Original publication: April 2014
Authors: Michel Petit (CIHEAM-IAMM, Montpellier, France) ; Zuzana Krístková (Czech University of Life Sciences, Prague, Czech Republic) ; Thomas Heckelei (Institute for Food and Resource Economics, University of Bonn, Germany) ; Kyösti Ilmari Arovuori and Perttu Pyykkönen (Pellervo Economic Research PTT, Helsinki, Finland) ; Fabian Capitanio (Università degli Studi di Napoli – ‘Federico II’, Italy) ; José-María García Álvarez-Coque, Raúl Compés-López and Victor Martínez-Gómez (Universitat Politècnica de València, Spain)
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This report assesses the competitive position of the European Union (EU) agri-food sector in the world market by examining the influence and scope of policies affecting competitiveness. Considering recent Common Agricultural Policy (CAP) changes, the method combines a value-chain approach with trade performance indicators, surveys of stakeholders, case studies and policy assessment. While the EU has recently evolved from being a net importer to a net exporter of agri-food products, the report explores the existing weaknesses in the EU’s competitive position in agri-food international markets, focusing on internal and external policy actions aimed at creating value.
The European Union (EU) has been a leading world economic actor and the world’s largest trading bloc of manufactured goods and services since 2007. In a context of economic recession, the EU has retained its capacity to negotiate and implement trade agreements. The agri-food sector is one of the largest and most important economic activities in Europe, and is vital to maintain employment, preserve rural public goods, supply quality food and facilitate the integration of small and medium-sized enterprises (SMEs) into the international food chain. The EU has recently evolved from a net importer of agri-food products to a net exporter, though the question emerges as to whether this process has a sound basis or if there are still elements of fragility in its competitive position in international agri-food markets. This report will assess the competitive position of the EU agri-food sector in the world market and examine the scope and influence of policies affecting competitiveness.
Competitiveness refers to the ability of firms or nations to offer quality products at competitive prices and to provide adequate returns on the resources employed. A great number of studies have made use of quantitative measures of competitiveness. Recently, however, new approaches have treated the subject by analysing the competitiveness of whole food chains, considering all types of drivers as well as strategies of firms, including SMEs and large corporations. Such approaches go beyond cost competitiveness as they consider innovation and differentiation strategies, based on an individual or collective approach, and rely on creating value.
In line with this general framework, this report combines four sets of information to investigate competitiveness: (1) standard indicators of trade performance; (2) a prospective online survey targeting a large group of stakeholders and complemented with in-depth interviews; (3) detailed case studies following a food chain approach; and (4) other data gathered from existing research and background documents from EU sources (e.g. European Parliament and European Commission).
One of the EU agri-food sector’s strengths in the world market is its orientation towards highly valued final products, which represent two thirds of its total agricultural exports. In addition, EU agri-food trade has recently moved towards a positive balance and export specialisation in final products. However, while the EU continues to be the world’s largest food and drink exporter, the EU market share of global exports of food and drink products has been slowly declining over the last few years (from 20.1 % in 2001 to 17.8 % in 2010). This has unveiled the absence of a single market, an imperfect functioning of the food supply chain, and productivity gaps largely related to a fragmented structure, small and medium-sized enterprises’ holdings being dominant in both agricultural and food manufacturing sectors.
Three indicators were used to assess the trade competitiveness of the EU and its Member States. The export market share (EMS) relates the share of the exports originating in a given country to the world exports of the same good. The net export index (NEI)compares exports to imports of the same good, in order to identify sectoral trade surpluses or deficits. The import penetration rate (IPR) assesses to what extent domestic consumption relies on foreign supplies. These indicators were calculated for the EU as a whole, as well as for each individual Member State from 2002 to 2012. Agri-food trade data have been gathered from official sources such as Eurostat and World Integrated Trade Solution (WITS), considering only extra-EU trade. The information has been processed according to the harmonised system (HS) chapters, i.e. at two-digit level. Additional information is provided at four-digit level when the product deserves to be looked at in more detail, or to stress a distinctive evolution.
