As a result of the liberalisation of the EU’s common agricultural policy, the agricultural sector will need to work with less predictable prices. LEI Wageningen UR has taken part in a European research project in order to ascertain what this means for agricultural incomes within the European Union. It appears that income fluctuations are increasing over time. We are also seeing clear differences between types of businesses and between member states. For a long time, dairy farmers have enjoyed a more stable income than pig farmers, for example, and the income of Dutch arable farmers fluctuates more than that of their Spanish colleagues.
Incomes in the agricultural sector have always fluctuated greatly between one year and the next. Climatological circumstances (such as drought, water damage, frost and hail) and incidences of animal and plant diseases can result in the physical production of the farm differing from what would be seen as ‘normal’ in any one year. Economic factors such as the yield prices of products and the costs of inputs (animal feeds, energy, etc.) can also bring about drastic changes in the income opportunities of a farm from one year to the next.
The research demonstrates that the importance of each of these factors differs greatly between regions within Europe and also between farm types. The prices of animal feeds therefore have a much greater influence on the operating results of pig farmers and poultry farmers than on the results of beef cattle farmers. As a rule, the influence of economic factors is greater than that of the weather and of diseases and infestations.
Small margin in the Netherlands
There are two main causes of the increase in income fluctuations within agriculture over the years. Firstly, the phasing out of the European market and pricing policy for products such as milk and grain is leading to greater price fluctuations than was the case until a few years ago. Secondly, the increases in farm sizes and productivity are resulting in increases in the differences between the farms. While a proportion of the farms are growing in size, many other farms remain as they are. In the case of a declining income margin per product unit, it is not only the differences in income between farms that increase, but also the income risks.
The reduced income margin of Dutch arable farming (due to the high costs of land (leases) and wages) compared with those in Spain goes a long way towards explaining why the incomes of Dutch arable farmers are subject to greater fluctuations. While the crop yields in Spain generally fluctuate more than in the Netherlands due to the dry climate, Dutch arable farmers are confronted by greater fluctuations in their incomes as a result of higher costs of depreciations, interest paid and lease costs, amongst other things.
Rule of thumb is not optimal
In its revision of the common agricultural policy, the European Union has take account of the risks for entrepreneurs in the agricultural and horticultural sectors. A rule of thumb is often used to ascertain whether a risk has occurred, for example in the event of a production loss of at least 30%. This research makes it clear that such a standard has a negative impact on Dutch farmers. A production loss of 30% would not directly result in negative incomes in many southern countries. In the Netherlands, however, there are few companies that can still produce positive results with a 30% production loss.
Report 2009-005 Volatility of farm incomes, prices and yields in the European Union