, in particular in the emerging economies of Asia and Latin America, and by changes in dietary pattern in many regions. As higher meat demand would take place in many net importing countries, world trade would rise and world prices would show moderate strength. The FAPRI projections exhibit a sustained rise in beef trade of nearly 1 mio t over the 2003-2011 period (i.e. some 26 %), with most of the growth from Asia and Mexico while Russia shows only a moderate increase since the introduction of TRQs in 2003. After the recent short-term fall due to lower availability, weaker economies and animal health crises, the outlook for pig meat trade is projected to display a renewed expansion over the 2003-2011 period (by around 0.5 mio t according to FAPRI), driven by strong import demand from Japan, China and Mexico.

Poultry meat would capture a large proportion of the increased global meat demand thanks to low production costs (relative to beef and pig meat) and consumer preferences in many parts of the world. Trade in poultry meat is also projected to trend upwards, with an increase estimated by FAPRI at around 1 mio t. Much would depend on the prospects for import demand from China and Japan, as Russian imports are assumed to be constrained by import quotas. On the export side, a weak currency, large availability of cheap feed grains and strong investments in the meat sector are all anticipated to further enhance and consolidate Brazil’s market share over the medium term.

Graph 3.3 Outlook for beef net imports, 1995-2011 (‘000 t cwe)

0

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1995 1997 1999 2001 2003 2005 2007 2009 20110

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OECD FAPRI

Ref.: FAPRI (world net imports) and OECD (OECD zone trade).

After the price surge of 2003, linked to the trade disruptions due to the discovery of BSE cases in Canada and in the USA, beef prices are expected to decrease in 2004 before re-bouncing and stabilising at a relatively high level over the medium term. Prices are supported by a strong import demand, although the changing structure of the world beef market, the emergence of new exporting countries and the increasing competition from other meats should restrain upward beef price tendencies. Poultry and pig meat prices would display very modest gains over the projection horizon as the continued


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improvement in feed efficiency, structural changes and the swift emergence of low-cost producers would maintain world market prices under pressure.

Graph 3.4 Outlook for pig meat prices – comparison with the 2003 outlook, 1995 – 2011 ($/t)

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1400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Projections - 2004

Projections - 2003

OECD

FAPRI

Ref.: Iowa and Southern Minnesota barrow and gilt, lw.

These perspectives rely heavily on the assumption that the recovery from the recent economic downturn will turn into sustained economic growth over the medium term. They also assume that the recent disruptions in world meat markets caused by sanitary issues will not occur over the projection period as they could trigger higher market segmentation and limit market access for some potential meat exporters. In this respect the recurrence of Avian Flu epidemic in South-East Asia of 2004 was not taken into account in any projections.

Milk and dairy products

The OECD and FAPRI foresee that the medium-term outlook for the dairy sector would 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). Demand growth is projected to be strongest in the non-OECD zone, notably in Asia, Latin America and the Middle East.

World milk production would grow at the sustained pace of 1.9 % on annual average over the 2003-2011 period, supported by higher demand and price rises in a number of countries, mainly outside the OECD area and in those OECD countries not subject to production quotas.

If dairy consumption in the OECD area is not expected to demonstrate significant changes over the medium-term (with the exception of cheese and –to a lower extent- whole milk powder), solid and sustained growth in the demand for dairy products is projected in developing countries fuelled by growing population, rising disposable income, urbanisation and changing dietary pattern.

Although a significant part of this increasing demand is expected to be met by domestic production, scope for additional, albeit increasingly regionalized, trade is foreseen in Asia and the Middle East. Milk powders trade is projected to increase over the medium term


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while cheese would show only a marginal increase and butter and whey powder trade would shrink. Technological advances are also projected to stimulate a rapid development in milk components.

A stronger economic growth and a strengthening demand for dairy products generated a rapid recovery in world market prices of dairy products in 2003. Over the medium term, however, the rapid expansion of milk production in low-cost producing regions (such as Oceania and China) is expected to moderate this price pattern. In spite of a short-term weakening, cheese prices should display the strongest pattern among the prices of dairy products. In contrast, the pace of price increase is forecast to be more moderate for milk powder, notably for SMP, which should face greater competition from WMP and whey powder. Butter prices would recover modestly and gradually, benefiting also from the expected high prices for vegetable oil.

These medium-term perspectives remain strongly dependent on the future development in some key (existing or emerging) markets such as Russia and East Asia as the world dairy market is foreseen to remain relatively thin. Furthermore, the trend towards further concentration and globalisation of the dairy industry, and greater differentiation of dairy products is expected to make trade projections for dairy products increasingly complex and dependent on dairy firms’ cost structure, production and marketing strategy.

3.2.2. Underlying factors

Five main factors can be identified to explain these developments:

Population growth

Population growth constitutes a traditional determinant for food demand. Global annual population growth has been steadily declining since the second half of the 1960s, falling from 2.1 % in the 1960s to 1.3 % in 2000.

Graph 3.5 Annual growth rate in population growth, 1995 – 2011 (in %)

0,0

0,5

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2,0

2,5

3,0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

World Developed economies Asia Latin America Africa

Source: FAPRI, OECD (Developed Countries)

This pattern is estimated to continue over the next seven years and overall world population is expected to increase by between 1.1 % and 1.2 % per year by the beginning of the next decade. However, the decade is expected to witness some of the highest absolute annual increments in world population history. It is estimated that the world


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population will increase every year by some 75 to 80 mio persons over the projection period. The pattern of population growth will differ widely between regions, with Africa and the Middle East demonstrating the strongest increase of around 16 % over the next eight years.

Graph 3.6 Cumulative population growth, 2003 – 2011 (in %)

Developedeconomies

LatinAmerica

Africa MiddleEast

Asia FSU World

EasternEurope

-2

0

2

4

6

8

10

12

14

16

18

Source: FAPRI

The strongest annual growth is expected in Africa where population would expand by around 2 % across the forecast period and reach 1.7 % in 2011. By 2011 Middle East’s population would grow faster than Africa’s, at around 1.8 % in the FAPRI projections. The next fastest growing regions are Latin America and Asia, averaging between 1.0 % and 1.1 % per annum by 2011. More than 90 % of the increase in world population would take place in developing countries, with more than half in Asia. By contrast, most of new EU Member States and other transition economies are projected to exhibit a fall in their overall population.

Strong rebound in world economic growth

The main contributing factor to the improvement in the medium-term outlook of agricultural markets in all baseline projections lies in the prospects for a favourable macro-economic environment based on sustained and balanced growth across most countries. The short-term economic outlook should remain dominated by the continuation of the marked increase which followed the drop that affected the world economy in 2001. Over the medium and long term, most agencies anticipate that long-term structural reforms and robust productivity growth should set the stage for a renewed sustained economic growth in most economies, with economic expansion above long-term averages in most regions. If Asia is foreseen to remain the major force in the expansion of the world economy, strong growth is expected in the transition economies of Eastern Europe and Russia, Africa and Latin America, leading to a significant narrowing of the growth differential between these regions. This broadly-based economic growth could then have major implications for global food demand as it could trigger significant changes in the food consumption pattern in many developing countries.


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Graph 3.7 Outlook for world real GDP annual growth, 1996 – 2011 (in %)

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USDAFAPRI

Weakened by the global downturn in 2001, world GDP growth is forecast to grow by more than 3 % in 2004 according to the USDA and FAPRI projections. From 2005 onwards, the FAPRI and the USDA anticipate that economic growth would stabilise at approximately 3.1-3.3 % per year. If much of this growth is expected to be fuelled by emerging economies, the slow implementation of structural reforms -that would provide the fundamentals for long-term sustained economic development- should constrain growth prospects below the rates recorded during the 1990s in some of these countries.

According to the USDA projections, Asian developing countries would exhibit a GDP growth averaging around 6 % per year (led by China that would display an annual growth rate of 7 %), i.e. somewhat lower than in the 1990s. By contrast, the performance of Latin American economies is foreseen to be more mixed, with strengthening economic growth that would reach approximately 4 % a year on average over the medium term.

The moderate developments in oil prices that are assumed in the baseline projections – way below the recent surge in oil prices at more than 50 $/barrel - provide the basis for an average economic growth at or above 4 % per year for Middle East countries, i.e. around the performance of the 1990s. In spite of some politically-troubled countries which could drag overall growth down, Africa is forecast to display a healthy economic pattern, with GDP growth estimated above 4 % over the medium term. However, GDP growth per capita in Africa and the Middle East would continue to be outperformed by those of Asia and Latin America by a larger margin than given by their GDP growth rate differentials owing to their higher population prospects (cf. section (1) above).

Russia weathered the slow down in the world economy in 2000 and 2001 when it experienced high GDP growth thanks to a large depreciation of its currency, a significant improvement in its terms of trade and prudent fiscal policy. Over the medium term, the USDA and FAPRI baselines foresee the continuation of the expansion of the economy. This performance would in any case constitute a substantial increase from the negative growth recorded in the 1990s (around –4 % per year). These prospects appear to depend critically on the process of implementation of structural reforms towards a market-based economy and the continuation of the integration of Russia into the global economy in terms of trade, foreign investment and currency convertibility. In that respect, the medium-term economic and financial prospects in that region constitute a major uncertainty for the future prospects of agricultural markets.


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Graph 3.8 Outlook for real GDP growth per region, 2003 - 2011 (cumulative growth in %)

0

10

20

30

40

50

60

70

Africa Middle East Latin America Asia FSU Eastern Europe World

USDAFAPRI

After the worst economic downturn in over a decade, the economic situation in developed countries is foreseen to continue improving in 2004 and to fully recover from 2005 onwards. Over the medium term, GDP growth is estimated to reach between 2.5 % and 2.7 %, i.e. above the rates achieved in the 1990s as structural adjustments undertaken throughout the second half of the 1980s and into the past decade created a foundation for growth. However, the path to recovery is forecast to show significant differences. After a marked slowdown in 2001, the economic growth in the US quickly returned to 2.9 % in 2003 and is expected to keep a long-term sustainable rate significantly above 3.0 % on average over the rest of the outlook period. Significant structural problems are still expected to constrain the Japanese economy on a modest growth path over the medium term at around 1.5 % per year. Owing to a milder slowdown, economic growth in the EU-15 would show a more modest rebound and less robust medium-term growth perspectives than in the US, with GDP stabilising at 2.4 % on annual average.

Whereas strong economic growth in the developed world should only have minor direct implications for the global demand for agricultural products34, it is expected to have a much stronger effect on food consumption in the non-OECD zone owing to higher per capita-income elasticity.

This environment of steady medium-term growth is foreseen to take place without significant inflationary pressures thanks to assumed moderate oil prices over the medium term -combined with a lower dependence of the economy on energy- and to a significant productivity growth. The recent surge in oil prices, which has not been taken into account in any projections, together with high freight costs and continuing Chinese strong economic growth may lead to increasing inflation.

