Original publication:  February 2017
Authors: Wageningen University, The Netherlands: Rico Ihle, Liesbeth Dries, Roel Jongeneel, Thomas Venus, Justus Wesseler
Short link to this post: http://bit.ly/2DYPOnG
Available languages:
– Study:
– Annex I:

The EU cattle sector consists of the EU bovine meat sub-sector, which produces and processes beef and veal, and the EU dairy sector, which produces and processes cow milk. The cattle sector is of considerable importance to the European Union (EU): the EU is one of the world’s leading producers, consumers, and traders of bovine meat and dairy products; the sector provides employment and contributes to territorial vitality especially in marginal or vulnerable regions; it provides environmental goods such as biodiversity preservation; and many EU beef meat and dairy products are regarded as high quality products that are protected by EU schemes. Nevertheless, the EU cattle sector is faced with severe challenges in recent years. These challenges relate to: public policies –both at national and EU level –such as environmental restrictions and the abolition of the milk quota system in April 2015; price developments at world, EU and national levels; problems of profitability in the sector; changing demand both in terms of quantity and quality; increased competition in the EU due to the progressive opening of the market through international trade agreements; a changing geopolitical context; the international economic situation; and the consequences of climate change.

 

The Common Agricultural Policy (CAP) includes provisions for the support of the EU cattle sector such as direct payments and market measures under the first pillar and rural development measures under the second pillar. However, challenges in the sector are of such a nature that specific support measures –especially for the dairy sector –were introduced. These included the 2012 milk package to improve bargaining of dairy farmers in the milk supply chain and the 2015 aid package targeting the beef meat and dairy sectors through, among others, aid for private storage and promotion.

In light of these considerations, the aims of the current study are to:

1) Analyse the current situation of the EU cattle sector focusing on its characteristics, the interlinkages between the meat and dairy sectors, the challenges and opportunities it is facing and the reasons behind the current crises.
2) Propose specific policy options for CAP measures for supporting the EU cattle sector by focusing on an assessment of the role of current CAP measures for farmers’ incomes and by discussing potential alternative measures of support for the sector.

While all farms  of the EU cattle sector share commonalities, they also differ considerably in important aspects across EU regions. Moreover, farms in the cattle sector that are specialized in certain products or production systems are clustered regionally. As a result, the effects of changing market conditions or policies do not affect farm income in the EU regions in a uniform way. Therefore, this study takes a regionally disaggregated perspective to account for these differences. Specifically, the methodological approach is based on two dimensions: (1) Macro-level analysis treating the sector as an entity from an aggregated point of view and; (2) Regionally disaggregated micro-level analysis ensuring the cohesion perspective of the analysis. Based on this pronounced cohesion perspective, the study assesses the diverse structures of the EU cattle sector, its regional disparities and the effects of potential future policy choices on these two aspects.

The methodological approach provides a comprehensive quantitative analysis which in part is descriptive and in part uses statistical methods for generating insights into the EU cattle sector. The quantitative analysis uses a number of suitable indicators and metrics, and a range of statistical tools and models to quantify and summarize multi- dimensional relationships between indicators. This approach allows to discover patterns in the data which are not detectable by descriptive analysis. Throughout the study, the analysis will follow seven perspectives along the macro-micro divide (Table 1). The analysis is complemented by results of interviews with experts in the EU cattle sector from various MS.

Table 1: Perspectives of the analysis

The study is written in a comprehensible and illustrative non-specialist style. It presents the information in an accessible visual way using informative infographics such as graphs or maps. Table A.1 contains a glossary in which key terms are explicitly defined and connected with their legal source documents where applicable.

The study is structured according to the conceptual model shown in Figure 1. The conceptual model includes the main factors that influence the current state of primary production and supply chains in the cattle sector, namely societal (demand, trends), political (policy) and economic (local and global markets) factors. The conceptual basis for the sections on the dairy and bovine meat supply chain is the Structure-Conduct- Performance paradigm. Each supply chain section includes three sub-sections: market structure includes indicators such as size distribution of processing firms, concentration ratios and regional distribution of the main EU processors; conduct provides information about the degree of vertical coordination along the supply chain; market performance is discussed based on the development of price margins and competition in the sector, and the level of innovativeness.

