The European Commission has just released its Autumn 2024 short-term Outlook for agricultural markets which highlights a gradual but fragile return to stability. Eurostat has also released data on agricultural output and input price movements for the first two quarters of this year. The Commission’s short-term Outlook does not contain a forecast for farm income developments in 2024 – we must wait until mid-December for the first official forecast when Eurostat publishes its preliminary estimate for 2024 farm income. However, with these two sources of information in hand, we can begin to make some educated guesses about the likely farm income outcome this year.
We need to have due regard to all the sources of uncertainty highlighted in the short-term Outlook. These include the potential for further extreme weather events to impact on production, the potential impact on both input costs and markets of geopolitical developments such as the wars in Ukraine and the Middle East and trade disputes with China, and possible plant and animal disease outbreaks. While being aware of these uncertainties, the evidence from the first half of the year suggests continued buoyancy in average EU farm incomes in 2024. Despite difficult weather conditions in various parts of Europe at different points in the growing season which made planting or grazing conditions problematic, farm incomes in 2024 could turn out to be close to the record year in 2022, at least in nominal terms.
In making this forecast, I introduce the concept of the income-related terms of trade, an indicator I have not seen used before although there is nothing remarkable about it.
Such a general statement immediately needs to be qualified by noting that this will not be the case for all agricultural sectors or all Member States. In particular, farmers depending on the sale of cereals face financial stress, with corresponding benefits for livestock farmers. Also, the impact of extreme weather events has been uneven across Member States. The figures presented in this post are averages across all sectors and all Member States. While some sectors and some Member States will not perform as well, the converse is that other sectors and Member States will perform better than the average.
Trends in average prices
Figure 1 shows the evolution of agricultural output prices since 2020 Q1 up to 2024 Q2. Output prices began to rise as the covid-19 lockdown periods were eased in 2021, and further increased subsequent to the Russian invasion of Ukraine in February 2022. That invasion led to a spike in wheat prices in particular, but wheat prices quickly fell back and in the first half of 2024 have clearly underperformed other agricultural commodities. Agricultural output prices peaked in 2022 Q4 and have slowly but unevenly declined since then. There is little difference in the overall price evolution of crop and animal products. Animal product prices have been somewhat more buoyant in recent quarters, but crop product prices have almost caught up during the last four quarters.

Figure 2 shows the corresponding evolution in agricultural input prices (note that although the base year for the index is the same, the scale for agricultural input prices is bigger than for output prices). Agricultural input prices also began to increase as covid-19 lockdowns were eased in 2021 and continued following the Russian invasion of Ukraine. Agricultural input prices peaked in exactly the same quarter, 2022 Q4, as did agricultural output prices, and at almost the same level (the index for agricultural output prices in that quarter was 151 and for agricultural input prices 154 – I will have more to say about that coincidence in a moment).
Since then, input prices have fallen more steadily than output prices. The increase in input prices was led by fertiliser prices particularly and by energy prices more generally, but their combined weight in the index is still relatively minor. Animal feedstuffs which have double the weight of fertiliser and energy prices combined in the overall index followed a more subdued trend. These weights would be different, of course, for arable farmers.

Farmers’ profitability depends on the relationship between agricultural output and input prices, a relationship known as the agricultural terms of trade. This is shown as the black line in Figure 3. This shows that the agricultural terms of trade deteriorated between 2020 Q1 and 2022 Q2, after which they recovered to end back more or less where they started at the beginning of the period. This reflects the fact that agricultural input prices increased more rapidly than output prices in the first half of the period but decreased more rapidly than output prices in the second half.

An obvious conclusion might be that farm incomes also deteriorated in the first half of the period but improved again in the second half. But this conclusion is not necessarily correct. If output prices rise by 10% and input prices rise by 10%, then the difference between agricultural output and input values assuming constant volumes is a proxy for the change in farm income, which also increases by 10%. The agricultural terms of trade have not changed in this example, but nonetheless farm income has increased. The agricultural terms of trade are not a good guide to how relative price changes impact on income. Indeed, even if input prices increased by 15% so that the agricultural terms of trade fell, it is still possible that farm incomes can increase.
To see this, we can construct what I call the income-related terms of trade. This describes the percentage change in income arising from the combined effect of output and input price changes, assuming constant volumes. It makes use of the share of the value of inputs to the value of agricultural output, which has been remarkably stable in EU agriculture at around 63% and is assumed constant. The income-related terms of trade ITT in any year t can then be calculated as follows:

