It is frequently asserted in Brussels agricultural policy discussions that European farmers over the past few years are barely surviving, buffeted by unprecedented price collapses, the unwillingness of supermarkets to pay decent prices, the closure of external markets and tightening regulations. Commissioner Hogan spent much of the first half of his term of office bringing forward one emergency financial package after the other as taxpayers pumped more money into a sector supposedly on its last legs.
This picture of an industry in crisis is naturally promoted by the well-oiled publicity machine maintained by the farm lobbies in Brussels and national capitals. But is it true? In this post, we examine the statistics on farm income trends to investigate this issue.
Eurostat produces the official figures on farm incomes in the EU. Preliminary estimates for 2016 (the first forecast) should be released towards the end of December of the relevant year, with the second updated forecast released the following March.
Usually, the first forecast is announced in an official statistical release, but Eurostat has now dispensed with this. Instead, the figures are released by simply updating the internet database for the economic accounts for agriculture. Last year, this process was delayed by a couple of months for some reason, but the second forecast figures (from March 2017) are now published.
Aggregate EU-28 farm income trends
The first figure below shows the trends in income for the aggregate EU-28 farming sector for the period since 2005 for two income indicators. Recall that Factor Income (formally, net value added at factor cost) is defined as net value added at basic prices less other taxes on production plus other subsidies on production. It measures the remuneration of all factors of production (land, labour, capital) employed in agricultural production. The other indicator, Entrepreneurial Income, measures the compensation for unpaid (family) labour, own land and own capital. It is derived from Factor Income by subtracting compensation of employees, land rent paid and net interest on borrowed capital.
The figure can be interpreted as showing either a glass half-empty or half-full. Farm income measured using either indicator has fallen in each of the last three years (2014, 2015 and 2016), as the farm organisations have emphasised. Factor income fell by 8% over this period, while entrepreneurial income fell by 15%.
However, a glance at the chart shows that 2013 was a record year for EU farm income. Farm income had never before been so high, even compared to the years of the food price spike in 2007-08. So using 2013 as a base for comparison is bound to show a fall in income in later years. If instead we take the average aggregate farm income in the previous seven years 2005-2012 (the ‘long-term average’) we find that both factor income and entrepreneurial income in 2016 were still higher than their long-run averages (though for entrepreneurial income the difference is barely significant).
Does this chart support the view of a farm industry in crisis? It is of course an aggregate picture, and we examine below the trends at a national level (unfortunately, the economic accounts for agriculture cannot be used to breakdown income trends by individual farm sector, where also the disaggregated trends have differed). However, it is worth keeping three further points in mind when looking at the aggregate trends.
First, the chart shows income trends in nominal terms. Eurostat has not yet published its estimate for EU-wide 2016 farm incomes in real terms so the real trends cannot be displayed. However, inflation as measured by the Harmonised Index of Consumer prices was less than 1% per annum since 2013 and close to 0% in both 2015 and 2016, so for these years the nominal trends give a close indication of the trend in real agricultural income as well.
Second, the aggregate EU farm income is shared among fewer people each year as the number of those engaged in agricultural production (for factor income) or family workers (for entrepreneurial income) declines. The agricultural labour force is falling by between 2-3% annually, so aggregate farm income in 2016 still represents an increase in per capita income compared with the long-term average. Unfortunately, the Eurostat Agricultural Income Indicators (A, B and C) which take account of both inflation and the change in the agricultural labour force are only available up to 2014 at the time of writing.
Third, as is well known, EU farm incomes are heavily dependent on public transfers. These are included in the economic accounts for agriculture either as subsidies on products (such as coupled payments) or other subsidies on production (which include decoupled income payments as well as many payments under Pillar 2 of the CAP). Without the emergency payments to farmers in the years 2014 through 2016, the drop in farm incomes would have been greater.
Subsidies on products fell sharply after 2005 as the MacSharry partially-coupled payments were replaced by decoupled payments, a process which continued in the CAP Health Check until these payments fell to €3.8 billion in 2014. Subsidies on products increased to €5.1 billion in 2015 and to €5.0 billion in 2016. Some of this increase reflects the greater flexibility to use coupled payments introduced in the 2013 CAP reform, but some of it also reflects coupled payments made under the emergency financial aid packages.
The value of other subsidies on production reached its maximum value of €54.0 billion in 2014, falling to €50.5 billion in 2015 and recovering to €52.0 billion in 2016. The drop in 2015 may largely reflect the delay in getting new rural development programmes up and running. It could be argued that the emergency aid packages largely substituted for delayed rural development funding in 2015, although of course the composition of beneficiaries would be very different and the rural development funds were delayed, not lost to the agricultural budget.
