At the request of the Ministry of Agriculture, Nature and Food Quality, LEI Wageningen UR has provided an overview of the effects and possible consequences of the credit crisis on the Dutch agricultural and fisheries sector. Because this sector produces food, it is less vulnerable to a decline in demand than industry sectors for luxury products. Prices of agricultural products are however very sensitive to changes in demand and supply. The price can drop significantly even if there is only a limited decline in demand. This can have significant consequences for the income of agricultural producers and for the margins of other links in the chains.
Partly on account of the high solvency, companies in pasture-based Dutch agriculture rarely go bankrupt and this is not expected to happen on account of the financial crisis. The greenhouse horticulture sector, the intensive livestock farming sector and the fisheries sector are more sensitive, as these are the sectors with companies that are less solvent. However, these sectors traditionally have to deal with strong fluctuations in the yield prices. Problematic situations for a portion of the companies in these sectors will therefore not be caused directly by the credit crisis. Because of the unexpected ‘accumulation’ of disappointing developments in prices and costs, companies could start to encounter problems. Even for healthy companies, the financing of investments is currently more difficult, because banks are more reticent.
Link with foreign countries
The risks of the credit crisis for the sector are a shrinkage in sales and a decline in the market prices; the disappearance of important export markets for certain products and payment problems in certain countries. Currency changes are felt strongly in the Dutch agricultural sector on account of the significant number of links between the Dutch agricultural complex and foreign countries.
Other important economical developments, such as a considerable decline in prices for grain, dairy and petroleum, will also have an effect. The decline in the prices of grain and dairy can partly be attributed to the credit crisis, but this is also the result of the supply response to the much higher price levels which existed until the spring of 2008.
Current situation
The decline in the demand for agricultural products remains limited. The agricultural sector is less vulnerable than sectors with mainly ‘luxury’ products. It is possible that there will be a bit of a shift for agricultural products, for example regarding the purchase of flowers. The effects of the credit crisis on the whole ornamental plant complex seem, however, to be limited for the time-being. The effects of the energy crisis have, to date, been more dominant; because of the contracts, the natural gas prices have not yet decreased for many horticultural companies, whilst the oil prices are already more than 100 dollars per barrel lower than prior to the crisis.
The scale of agricultural production will remain almost unchanged in the short term. Companies won’t easily adjust plans. During the coming year, the price reductions could have an effect on, for example, the growing plans in arable farming and horticulture. In the long term, the effect of fewer investments may become evident, for example, in greenhouse horticulture. Here, the combination of a number of poor years through this crisis will undoubtedly result in setbacks, for the suppliers too, such as the greenhouse manufacturers. This would then result in further scaling up and professionalisation.
Trade in agricultural products
In the market in which they operate, traders are better equipped for the crisis than many European competitors, and the financial system in the Netherlands is considerably better than elsewhere. Many traders are not afraid of a considerable decline in demand; the greatest risks involve the currencies, risk cover of the amounts and assessing the credit worthiness of buyers. Professional traders are able to arrange this properly. Because, for many Dutch agricultural sectors, more than 50% of the trade relates to import and/or export, if clever moves are made during this credit crisis and recession, more opportunities might be created.
Processing of agricultural products
The agricultural industry does not have to deal with a decline in turnover on account of the credit crisis, or only to a very small degree. On account of the good harvests and, for example, the increase in the milk quota, the supply of products is higher than last year. Many agricultural products will be processed by cooperatives; the members of these, i.e. farmers and growers, deal with the risks in the market and that is reflected in the selling prices. Listed concerns in the agricultural sector are doing better than most of the other sectors of the economy, because there has been no or little decline in the demand for food.
Report 2008-092 - Is the credit crisis affecting the agricultural sector? (only in Dutch)