Exchange rate fluctuations have constituted a major factor affecting agricultural trade flows and prices over the recent past, notably the depreciation of the US$ and the Brazilian Real. The three sets of baseline projections differ significantly regarding their assumptions on currency prospects over the next seven years. The USDA baseline broadly assumes no major change in relative exchange rates, with nevertheless a

34 However, economic growth in developed countries is crucial for spurring growth at world level, which would then translate into higher food demand and global trade.


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continued short-term appreciation of the euro in real terms up to 2005 before a slow depreciation over the longer run. The OECD baseline also assumes stable exchange rates in real terms. Accordingly, the US dollar would remain stable against the euro and weaken against the yen. Surprisingly, some depreciation of the Chinese and Russian currencies would also be projected. An appreciation of the Japanese yen is also anticipated by the FAPRI baseline, together with a continuation of the slow increase of the euro and a drastic fall in the value of the Brazilian and Argentinean currencies over the whole outlook period. The Chinese currency is assumed to appreciate against the dollar over the short term before stabilising at a later stage.

Change in dietary pattern

Higher per capita income is foreseen to have profound repercussions on the nature and the composition of global food demand on account of the direct correlation between per capita growth in income and diet diversification. Demand for meat products, processed food and beverages is expected to rise in developing countries in line with wealth. A higher degree of urbanisation and openness to trade would also translate into a shift in demand for wheat-based products and meat (with the ensuing increase in demand for coarse grains and other feedingstuffs as it takes more cereals and oilseeds to produce a unit of calories from meat than through the direct human consumption of these crops).

A differentiated pattern of food production and consumption should lead to some regional imbalance and increase trade

The prospects for trade over the medium term depend heavily on the differentiated pattern in domestic production and consumption at regional level. Although agricultural production is expected to increase in developing countries, the annual rate of increase of production in these countries is still projected to be lower than the increase in domestic consumption. This would result from the combined impact of the limited potential of available land and water (due to urbanisation and pressure on agricultural resources and environment) and under-investment in agriculture (as compared to the more profitable manufacturing sector), despite the scope for further productivity gains. This would lead to the emergence of some large countries and regions (such as China, South Korea, Indonesia and Middle East) as important and increasingly significant importers of agricultural products.

Continuing trends towards market-oriented policy reform and trade liberalisation

The implementation of the Uruguay Round Agreement on Agriculture (completed in 2000 by OECD countries and due by 2004 for developing countries) and further trade liberalisation in the framework of the new multilateral trade negotiations launched in Doha in 2001 is expected to lower barriers and increase the demand for food imports over the medium term. The pace of economic reform towards greater liberalisation of markets and integration into the global economy (in terms of trade, investment flows and currency convertibility) in many regions, such as the FSU and China should also have a significant impact on international trade over the medium term.


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3.3. Prospects per sector

This section is based on the projections35 of some prominent forecasting organisations (OECD, FAPRI) and the Commission’s internal assessment of possible development in world agricultural markets over the medium term. Its main objective is not to compare these different estimates or to give the most realistic levels of global supply, demand and trade of the different commodities at a given time, but only to assess the possible development of world markets over the next seven years. As a consequence, the absolute levels of the different variables considered must be interpreted with caution, and should be seen as providing an order of magnitude instead of a precise estimate of the level of these variables36.

3.3.1. Cereals

After the relatively low harvest of 2002 and 2003 the OECD and FAPRI foresee that the cereal sector will recover its production growth. Widespread economic growth and the expansion of the livestock sector are projected to combine to set the stage for a strengthening of world demand and maintaining a low stock-to-use ratio. This would also generate a broad based expansion of cereal trade, particularly in developing economies, driven by rising income, diet diversification and higher demand for livestock products and feeds. These factors would allow for a gradual, albeit moderate, price increase over the medium term.

Short-term developments

The short-term estimates from the International Grains Council (IGC37) for the 2004/05 marketing year indicate a wheat crop at 615 mio t, some 60 mio t higher than in 2003. The 2004 harvest would thus constitute a drastic change after many years of consecutive fall in world wheat production from the 1997 record of 610 mio t. Wheat production increased mainly in the EU and the FSU (notably Russia and Ukraine). In contrast significantly lower supply was found in the US. Coarse grain production rose sharply to 963 mio t, i.e. some 50 mio t higher than the 2003 harvest38.

World demand for wheat in 2004/05 resumed increasing after years of relative stagnation. Driven by food use in developing countries and feed usage in industrialised economies,

35 It is important to mention that these projections are not always directly comparable. They sometimes differ as regards their geographical coverage, the precise nature of the commodity concerned, the price variables used and the historical reference period. Despite these divergences, it is possible to point out some main trends that are presented hereafter.

36 These projections are not intended to forecast what the future will be, but instead describe what may happen under a specific set of assumptions and circumstances. The projections represent one plausible long-run scenario that presumes a continuation of the current agriculture and trade policies, with no major weather or political shocks, and with specific assumptions regarding the global macro-economy, international developments, productivity growth and other factors affecting food production, consumption and trade. It is obviously impossible to give a comprehensive view of all macroeconomic and policy assumptions adopted by each analyst. These can be found in the documents mentioned in references.

37 The short-term estimates from the IGC allow to throw some light on the most recent developments in the world cereal markets. In that context, they may display some differences with the medium and long-term projections available in the first quarter of 2004 from the OECD, FAPRI and USDA.

38 Higher coarse grain production would mainly result from a sharp recovery in barley and maize production that reached around 149 mio t and 663 mio t respectively.


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total wheat consumption would reach 606 mio t in 2004/05, i.e. an increase of around 6.5 mio t as compared to 2003/04. As production is forecast to exceed consumption for the first time in several years, the decrease in wheat stocks would be halted. Total wheat stocks would reach a level of 137.5 mio t in 2004/05 (i.e. a stock-to-use ratio of 22 %). Moreover, wheat stocks in the five major exporting countries would increase by 10 mio t to 50 mio t. Total wheat trade is set to slightly decrease in 2004/05 to 101 mio t, with the bulk of this decrease taking place in the US. Despite an increase of 18 mio t in 2004/05 in coarse grain consumption, these cereals would display a moderate growth in total ending stocks to 141 mio t (63 mio t in the five major exporters). Total coarse grain trade would slightly fall to 103 mio t.

Supply

World wheat production is forecast to increase substantially faster over the medium term than in the 1990s, albeit at a significantly lower rate than during the two decades before. Wheat availability would grow at a sustained pace of 1.9 % on annual average in the FAPRI and OECD forecasts (i.e. 90 mio t over the 2003-2011 period). Transition economies and developing countries are foreseen by all major organisations to account for most of the increase in production. Total wheat production would thus reach around 641 mio t in 2011 as compared to 609 mio t in 1997 (an historical high).

As in recent decades, most of the growth in production would be generated from higher yields as wheat area would only expand moderately. FAPRI and OECD estimate that wheat yields would rise by an anticipated 1.3 % on annual average. These wheat productivity growth rates represent a marked slowdown as compared to the previous decades39 but an improvement in comparison with the 1990s.

Graph 3.9 Outlook for world wheat production, 1995 – 2011 (mio t)

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700

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD FAPRI

World wheat area, which has been declining since its record level in 1996 in line with the market and policy environment in some countries, bounced back in 2004 and is projected to moderately expand by some 9 mio ha in the FAPRI outlook over the whole 2003-2011 period supported by firmer prices. However, land and water constraints in many countries

39 The slowdown in yield growth is attributed by some analysts to the lower quality of soils being brought into production and reduced budgets for research and development.


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(linked to urbanisation and climatic conditions) as well as sustained competition from other crops are expected to limit wheat area development over the medium term40.

If information on total coarse grain is not fully comparable as the definition of this group differs across projections, some important trends can be identified. The two major coarse grains, i.e. maize and barley, are projected to exhibit an outlook characterised by a development in production much stronger than over the most recent decade in the OECD projections. As for wheat, this organisation foresees that the majority of production growth would originate from yield growth, although scope would exist for a significant increase in total coarse grain area. FAPRI expects that the rise in coarse grain production would be mainly generated by increased productivity41, as total coarse grain area would only grow by slightly more than 2 mio ha from 2003/04 to 2011/12, the decline in barley area partially offsetting the projected increase in maize area. In the OECD projections, coarse grain production would rise by 130 mio t from 2003 to 2011 (i.e. 1.8 % per year). A growing demand for malting barley and sustained prices would support gains in barley production.

Graph 3.10 Outlook for world coarse grain production, 1995 – 2011 (mio t)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FAPRIOECD

Demand

After a marked slowdown in the 1990s, growth in wheat demand is forecast to gather pace over the 2004/05-2011/12 period and reach on average an annual rate ranging from 1 % (FAPRI) to 1.2 % (OECD), i.e. an increase of between 49 and around 57 mio t over the whole period. As most developed countries have already relatively high levels of per capita wheat consumption and only limited scope to increase it, developing countries would account for most of projected increase (although transition economies are also foreseen to show important gains). Nevertheless, if projected growth rates in global wheat use are significantly higher than those observed in the 1990s, they would still fall short of the levels recorded in the 1970s and 1980s.

40 It should be noted that land idling programmes in the EU and US have been set at or close to their maximum or reference base in most projections.

41 Over the next seven years, productivity growth in maize production is expected to reach 1.3 % per annum in the FAPRI projections, whereas barley yields would only rise by approximately just 0.7 % per year after the 5% increase of 2004.


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Total coarse grain consumption would follow a similar pattern with a growth supported by widespread economic growth and expanding meat production estimated on annual average between 1 % (FAPRI) and 1.3 % (OECD), i.e. an increase of between 73 and 101 mio t respectively over the forecast period. Demand for coarse grains would thus grow faster than during the 1980s and 1990s, but much slower than during the 1970s. According to the FAPRI projections this rise in demand would come from both maize and barley, due to the expansion of livestock production42, with an annual increase forecast of 0.9 % for both commodities (corresponding to 54 mio t of maize and 12 mio t of barley from 2003/04 to 2011/12).

This strong development in demand for cereals would be mainly derived from non-OECD (importing) countries, in relation to rising real incomes (and the associated gain in per capita meat consumption), population growth and continued urbanisation (changes in diet with increased meat demand and further diversification towards more wheat-based food). Developing countries –notably China, Latin America, North Africa and Middle East- and transition economies would exhibit significant growth in total cereal demand (for feed, food and industrial purposes) over the medium term as the consequences of the recent economic slowdown fade and their economies recover towards a more stable and sustainable path.

Trade

World cereal trade is projected to grow higher than in the 1980s and 1990s, boosted by rising demand and supply.

Table 3.1 Outlook for total imports in cereals, 2003 – 2011 (mio t)

USDA FAPRI USDA FAPRI USDA FAPRIWheat 96,1 74,5 122,2 106,3 26,1 31,7Coarse grains 101,7 91,6 127,9 104,5 26,2 12,9

Maize 76,9 73,2 99,3 84,0 22,4 10,8Barley 15,6 12,2 19,5 14,7 3,9 2,5

Total cereals 197,8 166,2 250,1 210,8 52,3 44,6FAPRI: net trade

2003 2011 Change in trade

FAPRI foresees a steady expansion in cereal trade from 2003/04 to 2011/12 ranging between 43 % for wheat (i.e. 32 mio t) and 14 % for coarse grains (i.e. 13 mio t). The OECD outlook expects net wheat exports from the OECD area to rise by 50 % over the forecast period.