Eye-balling the chart reveals that, apart from the dip in 2015, other subsidies on production have been a very stable component of farm income. This argument is used to defend the continuation of the CAP Pillar 1 Basic Payment/Single Area Payment Scheme as a form of safety net or risk management instrument for EU farmers. However, we can note that this argument applies in principle to all forms of direct payments, including the more targeted direct payments under CAP Pillar 2. This is thus not an argument to specifically maintain generalised decoupled income support payments under the CAP.
Member State trends
A rather different picture emerges when we consider the changes in farm income by Member State. Again, the 2016 farm income is compared to the long-term average 2005-2012 in each Member State rather than the record 2013 year. Changes in both factor income and entrepreneurial income are shown in the chart, as well as the averages for EU-28 and EU-15.
Looking first at factor income, in 10 of the 28 Member States factor income in 2016 was lower than the 2005-2012 average, with significant drops in Finland (-28%), Denmark(-26%) and Germany (-19%). However, these decreases were more than compensated by increases in other Member States, including increases of 72% in Lithuania, 70% in Hungary, 19% in Ireland and 15% in Italy.
The variations are much greater when looking at entrepreneurial income and not always in a consistent manner. The outlier is Denmark, where entrepreneurial income was negative in both 2015 and 2016. Because the average entrepreneurial income in 2005-2012 was very close to zero (actually, €16 million), the negative income of €550 million in 2016 represents a colossal percentage swing of over -3400%. Other large countries where the 2016 entrepreneurial income was significantly below the long-term average include Germany (-74%) and France (-18%).
On the other hand, entrepreneurial income was 2% above the long-term average in the United Kingdom, 13% in Italy, 15% in Poland, and 18% in Spain. At the top of the list (on the right hand side of the chart which is sorted according to the size of the percentage change in entrepreneurial income in 2016 compared to the long-term average) are Ireland (28% increase), Romania (56% increase). Lithuania (64% increase), Hungary (79% increase) and Czech Republic (93% increase).
These figures show that the fortunes of farming are very different in different Member States from year to year, despite the existence of a single agricultural market with common prices under the CAP. There are four main reasons why this is the case. Countries specialise in different products and commodity price cycles are not necessarily synchronised. Countries purchase different baskets of inputs and the prices of inputs are not necessarily synchronised. Direct payments make a different contribution to farm incomes in different Member States. And the sensitivity of income changes to changes in producer or input prices is very different in different Member States.
The sensitivity of income changes, and especially entrepreneurial income, to a change in producer or input prices depends on the share of income in gross agricultural output (including net other subsidies on production). When the income share is small, sensitivity of income changes with respect to producer/input price changes is high, and vice versa.
Countries with more intensive production systems (with a higher share of purchased intermediate inputs and purchased production factors) will experience greater income variability than countries with a small share of such purchased inputs, other things equal. Sensitivity is also a function of the legal structure of farm holdings, with corporate farms likely to be more highly leveraged in income terms than family farms.
Implications
At the very aggregate level, for the EU-28 as a whole, the farm income outcome in 2016 was in line with the long-run average. Fluctuations are observed, and aggregate farm income has now fallen for three years in a row, but from a record level. However, it is worth emphasising that, for the EU-28 as a whole, neither 2014, 2015 nor 2016 were crisis years for the industry, and farm incomes in 2016 were in line with the long-term average.
However, aggregation smooths out disparate trends at more disaggregated levels. When looking at farm income figures for Member States in 2016, there is a wide dispersion of results. For some countries, farm income in 2016 has been well above the long-run average, but for others 2016 was indeed a difficult year. For only two countries (Croatia and Finland) was the level of factor income in 2016 lower than the annus horribilis of 2009. However, entrepreneurial incomes in seven Member States (Belgium, Bulgaria, Germany, Estonia, Greece, Croatia and Finland) fell below the 2009 level in 2016. For Belgium, Bulgaria and Estonia, 2016 was the worst year for entrepreneurial income since 2005. Not surprisingly, it is these negative results that are emphasised in the commentary on farm incomes by COPA-COGECA while the positive results are overlooked.
This variability in farm income performance across Member States is yet another reason why using a common EU policy to try to influence income developments in individual Member States does not make sense. It should also be borne in mind that up to half of farms in the EU-28 have off-farm employment, and many more are in receipt of social welfare transfers such as pensions. Thus, these figures on farm income alone tell us very little about the status of farm household incomes in these countries. Of course, to the extent that a fall in income is due to a collapse in specific commodity prices, the EU has the means to try to influence commodity markets, as was seen in the dairy and fruits and vegetable markets over the past two years.
Ultimately, farm income variability at the Member State level reflects income developments on individual farms. It is at the individual farm level that income variability needs to be tackled, through risk mitigation, risk sharing and risk coping arrangements. The appropriate role for policy in facilitating these arrangements for farmers is one of the biggest issues in the debate on the CAP post 2020.
This post was written by Alan Matthews.
Picture credit: Pexels under a CC licence