The EU has moved from being a net importer of agri-food products to a net exporter over the period analysed, as the value of exports matched the value of imports in 2010, and has exceeded it ever since. However, the export performance of the EU-28 has worsened over the same period, as an overall loss of EMS is clearly taking place while global markets grow in value. This loss of competitiveness has also been observed for the majority of the agri-food chapters.
The performance of the different Member States is quite diverse. In general, countries that have increased their EMS are among those with lower average values. This is the case of the three Baltic States, Luxembourg, Poland, Portugal and Romania. The greatest declines in EMS have taken place in Denmark, Hungary and Slovenia. In terms of NEI, the trend noticeably indicates that most of the biggest improvements have taken place in the Member States with smaller populations. Among the countries with a general agrifood deficit, the positions of Denmark and the Netherlands are clearly weaker.
Regarding the different agri-food trade chapters, meat is the only one for which the EU-28 has increased its EMS. In this chapter, a very good competitive position and evolution has been registered for pork, whereas the traditional dominant position of Denmark has declined. In milk and dairy produce, the competitiveness of the EU-28 in world markets has been deteriorating over time. In this chapter, the position of two world-leading products from the EU-28 – cheese and curd, and concentrated milk – has eroded over time, while the EU-28 has reinforced its net exporter pattern.
The competitiveness of EU-28 edible vegetables is below average, but the evolution has shown a relatively good performance, with minor losses of EMS. There has been a remarkable weight of imports, which accounts for over 8 % of domestic consumption, and the IPR has grown over time; in any case, there is a clear trade deficit. The competitiveness of fruits has been quite similar, but with a greater overall dependence on imports.
In cereals, the EU-28 has also maintained its competitiveness, judging from the evolution of its EMS. The value of exports has been balanced by the value of imports, the latter usually representing about 7 % of apparent consumption. Wheat is the fourth product in terms of value of EU-28 exports, with an average of EUR 2.5 billion annually and 4.3 % of the value of EU-28 agri-food exports. The EU-28 has maintained its competitiveness in this cereal, but with noteworthy peaks over time; moreover, its net export position is positive. In milling industry products, the EU-28’s international competitiveness has declined, despite a very positive starting point. The EU-28 is mainly a net exporter of these products, with an average NEI close to 0.9.
In terms of oilseeds, the EU-28 is clearly not competitive. Overall, the EU-28 EMS has declined over time, reaching close to 4 % in 2012. The NEI is stable in negative high values, while the IPR represents about one third of domestic consumption, with significant variations among countries. Nevertheless, there are differences in the competitive situation among oilseeds. In soya beans, the dependence on imports is enormous (an average IPR of 93 % in this period), and the EMS is irrelevant, while in sunflower the EMS is close to one quarter of world exports and the dependence on imports is minor. The loss of competitiveness in fats and oils is illustrated by declining EMS and NEI. In this chapter, the EU-28 has a clear dominant position in olive oil, although its competitiveness has eroded.
The competitiveness of the EU-28 has also deteriorated over time in sugar and sugar confectionery. The EMS has dropped substantially, from an average 2002-2003 value of 19.8 % to an average 2011-2012 value of 7.7 %. In addition, the EU-28 has shifted slightly from net exporter to net importer. In sugar, as such, the EU-28 is rapidly losing competitiveness with the plummeting positions of the three main exporters (France, Germany and Belgium). In cereal preparations, the international competitiveness of the EU-28 has declined slightly, but the EU-28 remains a strong net exporter. Similarly, EU-28 competitiveness has experienced a moderate loss for vegetable preparations, as the modest reduction in the EMS shows.