When looking at the regional breakdown of cereal net imports, most analysts expect that developments in cereal imports would be mainly driven by income growth and its associated impact on per capita meat consumption, and urbanisation with its effect on dietary pattern in some lower and middle-income regions, including China and South East Asia, Latin America, North Africa and Middle East. In contrast, the role of the FSU, one of the world’s largest grain importers during the 1980s, is expected to remain limited over the medium term, with import demand at low levels over the projection period.

42 About two thirds of global coarse grain production are used as animal feed.


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Table 3.2 FAPRI outlook for wheat net imports for major importing countries, 2003–2011 (mio t)


Total Asia * 19,5 38,8 19,2

Japan 5,4 5,6 0,2

China 0,3 7,2 6,9Africa and M. East ** 29,1 39,4 10,2

North Africa *** 11 15 3,0* Japan, China, South Korea, Taiwan, India, Pakistan, Other Asia

** North Africa, Iran, Other Africa and Middle East

*** Morocco, Algeria, Tunisia, Egypt

Net cereal imports from China are forecast to increase over the forecast period: Chinese wheat net imports would grow between around 5 mio t (FAPRI) and 10 mio t (OECD) from 2003/04 to 2011/12. In spite of further yield increases, China’s wheat production is expected to stay systematically below domestic demand.

Besides China, other Asian countries that are expected to exhibit some increases in wheat import include the South East Asian countries, Pakistan and India. The latter, that has been a wild card player over the last years alternating as an importer or an exporter of wheat depending on domestic availability, is foreseen to become a steady net wheat importer by the FAPRI over the end of the projection period.

Cereal imports in Africa and the Middle East are expected to rise in response to sustained GDP expansion, high population growth and limited production potential. The FAPRI projections show a 14.7 mio t increase in net cereal imports from 2003/04 to 2011/12, although with different trends between wheat and coarse grains. Mexico and other Latin American countries are not expected to be a major source of import growth throughout the whole period after the sharp increase of the past few years.

Table 3.3 Outlook for coarse grains net imports for major importers, 2003 – 2011 (mio t)


USDA FAPRI USDA FAPRI USDA FAPRI

China -6.4 -5.9 5.4 7.8 11.8 13.7

Japan 19.7 19.3 19.1 17.5 -0.6 -1.8Mexico 10.1 9.6 16.7 12.8 6.6 3.2

North Afr. & M.East* 22.6 16.0 30.1 20.5 7.5 4.5

* FAPRI: Africa & M.East

The FAPRI expects that these prospects for higher world wheat trade would mainly benefit the EU, Ukraine, Russia and Argentina. Whereas Canada’s and Australia’s market share in the global wheat trade would broadly stagnate, the US’s would exhibit a decline owing to limited yield growth and increased domestic demand. The OECD anticipates similar trends, although more favourable for the US at the expense of the EU. Argentina increases its market share, benefiting from an expanding production through area and yield increases.

The OECD expects the FSU to remain a growing wheat producer and net exporter (for about 7 mio t) with Russia projected to continue to be a net wheat exporter of some 1-2 mio t over the medium term. The FAPRI anticipates similar trends, albeit more favourable for Russia’s net exports as they foresee a more modest pattern for wheat


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domestic demand. The uncertain recovery in the FSU’s livestock industry is expected by all agencies to generate moderate net exports of coarse grains over the next seven years. The latter would mostly concern barley and reach 2.4 mio t in the FAPRI baselines and less than 2 mio t in the OECD projections.

Graph 3.11 Outlook for wheat exports for the major wheat exporters, 1998 – 2011 (mio t)

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

USA Canada Australia Argentina EU-25 Source: OECD

Additional maize import demand is expected to be met by the US, Argentina and –to a lesser extent- South Africa, as China would turn net importer over the projection period. The EU is foreseen to capture a large part of the growth in barley trade at the expense of Canada and Australia.

Stocks and prices

After some strong rebuilding in 1997 and 1998, cereal stocks declined sharply over the last three years. Most organisations foresee that low cereal stock levels should continue to be a feature of cereal markets over the medium term as total stocks are projected to broadly remain at their 2003 low levels. Combined with a projected global increase in cereal demand, the stock-to-use ratio is expected to remain low and maintain an upward pressure on world cereal prices over the medium term.

Graph 3.12 Outlook for world wheat stocks, 1998 – 2011 (mio t)

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD FAPRI


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Graph 3.13 Outlook for world coarse grain stocks, 1995 – 2011 (mio t)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD FAPRI

After bottoming out by the turn of the century, cereal prices recovered slowly over the following three years, as supply was affected by severe climatic conditions and demand showed a marked recovery. Prices are expected to stay firm over the medium term as supply adjusts to a strengthening global demand. According to the OECD and FAPRI projections, prices of common wheat (HRW, fob US Gulf) are projected to range around 145 and 154 $/t in 2011/12 respectively (SRW wheat, that broadly corresponds to EU common wheat quality, would quote around 10 % below these HRW wheat price projections).

Graph 3.14 Outlook for world coarse grains prices, 1995 – 2011 ($/t)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Maize

Barley

FAPRI

OECD

Ref.: Maize: US yellow corn FOB Gulf; Barley: OECD-No.1 CW barley St Lawrence since 1995, Thunder Bay before; FAPRI

Canada feed.

Prices of coarse grains should follow a similar moderate trend, with maize prices (fob US Gulf) projected at about 107-114 $/t at the end of the period by the FAPRI and the OECD

After falling sharply from their peak in 1995/96, barley prices reached a new high in 2003/04 and are now projected to stabilise over the rest of the period, from 92 $/t in


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2003/04 (Canada feed) to 93 $/t in 2011/12 in the FAPRI projections and from 91 $/t in 2003/04 to 92 $/t in 2011/12 (St Lawrence reference43) in the OECD outlook.

3.3.2. Oilseeds and oilseed products

The medium-term prospects for the oilseed sector are expected to be relatively stable. After the high price 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. However, the vigorous growth in demand anticipated over the medium term, notably from developing countries, for oilseed and oilseed products -in the form of vegetable oil for human consumption and oilseed meal from an expanding livestock sector- is forecast to sustain further growth in the oilseed sector, gradually restore market balance and support prices by the end of the outlook horizon. Rape seed and sunflower seed are foreseen to benefit from more favourable long-term vegetable oil demand -in comparison to meal- and would accordingly exhibit a stronger price pattern than soybean.

Oilseeds and oilseed meals

Production

According to the OECD and FAPRI, total oilseed production is forecast to increase between 2003/04 and 2011/12 at an annual rate ranging between 2.8 % and 3 % (i.e. between 61 and 70 mio t), still slower in comparison to the 1990s. Oilseed production is expected to remain relatively concentrated as most of the increase in oilseed production would concern soybean and would take place in the US, Brazil and Argentina. Production growth is foreseen to result from both area expansion and yield improvement (except in the US where oilseed area is projected to remain close to its 2003/04 level).

Graph 3.15 Outlook for world oilseed production, 1995 – 2011 (mio t)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FAPRIOECD

43 The St Lawrence quotation for barley prices constitutes the appropriate reference for EU barley qualities and trade destinations.


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The continuous expansion in oilseed output would be supported in FAPRI projections by a strong increase in oilseed area, that would grow by 12.6 mio ha -split between around 91 % for soybean, 3 % for sunflower seed and 6 % for rape seed- to stand at 150 mio ha by 2011/12 and further yield gains that would reach 12 % over the 2003/04-2011/12 period (i.e. 1.4 % per annum on average). A very similar pattern for area and yield growth is predicted by the OECD. Yet, all projections appear to indicate a relative stabilisation in the oilseed area in the OECD zone (notably the US) in spite of relatively high world market prices throughout the projection period. Most of additional area allocated to oilseed production would be found in the low-cost exporting countries of South America (Brazil and Argentina).

In spite of the drop in oilseed production observed recently in several countries, short term and medium-term developments would exhibit a slow and gradual supply adjustment in the oilseed sector as a combination of policy and macro-economic44 factors is anticipated to make oilseed supply not fully responsive to market signals, notably in the US45. Many developing countries would benefit from the expansion in oilseed demand which allows for firmer market prices and are expected to support production developments through productivity gains and additional land, also taking into account the modest increases in the price of competing crops.

Graph 3.16 Outlook for world prices in the oilseed complex, 1995 – 2011 ($/t)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Vegetable oil

Oilseed

Oilseed meal

FAPRI OECD

Ref.: Oilseed CIF Rotterdam; oilseed meal CIF Rotterdam; vegetable oil Fob Rotterdam. Provisional OECD: average oilseeds;

FAPRI: soybean and soybean products.

Demand

The continued economic recovery over the medium term is foreseen to stimulate global demand for oilseeds and oilseed meals, notably in developing countries where income and population growth are likely to generate higher demand for livestock products, notably for poultry and pig meat. The shift in consumer preferences in these countries towards white meat and away from red meat, and the consequent large feed requirements

44 Mainly weak exchange rates in some major oilseed producing countries (especially in South America). 45 The importance of the US policy for the oilseed sector is foreseen to decline over the medium term as

markets are expected to stay firm.


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would become the main driving force underlying the strong growth in global oilseed meal consumption.

Graph 3.17 Outlook for world oilseed meal consumption, 1993 – 2011 (mio t)

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1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

FAPRIOECD

Oilseed meal consumption is estimated to rise by around 25 % over the whole period, i.e. between 38 and 44 mio t. This strong pattern constitutes nonetheless a slight slowdown as compared to the 1990s. Although the pace of growth is now slower in developed countries46 than in emerging economies, the former still make up for more than 50 % of world oilseed meal use. Moreover, OECD countries would still account for the largest share of oilseed and oilseed meal import demand during most of the period, especially the EU and Japan.

Trade

Total trade in oilseeds is anticipated to increase faster over the projection period than in the 1980s, but more slowly than in the 1990s. Trade growth in oilseed meals is foreseen to be relatively steady but still slower than over the last fifteen years. Soybean is forecast to account for most of the growth in oilseed and oilseed meal trade over the medium term. According to the FAPRI projections, soybean trade would rise at annual rates of around 4.4 % over the next seven years, whereas soybean meal imports would grow by around 3.7 % per year.

Table 3.4 Outlook for total imports in soybean and soybean products, 2003 - 2011 (mio t)

2003 2011


Soya bean 67,6 60,7 91,1 85,5 23,5 24,8Soya bean meal 48,5 43,0 57,2 57,3 8,7 14,3

Soya bean oil 9,9 8,5 12,7 11,5 2,8 3,1

USDA figures include intra-FSU and intra-EU trade. FAPRI: net trade

Change in trade

China’s domestic grain policy and recent shift towards maximising its large domestic crushing industry should translate into greater imports of oilseeds (rather than oilseed

46 The OECD markets are starting to mature in contrast to those of developing countries that now represent more than 40% of world consumption of oilseeds and over 65 % of vegetable oils.


