Original publication: June 2015
University of London: Professor Berkeley Hill, Emeritus Professor of Policy Analysis
Agra CEAS Consulting: Dr B. Dylan Bradley
Acknowledgements: Most of our analysis has made use of public databases. However, the authors gratefully acknowledge the assistance provided by the DG AGRI EU-FADN unit which provided special analysis where access to raw data was needed and for the construction of maps. The authors also gratefully acknowledge the input of Professor Sophia Davidova, University of Kent.
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The purpose of this study for the European Parliament, as set out in the Terms of Reference, is to:
- Provide an overview of the income developments of EU agriculture.
- Examine the different dynamics of farming incomes (changes, amplitudes of movements, stability) and their main drivers.
- Analyse the disparities across Member States and aggregates.
- Provide recommendations in order to adjust the CAP income support and national policies to counteract current trends.
This purpose has to be achieved within the context of what the Terms of Reference describe as the central aim of the Common Agricultural Policy ‘to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture’.
The Terms of Reference also make it clear that data sources and methodologies for making the comparative analysis are the responsibility of the authors of the briefing note. With that in mind, the chosen staring point is a review of the incomes of agricultural households and in particular the incomes they receive from independent activity in agriculture (their self-employment income from farming).
The profit from running a business (which may be called entrepreneurial income) has a number of economic functions which make it a very important concept in the context of farmers and agriculture. In particular, it represents both funds generated within the farm that can be used for consumption, investment and saving and the rewards to the resources owned by the farmer (including the unpaid labour on the farm).
Profits from agriculture in developed countries such as those of the EU generally suffer from a long-term downward pressure that help explain structural change and from shorter-term instability. Furthermore, there are geographical and circumstantial differences between groups within agriculture.
There are two alternative approaches to measuring entrepreneurial incomes in agriculture: aggregate accounting as used by the Economic Accounts for Agriculture (EAA) drawn up by Eurostat and microeconomic accounting as used by the EU’s Farm Accountancy Data Network (FADN). Both have important limitations, and there are also methodological differences between them that have relevance for their use in the context of this brief.
However, profit from agriculture is only part of the income picture for many farm households and a focus on their returns from agriculture will therefore present only a partial picture of the farm household’s income, which is a main determinant of the farmer’s standard of living.
Data sources and methodological explanations
Literature has been drawn on to establish the main types of comparison relevant to this study. This has been followed by an in-depth analysis of the statistical systems that generate income data in the EU, and a detailed and independent analysis of what the data show (presented in Chapters 3 to 5).
For statistics on the incomes of agricultural households key definitions for use in the monitoring and guidance of agricultural policy have been worked out by Eurostat and at international level by the FAO. The most appropriate indicator is considered to be the net disposable income of households (covering income from farming and other gainful activities, from property, pensions and other transfers, and after the deduction of personal taxes and other non-optional payments). Possible data sources to furnish these statistics are considered; these vary between Member States.
For income that arises from agricultural activity indicators based on the Economic Accounts for Agriculture are calculated by Eurostat, but these are only available at the national level. However, the Farm Accountancy Data Network (FADN) calculates indicators at the level of the farm business and these can be used to illustrate detailed patterns in the agricultural industry.
Two FADN indicators are appropriate in the present context. Farm Net Value Added (FNVA) represents the rewards to all the fixed factors used in the farm business, irrespective of their ownership. Farm Family Income (FFI) is after the further deduction of the costs of hired labour, interest paid and rent paid and is the return to the farmer for the use of his own labour, own land and own capital; it represents the amount generated by the farm business that is available for consumption, investment and saving.
FFI expressed per business or per work unit of family (unpaid) labour (FFI/FWU) is the preferred income concept for this analysis because it corresponds most closely to the concept of the profit from farming that is available to support the living standards of farmers. Because incomes are subject to much short-term instability, where possible, averages are taken across three adjacent years; the main study period is 2010-2012.
Overview of the income development of EU agriculture
There is currently no working statistical system at EU level for agricultural household incomes. Structural statistics for EU agriculture make it clear that many farmers (at least a third, and more if other members of their household are included) also have other gainful activities. National results where available show that other incomes not only raise the household income levels of farm families, but also add to its stability.