Undoubtedly, beverages, spirits and vinegar make up the leading exporter chapter in the EU-28 agri-food sector, both in terms of average EMS and contribution to the value of exports. Furthermore, the EU-28 is an absolute net exporter. However, this dynamic view depicts a less optimistic situation, as the EMS has declined slightly over time. Turning to the most relevant products within this chapter, of all EU-28 agrifood exports liqueurs rank first as regards average value; over 10 % of EU-28 exports and EUR 6.5 billion annually. The EMS for the EU-28 is 65.3 %, with most of this corresponding to the United Kingdom (28.6 %) and France (16.7 %), and the EMS of both gradually declining. Wine ranks second in average exports, totalling EUR 5.9 billion annually, or 9.8 % of the EU-28 agri-food exports. For wine, the EU-28 has managed to maintain its EMS, and the three leading countries are France, Italy and Spain. Spain’s share seems to be growing gradually, unlike that of France and Italy. Another relevant product within this chapter is beer, the EU-28 being the world’s top exporter. The average EMS is 44.4 %, and it has declined each year since 2002. The reason is that the Netherlands have sharply reduced their contribution. This decline has not been compensated by growth in other countries like Germany, Belgium or Portugal.
An online survey was launched to interview experts from different sectors of the food supply chain. The sample of stakeholders included 158 respondents that represent entry points to the analysis of food chains, from 19 Member States and various professional backgrounds. The two most highly represented groups were research (34 %) and farming organisations (28 %). The presence of public officers (18 %) and processors (15 %) was also significant, and some inter-professional organisations (5 %), retailers (4 %) and wholesalers (4 %) were included as well.
According to the survey results, the experts consulted believe in sustainability, quality and the growth potential of the EU agri-food economy, with 66 % considering it likely or very likely that the EU agri-food sector will become an engine for economic growth by 2020 (18 % believed that this is a very likely scenario). More pessimistic views were expressed regarding the ability of the EU agri-food sector to increase employment opportunities in rural areas and the likelihood that fairer practices will spread within the European food chain. Around 69 % suggested that the trade balance will continue to be negative in significant sectors, and less than one half (46 %) indicated that EU agri-food products will rely more on foreign demand, which means proper attention should be paid to the internal market.
Experts were asked whether the competitiveness of the EU sectors is expected to improve in the coming years. It is not surprising that the present situation is affecting the perception of the future, meaning that sectors that have been most affected by the crisis in the last few years could be seen as sensitive to potential improvements. This may be the case of the milk and dairy sector, which was considered as having good prospects by almost 49 % of the experts consulted. Export-oriented Mediterranean sectors were also expected to do well by 37 % of the sample for fruits and vegetables, 36 % for wine and 25 % for olive oil. Grain is another sector that was thought to have potential by 30 % of the experts consulted.
Through a comprehensive approach to agri-food competitiveness, this report focuses on factors affecting the ability of EU-28 agri-food products to create value in international markets: a) agricultural productivity, b) coordination in the supply chain, c) innovation, d) domestic agricultural and rural policies, and e) trade policies. In addition to these factors, the notion of sustainability cannot be forgotten, including the dimensions of environmental, social and economic sustainability which tend to overlap in EU food chains.
A labour productivity gap can be observed in the EU with respect to international competitors. In the agricultural sector, this is the result of weak farm structures, with many rural areas at a relative disadvantage. It can also be argued that the scope for crop yield increase is limited in the EU, as yields are already reaching the production possibility frontier.
Nevertheless, the yields themselves are not enough to assess productivity, as they only refer to the productivity of an individual production factor. A better measure is the total factor productivity (TFP) index, as it captures a large set of productivity improvements, including those that save land and other agricultural resources. In the last two decades, the TFP of countries in north-west and southern Europe has risen remarkably and now exceeds that of the United States (US). On the other hand, productivity has increased very slowly in eastern European countries.
Coordination in the supply chain is considered an efficient way to cope with high transaction costs and may contribute to higher income stability. Increasing the producers’ market power is one of the most controversial elements when discussing how the food chain could function better. In this respect, the key factors that determine the success of producer organisations (POs) and cooperatives in food chains relate to (a) their position in the food supply chain, (b) internal governance, and (c) the institutional environment.