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meals and oil). However, lower tariffs on soybean oil –following China’s WTO accession- are projected by FAPRI to favour oil imports, thus exerting some pressure on domestic crush margins and hindering the development of the crushing industry. Driven by strong oil consumption and increased demand for oilseed meals from the livestock industry (mainly for pig and poultry), China is foreseen by the FAPRI and the OECD to account for 70 % and 40 % respectively of the world’s growth in soybean imports over the next seven years.

Whereas the FAPRI expects China to nearly double its current level of soybean imports by 2011/12 (from 22.8 mio t in 2003/04 to 40.2 mio t in 2011/12), the OECD projections indicate a more moderate pattern with an additional 9.7 mio t of soybeans imported by 2011/12.

The FAPRI and OECD baselines exhibit modest developments for EU imports. The OECD and FAPRI baselines project a small increase of less than 1 mio t for oilseeds and between 2 and 3 mio t for oilseed meals. Besides the EU and China, the medium-term outlook for global oilseed import demand is projected to remain dominated by Japan, South East Asia and Mexico.

Table 3.5 Outlook for soybean net imports for major importing countries, 2003-2011 (mio t)



European Union* 18.6 18.3 17.8 19.0 -0.8 0.8

Japan* 5.2 5.2 5.3 5.5 0.1 0.4

China 22.0 22.8 38.7 40.3 16.7 17.5

South Korea* 1.6 1.6 1.9 1.7 0.3 0.2

Mexico* 4.4 - 6.8 - 2.4 -Taiwan* 2.3 2.4 2.6 2.7 0.3 0.4

* 'USDA: gross trade figures; including intra-EU trade.

On the export side, Brazil, Argentina and the US are forecast to benefit from this growth in soybean and soybean meal trade, while Canada would maintain its predominance in the rape seed market. If the US are expected to capture a large share of the additional import demand in the very short term as a favourable oilseed policy maintains US domestic production at high levels relative to other major exporters, firmer prices in ensuing years help Brazil and, to a lesser extent, Argentina to increase supply and enhance their export competitiveness. Brazil is projected in the FAPRI baseline to continue to expand its soybean production by nearly 50 % by 2011/12 through mainly increased area (38 %) but also higher yields (7 %). This fast output expansion would be accompanied by a growing processing infrastructure allowing also for an increase in oilseed meal production. By the end of the decade, Brazil is forecast to account for the largest share of the projected oilseed trade expansion and would capture more than 10 % in percentage point of US export market share.

If global import demand in soybean meal trade is forecast in the long run to be mainly driven by the EU and South East Asia (notably South Korea), a growing share of this demand would be widespread among many developing countries (from Africa and Latin America) and transition countries. According to the FAPRI outlook, Brazil and Argentina would capture 75 % of the expansion in world soybean meal trade between 2003/04 to 2011/12.


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Prices

Oilseed prices are foreseen to display a certain stability over the next seven years supported by long-term demand growth. This price stabilisation at moderate level would result from increased availabilities due to sustained yield growth, strong production potential in South America and the continuation of a policy favouring oilseed production in the US. Oilseed meal prices are expected to weaken in the short term after the peak of 2003 on account of strong production growth, before stabilising over the rest of the period.

Both FAPRI and the OECD foresee that prices of soybean and soybean products would decrease somewhat in 2004/05 after the peak of 2003. Prices are then expected to remain stable over the rest of the outlook period, with soybean and soybean meal prices reaching 241 $/t and 202 $/t respectively by 2011/12 according to FAPRI. The OECD outlook displays relatively similar price trends, although they relate to average oilseed prices (i.e. including rape seed and sunflower seed prices), with oilseed and oilseed meal prices at 253 $/t and 179 $/t respectively by 2011/12.

According to the FAPRI and OECD projections, rape seed and sunflower seed prices are foreseen to benefit from more favourable long-term vegetable oil demand -in comparison to meal- and would accordingly exhibit a stronger pattern than soybean prices. After a short-term drop associated with high world production stimulated by the recent price increases, rape seed and sunflower prices would stabilise at around 250 $/t and 260 $/t respectively in the FAPRI projections.

Vegetable oils

Vegetable oil has been the agricultural commodity with one of the most significant and continued growth rates over the last thirty years. Increasing income prospects are expected to maintain vegetable oil on its expansionary path, albeit at a more modest pace. The OECD projects that growth in vegetable oil consumption would average 4.1 % per year over the medium term. Most of this additional consumption (of nearly 20 mio t) is expected to be found in Asia and in Latin America, whereas slower growth is anticipated in Western Europe, the US and Japan.

Graph 3.18 Outlook for world oilseed oil and palm oil consumption, 1995 – 2011 (mio t)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FAPRIOECD


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Income and population increases in China and India, which together account for more than a third of total world population, are expected to drive trade growth in vegetable oil from 2003/04 to 2011/12. Palm oil and soybean oil should absorb the largest share of additional consumption and trade. Palm oil trade is forecast to expand by 5.4 mio t (i.e. 3.4 % per year over the 2003/04-2011/12 period as compared to an annual average growth of about 9 % in the 1990s). China, the EU and India would remain the major palm oil importing countries. Malaysia and Indonesia constitute the two largest suppliers of palm oil (accounting for more than 50 % of world production). These two countries are forecast to increase domestic supply of palm oil by 6.6 mio t over the next seven years (or nearly 30 %).

Growth in world soybean oil trade is projected by the FAPRI to slow on annual average to 3.9 % respectively over the next seven years, i.e. a much lower rate than those achieved in the 1980s and the 1990s, as additional demand stimulates domestic production in importing countries. Notwithstanding the diverse composition of global import demand, Chinese net imports, totalling more than 1.6 mio t by 2011/12, and, to a lesser extent, Indian imports would constitute the main driving force behind the growth in soybean oil trade.

Graph 3.19 Outlook for world oilseed oil and palm oil trade, 1998 – 2011 (mio t)

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5

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Soya bean oil rape seed oil sunflower oil palm oil

Source: FAPRI.

The stronger growth in oilseed oil consumption and trade relative to meals would entail higher oil prices, which is forecast to create incentives for increased production in high-oil content oilseeds (such as rape and sunflower seeds in the EU as compared to soybeans)47. The FAPRI projections provide for medium-term prospects of vegetable oil prices declining to 481 $/t (soybean oil) after the high level of 2003 (630 $/t). By contrast, the OECD average price of oilseed oils and palm oil is projected to increase over the medium term to reach 595 $/t by 2011/12 (fob Rotterdam). After the high level reached in 2003, palm oil prices would display a similar pattern with prices falling to a

47 In the FAPRI projections, demand for rape seed and sunflower oil is forecast to grow over the medium term by 11 % and 21 % respectively, in line with rising incomes and population, notably in China, India and other developing countries. After recovering in the short term from a sharp drop in 2001/02, trade in rape seed oil is foreseen to display modest growth over the medium term (+11%) while sunflower oil trade is expected to increase by nearly 30% over the forecast period.


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low in 2011/12 at around 409 $/t cif Rotterdam48. However, the strong dependence of the global vegetable oil market on imports from developing countries makes these trade and price projections very sensitive to the macro-economic outlook in these countries.

3.3.3. Meat

The medium-term perspectives for meat focus on beef, pig meat and poultry meat. Most international organisations provide an outlook characterised by growing production, consumption and trade as well as world meat prices showing moderate strength, with sometimes diverging features. 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.

Table 3.6 Outlook for world meat imports, 2003 – 2011 (’000 t cwe)



Beef 6088 3708 7091 4684 1003 976

Pork 3981 3064 5079 3580 1098 516Poultry 6230 4752 7536 5728 1306 976

FAPRI net trade

Graph 3.20 Outlook for world meat prices, 1995 – 2011 ($/t lw)

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2200

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FAPRI OECD

Beef

Poultry meat

Pig meat

These projections rely heavily on the assumption that the recovery from the recent economic downturn will turn into sustained economic growth over the medium term. They also assume that disruptions in world meat markets caused by sanitary issues like those that have affected the meat markets in Japan, South East Asia, Brazil, Argentina,

48 Owing to their lower cost structure, major producing countries of palm oil would be relatively less affected by the low price level foreseen in the medium term.


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Canada, the US and the EU over the most recent years, will not occur over the projection period. The occurrence of sanitary and/or food safety crises could significantly alter future trends in international meat markets by increasing market segmentation and limiting market access for some potential meat exporters.

Beef and veal

The animal disease outbreak of the last few years -notably in the EU and Argentina- together with the most recent appearance of BSE in Canada and in the US reinforced the traditional split between the Pacific and the Atlantic markets, with major market and policy consequences.

According to the OECD and FAPRI projections, world beef production is foreseen to increase strongly over the 2003-2011 period. The OECD and FAPRI anticipate an annual average growth ranging between 0.6 % for the OECD zone to 1.6 % for the whole world. Contrary to the non-OECD area, developed countries would only display an overall moderate beef production increase. Nevertheless, at country level substantial changes in beef production are projected by the OECD. They include strong rises in Australia and Canada and a very modest development in US production. As regards prospects for the US beef sector the FAPRI projections foresee a moderate expansion in the next US cattle cycle after a marked decline through 2004.

As regards the non-OECD zone, all projections show a steady increase in beef production in Brazil (at more than 3.2 % per year on average over the next seven years), in Argentina (3 % on annual average) and China (at an annual growth rate of 2.8%). Prospects for Russia are rather mixed as the OECD projects a 10 % increase over the next seven years whereas the FAPRI foresees a decrease of 6.6%.

Global beef consumption is expected to rise gradually by around 1.6 % per year on average in the FAPRI projections, in relation to income growth notably in emerging economies. In many developed countries, per capita consumption of beef is expected to stagnate or to fall, since consumers continue to substitute pig meat and poultry meat for beef.

Graph 3.21 Outlook for world beef production, 1995 – 2011 (mio t cwe)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FAPRIOECD

Ref.: OECD – data for OECD zone; FAPRI: data for selected countries.


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In contrast, after a short-term decline at the end of the nineties linked to the deterioration of the economic situation, beef demand is likely to increase over the projection horizon in Asian countries (mainly China, India, Indonesia, Japan and Thailand) and to a lesser extent in Latin America (Brazil, Argentina and Mexico). In Asia, beef consumption should increase gradually from relatively low levels, in response to population growth, economic development and higher disposable income that should lead to changes in food habits toward more western style.