Furthermore, the evidence points to farmers NOT being a particularly low-income sector of society in most Member States judged on the basis of their household disposable incomes. This is of obvious importance to the CAP’s aim to ensure a fair standard of living of the agricultural community.
In terms of incomes from agricultural activity, the focus of this report, it is clear that the income indicators at aggregate level (Eurostat) and farm level (FADN), where they share similar concepts, tend to move in similar fashion. The two FADN indicators (FNVA/AWU and FFI/FWU) are also closely aligned in their directions of change over time.
Among the various groups of Member States in common usage, in absolute terms FFI/FWU is highest in the EU-15, then the EU-N10 and lowest in the EU-N2. FFI/FWU increased over the 2004 to 2012 period with a substantial decline between 2007 and 2009 in all groupings with the exception of EU-N2.
For the EU-27, a strong relationship exists between the economic size of farm business and the average levels of income generated. This applies not only to FFI per farm (as might be expected) but, more importantly, income per unit of family labour (FFI/FWU). Care has to be exercised in interpreting results for small farms because only some Member States are represented because of the application of different thresholds for inclusion in FADN; only for size classes with Standard Output of €25,000 and over are all countries represented.
That said, in each farming type the smallest farms have the lowest incomes, and absolute incomes per FWU increase with farm size.
Incomes differ between the various types of farming, granivores having the highest incomes, and mixed farms the lowest. Granivores also tend to dominate in the largest size groups.
This relationship between farm size and income levels permeates other differences, such as between farms of different legal status and age of farmer, with the observed patterns largely explainable by differences in farm size.
Incomes of farms in Less Favoured Areas were lower than those in non-Less Favoured Areas, even after including the special payments that the former receive.
It is clear that the variability of income over time in FADN results at the group level is much greater in the smallest size class of farms, though it should be recalled that this omits data from many Member States because of the differing size thresholds applied. Beyond that, variation increases with farm size.
‘Granivore’ and ‘Fieldcrop’ farms have the greatest volatility of income. The most stable incomes are found in the ‘Horticulture’ and ‘Other permanent crops’ sectors.
When income volatility is measured at the level of the individual farm 55% of large farms and 38% of small farms experienced income volatility of ±30% from the previous three year average.
The distribution of income at the farm level is very unequal; 20% of the labour force generates 78% of the FFI. Furthermore, incomes averaged over three years 2010-2012 were negative for large parts of the farm labour force, suggesting that additional factors, such as income from other gainful activities, is important in explaining the ability of such farms to survive.
For the dependent (paid) section of the labour force, agricultural worker income (wages) increased steadily (in nominal terms) over the 2004-12 period with only the EU-N2 group experiencing a decline in 2008 and the EU-N10 one in 2009. The pay of agricultural workers in the EU-N10 converged with that in the EU-15 over the period, but pay in the EU-N2 did not. Agricultural wages per hour differ across farming type, being highest in the wine sector and lowest in ‘Other grazing livestock’ and ‘Fieldcrops’ farm types.
The dynamics of farm incomes and the key drivers
For agricultural households with income from other gainful activities, earnings from property and/or pensions and transfers, the drivers of this non-farm income are largely those that shape the general economy. Some 12% of EU-27 farms also draw income from on-farm diversified activities, and these increase with farm scale; this income is also driven by general economic factors, although some will be related to the agricultural economy.
The most important component of agricultural revenue is returns from the market which account for 86% of FADN Total Output for the EU-27.
Market returns are driven by quantity of output and price. Yields have been relatively stable, but prices, especially for crops, have fluctuated considerably over the 2005 to 2012 period.
Subsidies make up the balance of Total Output; there is no suggestion that changes in subsidies have played a major role in the evolution of income.
The most important cost element is total intermediate consumption which accounts for two-thirds of total expenses for the EU-27. Depreciation accounts for 15% of total costs, wages paid 9%, rent 5% and interest payments 3%.
Total intermediate consumption is made up of total specific costs (crop and livestock) and overheads (machinery and building costs, energy, contract work and direct inputs). These elements of intermediate consumption have all increased between 2004 and 2012, but specific crop costs have increased the least. Within specific crop costs, fertiliser cost is the most volatile element. Within overheads, energy costs have been the most volatile and showed the sharpest absolute increase.
Although the use of paid labour has declined, wages paid per farm increased steadily between 2007 and 2012.