The heterogeneity of the EU cattle sector at regional level is substantial. Pronounced differences exist between regions in western and eastern Member States (MS) as well as between regions in northern and southern MS. Farms in the western MS often operate on several dozens of hectares specializing either in milk or in bovine meat production. Farms in the eastern MS often continue to be small in size (often smaller around 10 ha or less) and have a mixed production portfolio, i.e. keeping several kinds of livestock or having a mixed crops-livestock focus. The EU cattle herd is concentrated in and around the Benelux, in and around the Alps, eastern Poland, north-western France and Ireland. The sector has special importance in naturally disadvantaged areas, such as mountain ranges or other regions of low production potential. Alternative farm specializations are barely feasible in these regions due to poor soil  quality, topographical conditions or climate. Therefore, farms will rather opt to follow an extensive production system.

Germany, France, The Netherlands, the UK, and Ireland are the five most important EU MS in the EU dairy sector measured by standard output. Moreover, the EU15 has a share of 83% in total EU milk production. The variance in prices for dairy products has increased substantially since 2007. From 2000 to 2006 the monthly prices ranged between 5% and 10% and they increased to price ranges between 15% and 30%. Per capita consumption of cheese in the EU has increased by more than 15% since the year 2000 while per capita consumption of fresh dairy products declined by 4% in the EU. The structure of the dairy processing sector differs substantially between MS and between regions. The dairy sector in MS in the north and north-west of the EU is based primarily on large-scale dairy companies that process in excess of 100 thousand tons of milk per year. In the south and the east of the EU, a larger share of milk is processed by medium- or small-scale dairy companies. Mergers and acquisitions and joint ventures are key avenues for the major dairy companies to uphold growth rates and profitability. The concentration ratio of the four largest EU dairy companies increased in the period between 2008 and 2013 from 32% to 36% of the total turnover in the dairy sector. However, concentration ratios in individual MS can be much higher than those of the EU level. Main changes in the conduct of dairy sector supply chains include: increased vertical coordination through long-term contractual arrangements and partnerships between dairy companies and dairy farmers (farmer supply groups) and increased sustainability standards driven by downstream actors in the supply chain.

More than 50% of the standard output of specialized cattle fattening farms is generated in France, Germany, Spain and the United Kingdom. Moreover, the EU15 produces 89% of the total bovine meat in the EU. Input cost productivity of bovine meat production is decreasing from south-western EU regions to north-eastern regions. Highest input cost productivity clusters on the Iberian Peninsula as well as in parts of Italy. Highest average cattle densities are clustered in and around the Benelux, in north-western France, northern Italy, Croatia, and southern Finland. Bovine meat production in the EU has declined since 2000 and this decline has been larger (in percentage points) in the EU13 than in the EU15. In comparison to dairy prices, cattle slaughter prices have shown a much smoother development and lower price variability. While the concentration ratio in the beef and veal processing sector is low for the EU as a whole, concentration levels within some individual MS are much higher; the top-5 beef and veal companies exceed a 50% market share in Germany, France and the United Kingdom.

A close interconnection exists between the bovine meat and milk sectors of the EU. A substantial share of the bovine meat production results from the dairy herd. Apart from pure milk breeds and meat breeds, farms may also have dual-purpose cattle breeds. Moreover, while most commercial cattle farms in the EU have milk as their main output (78%), switching between meat and milk production is possible through cross-breeding., The interconnection between the milk and bovine meat sector provides some additional flexibility to farmers, especially given the recent challenges in the dairy sector.

The major challenge for farms in the EU dairy sector is the structural  change in milk price formation in the EU since 2007, resulting in increased price volatility. Moreover, cattle farms in the EU13 may face higher survival risks than their EU15 counterparts in both the dairy and the bovine meat sector due to their smaller average scale and already smaller share in total EU production. Opportunities for the EU dairy sector derive from future growth in demand in major third country markets. However, these opportunities will depend on possibilities for further diversification of processed dairy commodities into high-quality and high-value products as well as macro-economic and political developments in importing countries. A challenge faced by the bovine meat sector is the response to the societal debate about high stocking densities in the sector, particularly in regions of the Benelux, north and south of the Alps and north-western France.

The analysis of the Direct Payment Scheme and farm incomes shows that on average EU dairy farmers are reliant on CAP payments for about 70 percent of their income, while for beef farms this share is even more than 100 percent. Income simulations under the new CAP conditions show that in the majority of cases, farm incomes are higher under the new CAP compared to the old CAP. This effect may be partly explained by changes in farm structure (e.g. farm scale increase) or by distributional changes within MS. The latter can be particularly more pronounced in those MS that switched from the Single Farm System to a flat rate per hectare. Three policy options are suggested: (1) Grazing premium for beef and suckler cows; (2) Market transparency and market information initiatives; (3) Product differentiation and institutional export promotion.

Link to the full study: http://bit.ly/585-911

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