The OECD does not expect that the growth in beef demand in China will generate significant import growth as they foresee that most additional beef consumption would be met by higher domestic production owing to China’s trade policy. On the contrary, the FAPRI anticipates an increase in China’s net beef imports towards the end of the projection period (223 000 t) on account of some cuts in Chinese high meat tariffs in the wake of China’s accession to the WTO. Moreover, additional beef consumption is projected to create additional market outlets for major beef exporters as limitations on feed production capacity (in terms of land and forage area) in many Asian countries are projected to constrain domestic production growth.

Table 3.7 Outlook for beef net imports for major importing countries 2003 – 2011 (’000 t)



Russia 700 691 910 749 210 58

Japan 825 825 1000 1115 175 290

South Korea 430 430 500 493 70 63

Philippines 120 120 198 224 78 104

China - -13 - 210 - 223

USA 1293 125 1270 -48 -23 -173Mexico 500 488 764 728 264 240

USDA = gross imports

The FAPRI predicts that total trade in beef should increase by 1 mio t (i.e. some 26 %) over the 2003-2011 period. Much of the growth in imports is expected to come from Asia, Egypt and Russia. Beef imports from Asia (in particular Japan, South Korea, Taiwan and the Philippines) are expected to continue growing over the next decade. Beef imports in Japan are projected to increase gradually over the medium term when the recovery in consumption after the BSE scare outpaces domestic production growth. The OECD projections show that the lack of efficiency and competitiveness of Russia’s livestock sector would not enable domestic production to fully respond to the increasing domestic consumption, thus generating additional imports. FAPRI foresees that the gradual increase in Russian beef imports would be linked to the slow and modest recovery in beef consumption over the medium term and to the declining domestic production.

Rising import demand is expected to mainly benefit to the US by the end of the period according to the FAPRI projections49. Other low-cost producers such as Brazil and

49 With a 30 % rise in US exports by 2011, FAPRI expects the US to become the world’s largest exporter and net exporter. The OECD foresees similar developments for US exports, with the US becoming net exporter by 2009. Both projections assume the BSE trade disruption to be short-lived and only affect 2004.


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Argentina would also exhibit export gains in the short run thanks to substantial and timely herd rebuilding, whereas Australia and New Zealand would maintain or even lose some market share.

As in last year’s baseline, the OECD outlook displays a different picture with Canada and Australia projected to expand their production by 15 and 20 % respectively and therefore their market share in the world beef market.

If some factors may be expected to exert some downward pressure on beef prices (including the changing structure of the world beef market, the emergence of new major exporters and the increasing competition from other meats), a sustained import demand -notably in the Pacific market- combined with limited growth in beef production should contribute to support market price developments over the medium term.

Pig meat

The pig meat sector is foreseen by all agencies to display a continuing increase in both production and consumption, driven by population and income growth in Asia and Latin America. After having overcome a drop linked to lower availability, weaker economies and animal health crises, the pig meat sector is expected to be characterised by a renewed and marked expansion in world trade. However, strong competition between exporters, sustained productivity growth and large supplies should prevent pig meat prices to rise substantially.

World pig meat production is projected by the OECD and FAPRI to continue to increase moderately over the medium term by between 6 and 14 %, i.e. a slower rate than in previous decades. The pig meat sector recently displayed an expansion of productive capacity and increased productivity. Higher concentration of production in some exporting countries is projected to raise productivity further and reduce production costs. However, pig meat expansion would remain constrained in some regions by greater competition from competitively priced poultry meat as well as by environmental and animal welfare standards.

Graph 3.22 Outlook for world pig meat consumption, 1995 – 2011 (mio t cwe)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FAPRIOECD

Ref.: OECD: data for OECD zone; FAPRI: data for selected countries.

According to FAPRI and OECD projections, most of world production growth (i.e. between 6 and 8 mio t over the next seven years) is likely to occur in China (for more


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than 60 % of total world growth for FAPRI). The prospects for production expansion in the other major pig meat producing countries differ widely across projections. Nevertheless, Brazil, Mexico, Canada and Russia are all foreseen to show significant production increase (ranging between 10-20%, 26-17%, 15-22% and 15-22% respectively in the OECD and FAPRI projections). Pig meat production in Japan is projected to decline, but at a slower rate than in the previous decade.

The mature pig meat markets in the EU, US and Canada are expected to record moderate demand growth in line with income prospects and population. Pig meat consumption in Japan, after the increase induced by the BSE crisis in the past few years is set to stagnate over the projection period. Slow or no consumption growth in these countries would be partially compensated by a stronger increase in Asia and Latin America (notably in China and to a lesser extent Mexico and Brazil where per capita pig meat consumption is set to rise by 13 %, 8 % and 7 % respectively between 2003 and 2011 in the FAPRI projections), driven by population growth, low price expectations and the improvement in the general economic conditions.

Table 3.8 Outlook for pigmeat net imports for major importing countries, 2003–2011 (‘000 t cwe)



Japan 1150 1150 1276 1297 126 147Russia 600 599 606 460 6 -139

South Korea 155 141 191 149 36 8

Mexico 335 275 517 342 182 67China Mainland 56 -244 137 67 81 311

Hong Kong 280 280 348 339 68 59


Global trade in pig meat is forecast to increase further over the medium term with average annual growth rates ranging from 2% in the FAPRI projections to 3.1 % in the USDA outlook (i.e. by 520 000 t and 1 100 000 t of additional imports from 2003 to 2011). Over the forecasting horizon, growth in pig meat trade would be mainly driven by strong demand from the major importing countries of Asia (notably Japan, mainland China, Hong-Kong), Mexico and Russia.

Prospects for the pig meat sector in Russia are still difficult to assess and are reflected both on the supply side, where the pace of production recovery is foreseen to be closely linked to economic reforms, and on the demand side, with consumption growth associated with a still uncertain economic outlook and income distribution issues. The introduction of quotas on meat imports has introduced another distorting element in these projections. Notwithstanding greater availability of cheap feed grains, all agencies foresee a contraction of Russia’s import demand for pig meat. Domestic production, which is still hindered by inefficiencies associated with structural problems, insufficient capital investment and low infrastructure and management is expected however to benefit from slightly higher domestic prices due to the improved border protection and growing domestic demand as economic prospects improve.

Japan would remain the largest pig meat importer over the outlook horizon, with net imports amounting to 1.3 mio t. In spite of a strong short-term increase in the wake of the BSE scare, import growth should significantly decline as compared to the previous decade owing to the slowdown in the contraction of domestic output. According to all


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agencies, income and population growth should boost Mexico’s import demand, which is set to increase by 67, 100 and 182 thousand t according to the FAPRI, OCDE and USDA respectively.

The USDA and FAPRI foresee that the increasingly export-oriented and low-cost producing pig meat industry of Brazil and Canada should capture most of the sustained rise in world pig meat trade. Brazil competitiveness is foreseen by FAPRI to benefit from further improvement in productivity (breeding and feeding programmes), domestic fiscal policies, favourable conditions for credit and investment in infrastructure, and a weakening currency. Significant restructuring, through concentration and vertical integration, and improved productivity in the production, marketing and processing sectors of the pork industry is expected to continue to boost Canadian competitiveness. Prospects are more diverging for the EU, the world’s largest pig meat exporter that is expected to show sustained export growth according to USDA (+36 %) and the OECD (+21 %) while FAPRI expects a decrease of more than 20 %. The US is projected to increase its exports (with expected increases ranging from 114 000 t according to FAPRI to 226 000 t in the OECD projections) but its net exporting position is set to slightly decrease over the projection period.

Continued efficiency and productivity gains in feeding practices, stiffer competition from other meats and the swift emergence of low-cost exporting countries supported by weak currency should prevent pig meat prices to rise substantially over the medium term.

Poultry

Over the 2003-2011 period, the outlook for poultry meat is projected to remain favourable, as all market fundamentals would demonstrate solid growth. In the past few years poultry meat has generally benefited from the BSE and FMD outbreaks. However, the widespread Avian Flu epidemic of 2003 has completely disrupted production and trade in many areas of the world, notably South East Asia but also the US and Canada. World production and consumption are forecast to continue to expand over the medium term at rates above those for beef and pig meat, albeit somewhat lower than during the 1990s. This expansion of the poultry meat sector would remain mainly driven by its low production cost (relative to beef and pig meat) and consumer preferences in many parts of the world (in line with changing diets towards western lifestyle and health considerations).

Graph 3.23 Outlook for world poultry meat consumption, 1995 – 2011 (mio t cwe)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FAPRIOECD

Ref.: OECD: data for OECD zone; FAPRI: data for selected countries.


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Poultry meat production and consumption are predicted by FAPRI to increase sharply over the next seven years (by more than 20 %, i.e. an average annual growth of approximately 2.5 %). Production in the large producer countries (such as the US, China, EU, Brazil and Mexico) should continue to expand as domestic and global demand increase. Overall, most of the growth in production and consumption is to be found in the developing countries.

In most countries, poultry meat is foreseen to increase its share of meat consumption over the medium term driven by its price advantage relative to beef and pig meat, rising incomes and changing food demand pattern in many countries. Therefore, in many countries with a relatively low per capita consumption (such as China, Mexico and Russia), the expected improvement of the economic situation is anticipated to favour first the poultry sector. In addition, consumption should also increase, though more moderately, in countries with a relatively high per capita consumption due to a continuing shift in consumer preferences50.

Since production in many of the countries with expected rapid growth in consumption (China, Middle East etc.) is only projected to expand at slower rates, increased demand is expected to generate a strong rise in trade (estimated at between 1.5 % and 2.4 % on annual average by the USDA and the FAPRI respectively over the 2003-2011 period). Most of the growth in trade is likely to take place in poultry cuts as opposed to whole birds.

Table 3.9 Outlook for poultry meat net imports for major importing countries, 2003–2011 (‘000 t)



Russia 1260 139 1435 154 175 15

China mainland 415 -5 469 359 54 364

Hong Kong 170 170 196 186 26 16

Mexico 435 279 526 329 91 50Japan 700 697 782 880 82 183

Saudi Arabia 390 370 426 545 36 175South Korea 98 88 147 124 49 36


China is expected to demonstrate a sustained rise in consumption which would outpace the growth in production, generating an increase in import volumes. Net imports are foreseen at around 120 000 t in the USDA outlook by the end of the projection period, whereas the FAPRI and the OECD foresee a stronger pattern for Chinese imports over the medium term (at 360 000 t and 370 000 t respectively). Chinese imports would reflect consumer preferences for various low-value poultry products (notably for chicken feet, wings and offal) which are complementary to the demand for poultry meat products in many countries. Further trade liberalisation is foreseen by all three agencies to boost net

50 A strong rise in US per capita consumption of poultry meat ranging between 8 % and 11 % is projected by the OECD, FAPRI and the USDA for the next seven years. Chicken consumption would approach and sometimes exceed consumption of the traditional meat product, such as beef in the American continent.


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imports from Mexico, expected to increase by between 18 and 30 % throughout the forecast period.