The importance of these income components differs by farm type. Subsidies account for a quarter of the value of total output in ‘Other grazing livestock’ farms, but less than 5% in the horticulture, granivore and wine sectors. There is less difference in the relative importance of costs by farm type, although paid wages are more important in the horticulture and wine sectors.
Analysis by farm size shows that the relative importance of subsidies decreases as farm size increases.
Differences between Member States
A Common Agricultural Policy does not appear to result in a common absolute level of income for the average farm in different Member States. Belgium, Denmark, Germany, France, Luxembourg, the Netherlands and the UK stand out as having high farm incomes. Amongst the EU-N10 Member States, only in the Czech Republic, Estonia and Hungary do farm income indicators exceed or come close to the EU-27 average.
The main reason for this is the economic size of farms; the mix of farm types also plays a role. However, when farms of the same size and type are compared, performance is often equivalent throughout the EU-28 and sometimes higher in the EU-N10 and EU-N2 than it is in the EU-15.
The influence of farm structure is also important at the regional level with farm incomes varying widely within Member States. This regional variation is especially noticeable in France and Germany.
In terms of the growth in farm incomes between figures averaged for the 2004-06 and 2010-12 periods, EU-N10 Member States have outperformed EU-15 Member States as a result of higher market prices, access to the single market and increased public support. The increase in farm income per unit of labour in these Member States also reflects decreases in total labour use. Despite these increases, farm income in the EU-N10 and especially the EU-N2 lags behind that in the EU-15.
Within this overall trend, farm incomes are highly variable from year to year, but farm incomes in different Member States move in different directions and by different magnitudes, partly the result of structural difference in farm type.
Some Member States have higher levels of income variation than others. Again this is partly structural with income in the granivore and fieldcrop sectors relatively unstable while income in horticulture and permanent crops is relatively stable. The relatively low variability in farm income seen in Greece, Spain and Italy reflects the substantial proportion of other permanent crop farm types in these Member States.
There is a tendency for EU-N12 Member States to have higher coefficients of variation than EU-15 Member States, but this is partly the result of the general upward trend in farm incomes that these Member States have experienced.
Farm income levels differ between Member States within farm type, although this is partly the result of the structure of farms within FADN. A key factor in differences between Member States by farm type is actually farm size within the FADN sample.
As economic size increases, it becomes more common for farms from the EU-N10 to show higher FFI/FWU than farms in the EU-15. For the largest size group, only farms in Italy and the UK from the EU-15 have farm income higher than the EU-27 average.
Agricultural wages differ markedly between Member States. In Denmark, the Netherlands and Sweden wage levels average more than €15 per hour while in Bulgaria, Greece, Latvia, Lithuania, Poland and Romania the average is €3 or less.
Agricultural wages vary little within Member States, although there are some exceptions with wages higher in Champagne than in the rest of France and higher in the east of Germany where the wages of company farm managers and administrators are included in the figures.
Recommendations for future income support under the CAP
Based on our analysis the recommendations to the European Parliament are that:
- Further consideration is given to the re-establishment of EU statistics on the incomes of agricultural households, since they are needed to assess the extent to which the CAP is achieving this core objective of a fair standard of living.
- Data sources that relate to the entire economic activities of the households (and other institutional units) that operate farms should be encouraged.
- A study be undertaken to assess the relative attributes of a safety net for the incomes of farm households for the EU, including its costs, and the necessary technical conditions that would be required for it to operate successfully.
- When considering the need for support of incomes, the wealth of agricultural holdings should be taken into account.
- Suitable caveats should be used when FADN data are reported to make clear the impact of the field of observation on the results.
- Consideration should be given to the need to represent people (the operators of farm holdings) rather than production. A suitable balance needs to be struck between the current production/land use focus of FADN and the social impact of the CAP.
- Attention should be diverted away from interventions that attempt to combat instability directly at the farm level and towards risk management schemes that prepare farm operators to better anticipate and cope with instability. This could involve further studies.
- Consideration should be given as to how the occupiers of small farms can enhance their economic prospects by building their skills and other forms of human capital.
- We recommend that policies that increase market participation and ease the adjustment of farm businesses and households should be further supported and that current impediments to access be examined.
Link to the full study: http://bit.ly/540-374
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