Related to the position in the food supply chain, empirical studies in the EU found that a large market share for cooperatives in one specific sector or country can help to increase the price level and reduce price volatility. In some sectors, cooperatives account for a large share of the farm product market, but not in others, with substantial differences between EU sectors and countries. Furthermore, in most sectors, the bargaining power of cooperatives remains limited. In order to be competitive, cooperatives must also follow ongoing consolidation processes in all sectors of the food chain, including international mergers among cooperatives.
Regarding the internal governance and organisation of POs, there is room for strengthening management and supervision capacities. Elements proven to have a positive effect on cooperative performance are proportional voting rights, professional management and supervision by outsiders. Strengthening the capacities of supervisory boards also seems to be relevant. Considering the geographic organisation and scope of cooperatives, most prefer to internationalise by acquiring or setting up foreign investorowned firms (IOFs), and not by merging with other cooperatives or inviting foreign farmers to become members, thus avoiding dilution of ownership.
Taking into account the institutional context surrounding POs, one of the most challenging issues is the possible conflict between competition rules and POs. There is empirical evidence that a number of cooperatives and POs are having to deal with the legal uncertainty stemming from competition laws, and report high legal costs. In order to improve farmers’ negotiating positions in the food chain, the recent Common Agricultural Policy (CAP) reforms open up the possibility for farmers to collectively negotiate contracts for the supply of olive oil, beef, cereals and certain other arable crops under specific conditions and safeguards. This would allow the extension of the milk package philosophy to other sectors.
With respect to innovation and research, certain characteristics distinguish agricultural research from research in other sectors, namely the long gestation payoff period, the high social returns, the prominent role of public institutions, and the slow speed of technological transfer from science to farming practice. Measures in the recent EU policy focus increasingly on the innovation potential of the agri-food sector. The main example is the European Innovation Partnership (EIP) in agriculture, a pilot initiative that highlights the importance of agriculture in the search for smart and sustainable development. Evidence shows that farmers have the most potential to improve added value to the supply chain if they are more oriented towards innovation. Therefore, the EIP might succeed in increasing farmers’ competitiveness, as it should facilitate a faster exchange of knowledge from research to farming and provide feedback on practical needs to the scientific sector via operational groups. However, certain weaknesses are still evident in the new agricultural innovation policy of the EU. Ambiguities have been detected in research objectives and priorities, as well as the organisational fragmentation of policy responsibility.
Regarding the relationship between the CAP and competitiveness, Pillar I has general, relatively non-targeted and indirect effects, while Pillar II has great potential to promote sustainability, competitiveness and innovation.
Considering Pillar I, the impact of direct payments on productivity, as a consequence of competitiveness, is ambiguous and a lively debate persists. On the one hand, direct payments contribute significantly to farmers’ income and thus enhance the economic viability of existing farms; this is a positive short-term impact on competitiveness. On the other hand, this effect slows down the process of farm concentration, most often associated with lower production costs, and is thus a negative long-term impact of direct payments on competitiveness. Greening seems to be detrimental to competitiveness as well. In conclusion, the likely reduction in direct payments received for arable crops and the growing environmental conditions attached to these payments will reduce the competitiveness of European crops in the short run.
The reform of Pillar II must be seen as a positive step towards adapting agricultural policy to the competitiveness needs of European agri-food chains. For example, rural development programmes will include a toolbox of measures that are designed to help Member States address the differing competitiveness needs in accordance with the situation and the specific needs of their agricultural and forestry sectors. On the down side, the budget reduction for Pillar II has given rise to questions about the scope and effectiveness of the measures taken.
As for trade policies, many countries look at bilateral trade negotiations as a more practical road-map for integrating into international markets. The EU is actively engaged in a series of bilateral negotiations, the most visual example perhaps being the Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU. In this respect, the stakeholders in the online survey considered it crucial to enhance the promotion of EU standards at international level, and to ensure a level playing field with third countries in order to enhance competitiveness. As a matter of fact, some researchers stated that there is a risk that the TTIP will shift standards towards the ‘lowest common denominator’, or will lead to a deregulatory approach being adopted.