Since the introduction of quotas on meat imports in 2003 all agencies assume a stabilisation of Russian poultry imports at around the quota level of 1 050 000 t. The steady increase in meat consumption is projected to be met by increased production, which would display rapid growth in spite of the lack of investment and remaining inefficiencies. The FAPRI and OECD foresee higher production of some 360-380 000 t by 2011 to satisfy a solid domestic demand which cut out from the possibility of additional import since the introduction of import quotas.

All organisations foresee that Brazil, the US and Thailand would strongly benefit from this projected rise in poultry meat trade. Brazil would also gain from currency depreciation which is anticipated to slightly enhance Brazil’s share of the world market. US exports would continue to benefit from a competitive production structure through vertical integration, high technology levels, access to low-cost feed products and efficient transport and storage infrastructure. Competition from these countries is anticipated to reduce export growth prospects for the other major exporters, such as the EU.

Poultry prices are expected to rise only moderately over the medium term, as strong demand stimulates supply worldwide. Furthermore, the emergence of low-cost exporters combined with the rapid growth in poultry meat production supported by moderate feed prices, continuous structural changes of the poultry sector and further productivity gains should combine to keep pressure on world prices and moderate future price trends over the next seven years.

3.3.4. Milk and dairy products

This outlook for the world milk and dairy products market focuses on milk production in some selected countries and on some dairy products, notably butter, cheese and milk powder, since only limited quantities of fresh milk are traded. Compared to other agricultural products, projections for the dairy sector are more limited as only few organisations establish long-term prospects for this sector51.

According to the FAPRI and OECD projections, 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). Demand growth is projected to be strongest in the non-OECD zone, notably in Asia, Latin America and the Middle East. Stronger demand would trigger further price rises for dairy products over the medium term. In many developed countries dairy products constitute a fundamental component of the diet with relatively high consumption levels. Accordingly, no major changes in the demand for dairy products (with the noticeable exception of cheese) are foreseen in these regions. In contrast, 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.

51 The USDA for example focuses only on the US dairy market in its most recent publication on long-term projections.


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A significant part of the increased demand in developing countries is forecast to be met by domestic production. If some countries of the non-OECD zone (in particular from South America) may become net exporter, most developing countries would however remain net importers of dairy products with most imports originating from developed countries.

The OECD and FAPRI projections depict a medium-term situation in which traditional major exporters, such as New Zealand, Australia and to a lesser extent the EU will keep dominating the world market for dairy products thanks to technology-driven improved efficiency, geographical proximity to growing import markets as well as domestic policy changes (notably in the EU from 2004 onwards).

As increased demand for dairy products would be mainly driven by improved income levels, these medium-term projections appear highly dependent on the future economic and financial situation of many developing countries. In particular, any economic, financial or policy developments that would alter the pace of growth in Russia could have major implications for future developments in world trade volume and prices given Russian share in the world dairy market.

Milk production

World milk production is foreseen by the FAPRI and the OECD to grow at the sustained pace of 1 % and 1.9 % on annual average respectively over the 2003-2011 period. After a relative slow down in 2003-2004 estimated by the OECD and FAPRI in some major producing countries (notably the US, New Zealand and Australia), milk production would resume expanding supported by increasing demand and price rises in a number of countries, mainly outside the OECD area and in those OECD countries not subject to production quotas.

The OECD baseline shows an increase in world milk production of 94 mio t (+16 %) from 2003 to 2011. Most of additional milk production would originate from the non-OECD area where milk output would grow by more than 27 % over the medium term. The greatest increase in milk output is forecast in China, India, Brazil and Argentina. As a consequence, the share of developing countries in world milk production is expected to rise significantly52.

The OECD and the FAPRI projections have a different appreciation of the growth prospects for Russia’s dairy sector. The FAPRI outlook provides for a 14 % increase in Russian milk production thanks to improved productivity that would outweigh the impact of a slightly declining dairy herd. The OECD projections suggest a faster growth for the Russian milk sector thanks to higher investment in the sector and further structural adjustment.

52 The OECD predicts that the non-OECD share of world milk production would reach around 51 % by the end of the projection period. One consequence is that the share of milk from animals other than cows is also forecast to expand (a significant share of milk produced in developing countries comes from buffaloes, goats, sheep and camels).


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Graph 3.24 Outlook for world milk production, 1995 – 2011 (mio t)

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600

700

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FAPRIOECD

Ref.: OECD: data for total world; FAPRI: data for selected countries.

The OECD foresees that milk production in the OECD area should grow at a similar pace to that during the 1990s. Yet, the share in world output from developed countries operating under constraining dairy policies, in particular production quotas, would shrink. EU production would only increase when higher milk quotas are implemented in 2006. Australia and New Zealand, two major exporters of dairy products, are anticipated to benefit from increased demand in Asia to substantially increase milk production, albeit at a slower pace than in the 1990s. Whereas the OECD foresees that the dynamic expansion of milk production will continue over the medium term at the substantial rate of 12 % and 30 % respectively for these two countries, the FAPRI outlook appears more moderate with increases limited to 15 % and 18 % respectively.

US milk production over the 2003-2011 period is forecast to increase by 6 % according to FAPRI and 12 % for the OECD, driven by productivity growth (associated with better management, improved genetic potential and cheap feed grains).

Graph 3.25 Outlook for world milk production, annual changes, 2002 – 2011 (mio t)

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0

5

10

15

20

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

EU25 AUS+NZ CAN+US ARG+BRA+MEX India Russia+Ukraine China Source: FAPRI (selected countries)


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Dairy products

As fluid milk consumption should only exhibit a modest growth over the medium term, most of the milk production increase would be processed into dairy products. Global dairy consumption in the OECD area is not projected to demonstrate significant changes over the 2003-2011 period according to the OECD baseline. However, differentiated patterns are provided across the various types and forms of dairy products with, in particular, a strong increase in cheese (+13.7 %, i.e. +9.6 % per capita) and whole milk powder (+13 %, i.e. +9 % per capita), a mere stagnation in the consumption of butter (+3.8 %, i.e. 0 % per capita) and a marked decline for skimmed milk powder (0 %, i.e. –3.8 % per capita).

On the contrary, the non-OECD area is expected to demonstrate marked increases in the overall consumption of dairy products (notably in Asia, Latin America and the Middle East). According to the OECD outlook, solid growth in dairy products consumption should concern all products, albeit to a lesser extent for skimmed milk powder. Whereas SMP demand would rise by 20 % (i.e. +8.3 % per capita) from 2003 to 2011, consumption of WMP, butter and cheese would exhibit a stronger pattern with growth of more than 25 % (i.e. more than 12 % per capita) from 2003 to 201153. Growing population, improved economic conditions, increasing urbanisation and a shift towards “western” diet would constitute in these countries the main factors underpinning the rise in dairy products consumption.

The structural change in world trade of dairy products from bulk dairy products (SMP and butter) towards higher value-added products (such as cheese and whey powder) that has been observed since the mid 1980s would seem to consolidate over the next seven years according to the OECD outlook (although trade in butter and SMP would still remain substantial in terms of quantities involved). Technological advances are also projected to stimulate a rapid development in milk components.

Table 3.10 Outlook for total imports for major dairy products, 2003 – 2011 (’000 t)


OECD FAPRI OECD FAPRI OECD FAPRI

Butter 615 720 549 692 -66 -28

SMP 756 1049 698 1136 -58 87

WMP 1225 1377 1436 1549 211 172Cheese 416 934 277 942 -139 8

OECD: Net imports from the non-OECD zone; FAPRI: net trade from major countries.

OECD projections indicate a sustained growth in global world consumption of cheese in the OECD projections with a cumulative 16 % growth over the 2003-2011 period (i.e. 1.9 % per year on average). Most of the increase in consumption (around 65 %) would take place in OECD countries, which accounted for more than 75 % of total world consumption in 2003, and be met by increased domestic supply. The US and the EU would account for 85 % of this additional cheese demand in OECD countries.

53 The OECD outlook suggests that cheese, WMP and butter consumption would increase in the non-OECD zone by 24.2 %, 25.3 % and 28.9 % from 2003 to 2011 respectively (i.e. 12.2 %, 13.3 % and 16.6 % per capita).


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Graph 3.26 Outlook for world cheese per capita consumption, 1995 – 2011 (kg/capita)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110,0

0,2

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NZ EU AUS CAN USA Non-OECD (right axis) Source: OECD

Total cheese exports and imports of the OECD countries are expected to rise by 17 % and 27 % respectively over the 2003-2011 period.

According to the OECD, net imports of cheese from the non-OECD area would decrease by 33 % or 4.8 % annually until 2011 as more domestic milk is channelled to the production of cheese. The OECD outlook shows that increasing cheese consumption in Japan would be satisfied by both increased imports (+17%) largely from Australia and New Zealand, and growing production (+18%). The increasing demand projected in Latin America should be supplied either by domestic production or by the expanding production in Argentina. After their sharp drop in 1998 and 1999 in the wake of the economic turmoil, Russian imports are anticipated to grow at a rather sustained pace over the medium term driven by an expanding consumption and modest increases in domestic production. Whereas the OECD baseline anticipates net cheese imports from Russia at 310 000 t in 2011, FAPRI displays net imports reaching 209 000 t by 2011. Most of these additional imports would be supplied by the EU.

World butter production and consumption are forecast to increase by 2.1 % (OECD) on annual average over the next seven years. Nevertheless, the OECD foresees that all the growth in butter production and consumption would take place in the non-OECD area, since they would remain fairly stable in the OECD zone. In the non-OECD area, total butter consumption is likely to increase by 29 % from 2003 to 2011 (i.e. 3.2 % per year).

Since the growth in domestic production is projected to be outweighed by the expansion of demand in some of these countries (in particular Russia and Mexico), scope for additional exports from the main OECD producer countries may be expected. The bulk of the growth in butter trade is foreseen to be captured by the New Zealand, Australia and, to a lesser extent, the EU. These perspectives for the world butter market would however remain strongly dependent on the Russian market. The FAPRI and OECD projections anticipate a rather modest import growth from this country by historical standards (less than 20 000 t increase from 2003 to 2011). Yet, given Russian’s share of the world market in the most recent years, any change in import levels from Russia could have a significant impact on the future development in the size and price of the world butter market.


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Graph 3.27 Outlook for world butter per capita consumption, 1995 – 2011 (kg/capita)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110,0

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The OECD baseline provides for sustained growth in world WMP consumption by 2.6 % per annum on average while SMP would exhibit a more modest growth pattern of 0.9 % per year, owing to the projected decline in SMP demand in the OECD area54. If the future perspectives for whole milk powder trade are broadly consistent between agencies in showing a steady rise in trade (ranging between 12 and 14 %), the magnitude and pace of SMP trade differs significantly across the FAPRI and OECD projections (increase of 8% over the next seven years in FAPRI against no change in the OECD projections).