For example, if between two years t and the base year, the output price index increases by 20% and the input price index by 10%, then farm income (assuming constant volumes and an input share of 63%) will increase by 27% between these two years due to price changes alone.
The income-related terms of trade is shown in Figure 3 by the red line. Note the sharp dip in the first two quarters because output prices fell during these two quarters. A change in output prices contributes 1.59 times more than a change in input prices to a change in income, hence we observe the substantial fall in the income-related terms of trade in the first two quarters. Subsequently, however, even though input prices increased faster than output prices (as shown by the fall in the black line for the terms of trade), there is a steady increase in the income-related terms of trade. This is because any increase in output prices contributes more to income than any increase in input prices given that inputs are only a 63% share of the value of output (the converse is also true when output prices turn down after 2023 Q1).
There is another dramatic improvement in the income-related terms of trade between 2023 Q3 and 2024 Q1 when output prices increased while input prices continued to decline, and then a fall in 2024 Q2 reflecting the fall in output prices in that quarter. Nonetheless, the index for the income-related terms of trade for the first two quarters in 2024 is 6.9% higher than the average for 2023. Assuming relative prices remain relatively steady in the second half of the year, this would be a positive factor supporting farm income in 2024.
It is important to underline again that this positive effect does not necessarily hold for all farm sectors, or to the same extent. For cereal crops, a more relevant indicator of profitability is the fertiliser affordability index, referenced by the evolution of the ratio between fertiliser and cereals prices (maize, wheat and barley). Figure 4 reproduces a graph from the Commission Autumn Outlook that shows the recent evolution of this index in the first half of this year. The higher the index (the black dotted line), the higher the relative price of fertilisers and the more stressed will be the income of cereal farmers. The financial affordability index remains much more stringent for cereal growers than was the case prior to start of the dramatic price increases at the beginning of 2021.

Taking account of volume changes
The income-related terms of trade abstract from changes in the volumes of output and inputs. Here, the Commission Autumn Outlook provides forecasts. Both agricultural output and intermediate inputs have fallen in 2022 and 2023 compared to the record level reached in 2021, and these trends may continue into 2024. Increased output is foreseen for sugar, protein crops, olive oil, some fruits and vegetables, and poultry, broadly stable output for raw milk and beef, and lower output for cereals, oilseeds, wine, pigmeat, and sheep and goats. On the input side, animal feed use is expected to remain stable while purchases of fertiliser may fall due to continued high prices. Overall, one might expect slightly lower production and input use this year compared to 2023. However, on the assumption that there are no further major shocks to prices in the second half of the year, these volume changes will reduce but not reverse the expected positive impact of price developments on farm incomes in 2024.
Conclusions
This post has reviewed the prospects for farm income in the EU in 2024, making use of a new indicator which I call the income-related terms of trade. This isolates the impact of changing relative prices for outputs and inputs on farm income, assuming constant volumes. This indicator has moved favourably for farm income in the first half of the year. The Commission Autumn Outlook also underlines the high level of the farmers’ price index due to high prices for sugar, olive oil and vegetables and stable prices otherwise, while noting that energy and fertiliser prices appear to have plateaued. It also notes the many uncertainties that may affect agricultural markets in the second half of the year. But at this point in time, we are on course for another good year for EU average farm incomes in 2024.
As I have pointed out several times, this does not necessarily hold for all Member States and all sectors, depending on their composition of production, the differential impact of extreme weather events, and so on. For example, the Commission proposed last month to allocate €120 million from the agricultural reserve for farmers in five countries, Bulgaria, Germany, Estonia, Italy and Romania, who have been impacted by exceptional adverse climatic events in spring and early summer. But for every Member State and sector that will perform less well than the average, there is a Member State and sector that is performing better than the average.
Rapid assessment of the impact of market, weather, disease and geopolitical shocks on agricultural markets, prices and incomes is an essential element of crisis management and an early warning system. Publicly available data only become available after a certain time lag, but the Commission has access to more up-to-date data through its regular communications from Member States.
Nonetheless, it gives pause for thought whether the system is working as well as it should when we look back at the response to the farmer protests in spring this year. In March this year, the Commission proposed its ‘Simplification Regulation’ to walk back on some of the conditionalities introduced in the last CAP reform that farmers should observe to be eligible to receive CAP payments. While the principal justification for this move was to alleviate the administrative burden on farmers, the proposal also referred to the fact that high energy and input prices were influencing (presumably adversely) farmers’ margins.
The proposal could have noted that farm producer prices had also reacted with a positive impact on farmers’ margins, although the sheer volatility of prices at this time was a negative factor in itself due to heightened uncertainty. Nonetheless, the income-related terms of trade peaked in the first quarter of 2024, at precisely the time when the argument was being made that farm incomes were under pressure (see Figure 3). Without good data, it is easy for emotions to carry the day. A clear recommendation is that the newly-created Agriculture and Food Chain Observatory should develop both enterprise and sector-level indicators that allow the tracking of gross margin and income developments in as close to real time as possible.
This post was written by Alan Matthews.
Photo credit: Horses grazing (own photo)