Finally, the challenge is now to consider tools promoting sustainability as opportunities rather than threats to competitiveness. In this respect, there are substantial differences depending on the sectors affected and on the scope and type of organisations. Experts from EU-wide organisations seemed to support more organic farming and animal welfare regulations. Experts with backgrounds in Mediterranean crops also seemed keener to select organic farming measures and agro-environmental policies.
This report includes six case studies to reflect the different competitiveness factors and the competitive position of trade, aimed at identifying the main drivers of future competitiveness in these sectors. In brief, the results were as follows:
For cereals, the key future elements are represented by the rising demand for cereals in the future, linked to other biofuels and dietary changes, price volatility and the sustainability of intensive grain farming in western Europe.
For dairy products, the increasing demand in the world market and a strong intra-EU market support the possibility of maintaining dairy production in Europe. However, coupled support, some kind of safety net and the strengthening of the market power of producers are still needed. Environmental issues also deserve more attention.
For beef, liberalisation will lead to open competition with external countries – mainly those in the Mercosur – which could seriously threaten the competitiveness of domestic beef. Abolishing milk quotas is expected to motivate beef producers to switch to milk production. It is therefore important to better target direct payments to beef producers, given the low profitability of EU production.
In fruits and vegetables, strengthening producer market power seems crucial. In this respect, operational programmes are essential to favour growth processes in the sector. Improved mechanisms to prevent crises will surely benefit long-term competitiveness.
In the case of olive oil, current levels of competitiveness could be maintained if future drivers continue to promote the healthy properties of the product and to strengthen the incipient demand in non-traditional countries. In addition to this, efforts to improve quality in production and disseminating the quality labels are subsequent steps. Furthermore, an effort to internationally harmonise standards and controls could prevent unfair trading practices from occurring.
For wine, competition between ‘old’ and ‘new’ worlds is the first driver of the international market. Additionally, quality indicators and certain policy regulations in the EU are sometimes seen as burdens to producers who lack the flexibility to adapt to the changing demand for wines. In any case, promotion in growing markets is also seen as a determinant driver for the EU wine sector.
Conclusions and recommendations
Seven main conclusions and recommendations are drawn from this report.
- The EU maintains its general competitiveness in spite of growing pressure from third countries. However, the level of competitiveness within the EU is not balanced, and this undermines future prosperity in the countries affected.
- The share of EU agri-food exports in world markets is decreasing in the medium term, with differences among products. However, the EU has been able to improve its external agri-food balance, thus making the final assessment of this report ambiguous.
- The current agri-food competitiveness of the EU stems from its own social and economic vision, including a certain rural and agricultural model. Therefore, preserving the limits of social and territorial cohesion and sustainability should contribute to defending agri-food competitiveness.
- An adequate balance between effective and non-burdensome regulations is needed to provide a competitive position for agri-food firms.
- The CAP is adopting a more sustainable, competitiveness-oriented approach. However, Pillar I is still too ambiguous and Pillar II is not effective enough, mainly for economically weaker and less competitive countries and regions that face budgetary problems when transferring funds from direct support to rural development. Three kinds of incentives should be reinforced: (1) those addressing structural adjustment, consolidation and concentration in the EU food chain, (2) those related to quality differentiation, and (3) those aimed at transferring best competitiveness practices.
- Trade policy should be seen as part of the strategy to level the playing field between the EU and global partners. This strategy should focus on quality and value added products, and on pursuing social and environmental concerns without jeopardising global public goods and human development.
- The ‘Horizon 2020’ and the European Innovation Partnership ‘Agricultural Productivity and Sustainability’ (EIP) create a strong framework for R&D&I policy in the agri-food sector. More funds and a new R&D&I partnership model could open up new opportunities for public and private stakeholders. Given the interests and difficulties of implementing this complex and sophisticated approach, the European Commission and its Member States should give priority to this new framework with a fair and eclectic spirit.
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