Developing countries of Asia, Latin America and Africa would demonstrate a sharp reduction in their overall growth in import demand as total SMP imports from these countries would only increase by some 60 000 t by 2011. After several years of continuous decline, SMP imports from Japan and Mexico would increase slightly. EU SMP exports would decrease over the medium term, whereas the US –after an initial releasing of public stocks- would exhibit a slightly declining trend in SMP exports. Greater profitability in other dairy markets (cheese and WMP) is foreseen to constrain the development in export supply from other traditional exporters (such as New Zealand and Australia). Additional WMP import demand would be broadly spread over the non-OECD area and mainly draw on additional exports from New Zealand (60 % of the total growth), Australia and Argentina. By contrast, EU exports would stagnate at 470 000 t over the medium term.

If the OECD foresees that SMP exports from the OECD zone would remain rather stable throughout the 2003-2011 period, New Zealand and Australia would show a strong increase (by more than 35 %), capturing the lion’s share of the reduced EU’s exports (-50 % over the 2003-2011 period). Total WMP exports from the OECD area are expected to continue growing over the medium term. The growing demand in Latin America, North Africa and Asia is projected to outpace domestic production potential and to generate a significant expansion in trade between the OECD area and the rest of the world (44 % from 2003 to 2011). Like in the FAPRI projections, New Zealand and Australia would capture the bulk of the additional trade to the detriment of the EU.

54 Additional WMP consumption would be used for milk reconstitution, displacing SMP and condensed milk. In turn, SMP would also face competition from whey powder in animal feed and food processing.


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Dairy prices

A stronger economic growth and a strengthening demand for dairy products led to a rapid recovery in world market prices of dairy products. Over the medium term, however, the rapid expansion of milk production in low-cost producing regions (such as Oceania) is expected to moderate this price pattern.

Cheese prices would display the strongest pattern among the prices of dairy products. After a short-term weakening, they would recover somewhat supported by the steady rise in global consumption.

Graph 3.28 Outlook for world market prices for butter and cheese, 1995 – 2011 ($/t)

1100

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2100

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Cheese

Butter

OECD

FAPRI

Ref.: Cheese: FOB export price cheddar cheese 40lb blocks, Northern Europe; butter: FOB export price Northern Europe.

In contrast, the pace of price increase is forecast to be more modest for milk powder, notably for SMP, which should face greater competition from WMP and whey powder. Having reached high levels in 2000 and 2001, milk powder prices fell in 2002 before recovering from 2003 onwards. Butter prices would recover modestly and gradually after the 2002 low, benefiting also from the expected rise in vegetable oil prices.

These medium-term perspectives remain strongly dependent on the future development in some key (existing or emerging) markets such as Russia and East Asia as the world dairy market is foreseen to remain relatively thin. Furthermore, the trend towards further concentration and globalisation of the dairy industry, and greater differentiation of dairy products is expected to make trade projections for dairy products increasingly complex and dependent on dairy firms’ cost structure, production and marketing strategy.


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Graph 3.29 Outlook for world market prices for whole milk powder and skimmed milk powder, 1995 – 2011 ($/t)

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Whole milk powder

Skimmed milk powder

OECD

FAPRI

Ref.: FOB export price Northern Europe.

3.4. Key issues

If the outlook for agricultural markets over the next seven years appears relatively favourable it clearly remains subject to some uncertainties. In this respect, four main areas of uncertainty can be identified:

• the economic prospects

• the scope for production growth

• the policy and trade environment

• the disruptions linked to animal diseases

3.4.1. Economic prospects

The medium-term projections from the FAPRI, OECD and USDA presented in this chapter depend heavily and critically on the robust and sustainable economic growth which is expected over the medium term in many developing regions (in particular China, South East Asia, Latin America, North Africa and the Middle East). Strong and sustainable economic expansion, population growth, urbanisation and dietary changes in these regions seem to constitute the main driving force behind the projected recovery in most agricultural markets as they are all foreseen to lift global food demand and stimulate solid growth in world trade. An outlook of strong and broadly based growth in developed countries would combine with a rapid recovery in many emerging economies towards sustained expansion to set the stage for a prolonged high-growth period in almost all regions of the world without significant inflationary pressures (cf. table 3.11).


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Table 3.11 USDA assumptions in real GDP annual growth, 2003 – 2011 (%)

1996-2000 2001-2005 2006-2011

World 2,4 3,2 3,3 3,3 3,2 3,1 3,3 2,7 3,1 European Union (EU15) 0,7 1,7 2,4 2,3 2,2 2,1 2,9 1,5 2,2 USA 2,8 4,2 3,7 3,7 3,5 2,9 4,2 3,2 3,0 Eastern Europe 3,3 4,2 4,3 4,3 4,0 4,2 4,4 3,6 4,0 Former Soviet Union 6,3 5,5 5,2 4,9 4,6 4,7 2,0 5,5 4,6 Asia 3,6 3,4 3,4 3,5 3,6 3,7 2,4 3,1 3,7 China 7,7 7,5 6,9 6,7 6,6 6,8 7,9 7,5 6,8 Indonesia 3,6 4,2 4,9 5,1 4,9 4,8 -0,7 4,1 4,8 South Korea 2,8 6,1 6,3 6,1 5,9 5,6 4,6 5,4 5,3 Thailand 6,4 6,6 6,1 5,8 5,6 5,8 -0,7 6,1 5,9 Latin America 1,4 3,2 3,6 3,8 4,0 4,1 4,9 2,0 4,1 Brazil 0,5 2,6 3,3 3,6 3,9 4,2 2,1 2,1 4,1 Mexico 1,5 3,4 3,5 3,5 3,6 3,6 5,5 2,3 3,6 Africa 3,1 3,5 4,1 4,4 4,5 4,5 3,3 3,3 4,3 Middle East 3,4 3,4 3,9 4,1 4,1 4,0 4,2 3,2 3,9Source: FAPRI

2003 2004 2005 2006 2007 2008Average

However, significant sources of risk to the sustainability and durability of the economic recovery remain. They concern notably the imbalances that developed in the late 1990s in the US and the global economy, with the large US current account and budgetary deficits and the surpluses in other countries, the low US personal savings rate, the apparent undervaluation of the US dollar and overvaluation of the euro, and relatively high levels of corporate and household indebtedness in a number of countries. These imbalances have been fuelled to a large extent by the relatively rapid growth in the US relative to other countries. There also remains concerns about the financial markets, that may still embody relatively optimistic expectations for corporate profitability and the pace of recovery, and about Japan where the economic situation continues to represent a source of serious concern.

Moreover, specific risks still exist for the medium-term outlook. The volatility of oil prices, which exceeded 50 $/barrel in October 2004, may become a potential risk to the recovery, especially if the security situation in the Middle East were to deteriorate further. After the strong devaluation of the past few years, significant changes in relative exchange rates in Latin American countries could still significantly affect agricultural trade and markets. The orderly reduction in the global imbalances and a supportive macro-economic policy framework would thus appear necessary to ensure investor confidence and the maintenance of a steady and sustainable growth over the coming years.

A slower pace and strength in the economic growth could lead to weaker demand and lower food trade and consequently lower world price prospects. The largest adverse impact would likely concern higher value-added agricultural products, such as meat, dairy products and processed food that are directly and indirectly sensitive to changes in income. Lower demand for these products could in turn put downward pressure on feed grain prices.

3.4.2. Growth potential in agricultural supply

The projected moderate increase in trade and prices over the medium term, one of the major outcomes of the projections, remains strongly conditioned by capacity of adjustment of agricultural supply to the rapid expansion of food demand in some regions


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of the world. Yet, the possibility that production could become outpaced by a rising domestic consumption would result in an improved price outlook.

Like in the most recent decades, much of the growth in grain production is projected to be driven by productivity increase as the potential for additional land is foreseen to be limited in most regions -with the noticeable exception of Argentina, Brazil, Australia, Mexico and Russia- due to the expansion of urban areas, pressure on agricultural resources and environment, and climatic limitations. The projected price increases would not appear sufficient to reverse this trend.

If total cereal productivity growth is forecast to be broadly comparable over the next seven years to that of the 1990s, it should remain significantly lower than in the previous decades55. However, prospects for more favourable price levels and increased reliance on food imports in some regions may be expected to generate further research for renewed gains in productivity (in terms of wider adoption of improved varieties and farming methods, increased investment in agricultural structure, storage, transport and marketing systems).

In this context, policy management and development in some major producing countries -such as China56, Russia and India- and exporting countries -such as the EU and the US could also have far reaching implications for the future level of world agricultural supply.

3.4.3. Policy and trade environment

Future changes in agricultural and trade policies as well as the new round of multilateral trade negotiations may have important implications for the medium-term outlook for agricultural production, consumption, trade and prices as well as the functioning of agricultural markets. They include notably the 2003 EU CAP reform (the impact of the implementation of the Single Farm Payment and of the reform of some common market organisations), the recent enlargement of the EU to 10 new Member States, the future enlargement to candidate countries (Bulgaria, Romania, Croatia, Turkey) and the emergence of new issues related to food quality and the environment.

3.4.4. Sanitary and animal health issues

A number of animal disease outbreaks have hit major producing and exporting countries in the past few years (BSE in the EU, Japan, Canada, USA; Avian influenza in South East Asia and North America; Foot and Mouth disease in the EU and South America; Newcastle disease in US). Most projections assume normal conditions concerning animal disease over the medium-term. This means that the current epidemic is assumed to ease and become rapidly under control and that no new diseases will appear during the projection period.

The recent experience showed that whatever the scale of the epidemics - some outbreaks were limited to a few cases – their impact on markets was dramatic, with disrupted production patterns and trade flows and pronounced effect on market prices. Therefore

55 The extent to which future prospects for yield trends will be influenced by the development and diffusion of genetically modified organisms is still an open question.

56 Uncertainties still exist also regarding the current level of grain stocks (as well as their marketability) in China and India.


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any appearance of animal disease in the future, which is more probable than assuming the absence of such outbreak, could have drastic and significant repercussions on trade and world market prices, even if limited to a defined region.


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References

European Commission, 2004. Prospects for Agricultural Markets 2004 - 2011. Brussels.

FAPRI, 2004. World Agricultural Outlook. Iowa State University – University of Missouri-Columbia.

FAPRI, 2003. World Agricultural Outlook. Iowa State University – University of Missouri-Columbia.

IGC International Grains Council. Grain Market Report N. 338. 30th September 2004

OECD, 2004. The OECD Agricultural Outlook, 2004-2013. Paris.

OECD, 2003. The OECD Agricultural Outlook, 2003-2008. Paris.

USDA, 2004. Agricultural Baseline Projections to 2013. Washington D.C.


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Statistical annex

1. Medium-term outlook for cereals

1.1 Wheat

Table A.21 Outlook for world wheat production, 2002 – 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 563,2 551,2 582,6 588,8 599,8 608,4 616,6 625,1 632,6 640,8FAPRI 566,8 552,7 591,3 600,8 610,8 615,2 621,7 628,0 634,5 640,8

Table A.22 Outlook for world wheat consumption, 2002 – 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 596,4 581,0 590,5 594,1 599,3 606,8 614,0 622,1 630,2 638,2FAPRI 602,5 590,8 597,2 602,7 610,7 616,1 622,2 627,7 633,1 639,6

Table A.23 Outlook for world wheat stocks, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 193,8 164,1 156,2 150,8 151,3 152,9 155,5 158,5 160,8 163,4FAPRI 165,4 127,3 121,4 119,5 119,6 118,7 118,3 118,5 119,9 121,1 Table A.24 Outlook for world wheat market prices, 2002 - 2011 ($/t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 160,0 152,7 148,1 154,0 156,2 156,8 156,4 154,7 154,8 153,6FAPRI 163,4 144,9 140,8 139,0 136,4 138,9 140,3 141,5 143,7 145,1

US FOB Gulf, HRW

1.2 Coarse grains

Table A.25 Outlook for world coarse grain production, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 844,9 875,0 909,7 927,1 944,6 957,9 970,1 981,4 994,1 1.005,9FAPRI 787,7 800,5 836,7 851,6 864,4 872,7 884,0 894,5 904,5 914,7

Table A.26 Outlook for world coarse grain consumption, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 880,3 903,1 911,5 929,7 946,3 958,2 969,9 980,8 992,9 1.004,3FAPRI 818,8 840,7 841,9 850,6 863,3 873,2 883,7 893,6 903,7 913,7


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Table A.27 Outlook for world coarse grain stocks, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 150,9 122,9 121,1 118,5 116,8 116,5 116,7 117,3 118,6 120,1FAPRI 131,7 91,5 86,3 87,2 88,3 87,8 88,1 89,0 89,9 90,9

Table A.28 Outlook for world barley market prices, 2002 - 2011 ($/t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 106.4 90.7 87.9 95.4 96.1 95.3 94.1 94.0 93.9 92.0FAPRI 109.5 92.2 88.1 82.7 84.7 87.4 88.2 89.9 91.1 93.1

FAPRI: Canada feed; OECD: No. 1 CW barley St Lawrence

Table A.29 Outlook for world maize market prices, 2002 - 2011 ($/t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 107.1 104.9 106.2 111.5 112.6 113.6 114.1 114.5 114.5 113.7FAPRI 104.7 103.5 105.2 104.2 103.6 105.3 106.1 106.4 106.9 107.1

US yellow maize, fob Gulf 2. Medium-term outlook for oilseeds

2.1 Oilseed beans Table A.30 Outlook for world oilseed production, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 239,1 244,2 269,2 271,2 274,0 281,3 287,5 293,9 300,0 305,1FAPRI (world) 253,2 262,2 288,6 292,4 294,6 302,8 309,4 316,9 324,0 331,4

Oilseeds = rape seed, soya bean and sunflower seed.

Table A.31 Outlook for world oilseed consumption, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 238.9 246.7 262.9 270.1 274.0 280.3 287.0 293.3 299.5 305.0FAPRI 247.1 265.1 281.8 288.3 294.0 301.6 308.5 315.7 323.0 330.4


Table A.32 Outlook for world oilseed stocks, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 18.7 16.2 22.5 23.6 23.6 24.6 25.1 25.6 26.1 26.2FAPRI 41.5 38.6 45.3 49.4 50.0 51.1 52.0 53.1 54.2 55.2


Table A.33 Outlook for world oilseed market prices, 2002 - 2011 ($/t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 251.9 316.8 252.5 245.6 257.6 256.1 254.9 252.7 249.9 253.3FAPRI 267.0 312.0 260.8 237.5 242.8 243.6 244.5 243.2 242.1 240.7

OECD: average oilseeds, cif Rotterdam; FAPRI: US soyabeans, cif Rotterdam


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2.2 Oilseed meals

Table A.34 Outlook for world oilseed meal production, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 158,8 160,4 170,4 175,2 178,0 182,1 186,8 190,9 195,1 198,8FAPRI (world) 159,3 169,9 180,3 184,9 188,9 194,1 198,9 203,8 208,8 213,9

Oilseeds = soya bean, sunflower and rapeseed

Table A.35 Outlook for world oilseed meal consumption, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 158,3 161,1 169,6 175,0 178,0 182,0 186,7 190,9 195,0 198,8FAPRI (world) 161,4 170,4 180,0 185,0 189,3 194,5 199,2 204,2 209,2 214,2

Oilseeds = soya bean, sunflower and rapeseed

Table A.36 Outlook for world oilseed meal market prices, 2002 - 2011 ($/t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 185,1 237,3 192,2 180,2 183,0 181,3 180,7 181,0 179,1 179,5FAPRI 197,0 275,0 204,0 193,3 199,0 202,3 203,7 202,9 202,3 201,8

OECD: average oilseed meals, cif Rotterdam; FAPRI: US soybean meals, cif Rotterdam

2.3 Oilseed oil

Table A.37 Outlook for world oilseed oil production, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 71,0 72,7 76,5 78,5 80,0 82,4 85,0 87,6 90,1 92,5FAPRI (world) 81,1 85,9 90,4 92,3 94,4 96,9 99,1 101,6 104,0 106,5

Oilseed oil = soya bean oil, sunflower oil, rapeseed oil and palm oil

Table A.38 Outlook for world oilseed oil consumption, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 71,4 73,0 75,7 78,2 80,0 82,2 84,9 87,4 90,0 92,4FAPRI 82,1 85,4 89,6 91,7 93,9 96,4 98,7 101,1 103,6 106,1

Oilseed oil = soya bean oil, sunflower oil, rapeseed oil and palm oil

Table A.39 Outlook for world oilseed oil market prices, 2002 - 2011 ($/t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 526.8 582.6 570.2 568.1 582.3 593.4 599.0 593.1 589.0 595.0FAPRI 534.0 630.0 546.8 509.3 507.0 498.7 493.4 488.4 485.2 480.8

OECD: wheighted average price of oilseed oil and palm oil, fob European port; FAPRI: soybean oil, fob Rotterdam.


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3. Medium-term outlook for meat

3.1 Beef

Table A.40 Outlook for world beef production, 2002 - 2011 (mio t, cwe)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD (OECD zone) 26,4 25,9 26,1 25,4 25,4 25,9 26,1 26,4 26,7 27,1FAPRI (selected countries) 50,8 50,5 51,4 52,0 52,6 53,3 54,2 55,1 56,2 57,3

Table A.41 Outlook for world beef consumption, 2002 - 2011 (mio t, cwe)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Table A.42 Outlook for world beef prices, 2002 - 2011 ($/t lw)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 1501,8 1902,9 1642,2 2075,8 2117,6 2040,7 1988,5 1896,3 1835,2 1794,4FAPRI 1478,0 1867,1 1663,6 1773,5 1841,9 1808,5 1745,9 1681,1 1623,2 1581,3

Nebraska Direct Fed Steer price.

3.2 Pig meat

Table A.43 Outlook for world pig meat production, 2002 - 2011 (mio t, cwe)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Table A.44 Outlook for world pig meat consumption, 2002 - 2011 (mio t, cwe)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Table A.45 Outlook for world pig meat prices, 2002 - 2011 ($/t lw)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 791,2 890,7 884,5 933,5 914,9 883,8 870,5 868,7 870,5 876,6FAPRI 769,9 869,7 841,4 921,6 934,8 902,2 862,2 891,6 952,9 999,7

US price Iowa-Souther Minnesota, barrow and gilt price.


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3.3 Poultry meat

Table A.46 Outlook for world poultry meat production, 2002 - 2011 (mio t, cwe)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Table A.47 Outlook for world poultry meat consumption, 2002 - 2011 (mio t, cwe)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Table A.48 Outlook for world poultry meat prices, 2002 - 2011 ($/t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

OECD 1226 1365 1390 1393 1412 1425 1424 1424 1413 1417FAPRI 1226 1367 1381 1321 1314 1317 1321 1319 1325 1333

Wholesale weighted average broiler price US 12 cities

4. Medium-term outlook for milk and dairy products

Table A.49 Outlook for world production of dairy products, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Milk OECD 564,4 573,9 583,3 594,2 607 618,3 630,9 642,9 655,2 668,1

FAPRI 412,0 411,3 412,5 417,3 421,9 427,3 432,4 437,2 442,1 447,0

Butter OECD 8,0 8,1 8,3 8,4 8,6 8,8 9,0 9,2 9,4 9,6

FAPRI 6,7 6,8 6,8 6,9 7,0 7,1 7,2 7,2 7,3 7,4

SMP OECD 3,0 3,0 2,9 2,9 2,8 2,8 2,8 2,8 2,8 2,8

FAPRI 3,6 3,5 3,5 3,6 3,6 3,6 3,7 3,7 3,7 3,8

WMP OECD 1,9 1,9 1,9 2,0 2,0 2,1 2,1 2,1 2,2 2,2

FAPRI 3,0 3,1 3,1 3,1 3,2 3,3 3,4 3,4 3,5 3,6

Cheese OECD 17,3 17,5 17,9 18,3 18,7 19,1 19,5 19,8 20,2 20,6 FAPRI 15,3 15,3 15,5 15,7 15,9 16,1 16,3 16,4 16,6 16,8

FAPRI: data for selected countries


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Table A.50 Outlook for world consumption of dairy products, 2002 - 2011 (mio t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Butter OECD 7,9 8,0 8,3 8,5 8,7 8,8 9,0 9,2 9,4 9,6

FAPRI 6,3 6,4 6,4 6,5 6,6 6,7 6,8 6,9 7,0 7,0

SMP OECD 3,5 3,5 3,6 3,7 3,7 3,7 3,7 3,7 3,8 3,8

FAPRI 2,9 2,9 3,0 3,0 3,1 3,1 3,2 3,2 3,2 3,3

WMP OECD 3,5 3,7 3,6 3,8 3,9 4,0 4,1 4,2 4,3 4,4

FAPRI 1,9 2,0 2,0 2,1 2,1 2,2 2,2 2,3 2,4 2,4

Cheese OECD 17,2 17,5 17,9 18,2 18,7 19,0 19,4 19,8 20,2 20,6 FAPRI 14,9 15,1 15,2 15,4 15,6 15,8 16,0 16,2 16,4 16,6

FAPRI: data for selected countries

Table A.51 Outlook for world dairy products prices, 2002 - 2011 ($/t)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Butter OECD 1145 1392 1439 1460 1421 1439 1486 1492 1496 1501

FAPRI 1147 1392 1552 1517 1575 1615 1648 1684 1707 1707

Cheese OECD 1740 1877 1939 1911 1914 1953 1986 2008 2025 2050

FAPRI 1740 1839 2145 2088 2068 2080 2104 2122 2145 2163

SMP OECD 1326 1733 1760 1734 1688 1724 1741 1759 1766 1775

FAPRI 1326 1709 1809 1810 1765 1753 1769 1780 1817 1866

WMP OECD 1391 1752 1815 1771 1761 1797 1816 1847 1860 1872 FAPRI 1341 1747 1792 1781 1763 1774 1793 1813 1842 1877

Ref: Cheese: FOB export price cheddar cheese 40lb blocks, Northern Europe; others: FOB export price Northern Europe

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