Sector Report by Bank Austria Economics:
Austrian agriculture has optimistic prospects for the future
- Positive development in the past two years: Agricultural revenues grew by roughly one third in 2010 and 2011 to EUR 2.6 billion
- Agriculture loses a bit of momentum in 2012: Losses in revenue despite price increases due to dramatic decline in harvest yields
- High level of revenue growth in recent years independent of subsidies; funding will decline over the medium term
- Positive prospects for Austrian food: Products are competitive, demand remains stable, regional factors and freshness are important to consumers
- Organic food is in demand and is shaping the retail food industry: Turnover rose to EUR 1.2 billion last year, demand remains stable
Austrian agriculture has two very successful years behind it: Agricultural revenues in Austria rose by nearly one third in 2010 and 2011 to a total of EUR 2.6 billion. Last year in particular, production increased dramatically, and producer prices also rose in many segments, allowing them to make up for the high input costs and the declines in agricultural subsidies. However, this positive development will weaken somewhat in 2012 as revenues fall again this year despite further increases in producer prices. As the most recent sector report on agriculture by Bank Austria's economists shows, dramatic declines in harvest yields are putting a damper on results for this year.
"The excellent result last year was due to large production increases and very large price increases. This year, however, losses in revenue are expected despite higher producer prices, which will not be able to compensate for the partially dramatic declines in harvest yields," said Günter Wolf, an economist at Bank Austria, in his analysis of the agriculture sector. According to the results of the latest harvest survey, 12 per cent less vegetables and roughly 20 per cent less grains have been produced so far in 2012. In the case of pork and beef, the slight declines in production can be balanced out by higher prices: By August, the prices of slaughter pigs had risen by an average of 10 per cent and the prices of beef cattle by 16 per cent. This means that in 2012, the average beef prices for the year will be above the level from before EU accession for the first time. Dairy farming can also expect to see slight losses in income this year. According to Wolf, "Following a very good year for dairy in 2011, milk prices fell by roughly 13 per cent from April to September. The main factor bringing prices down is weaker demand for more highly processed dairy products. Since August, the volumes of milk delivered to dairies have also declined. In the long run, however, milk consumption in Austria is growing as a result of the rising number of consumers – in other words, problems with sales are not expected."
The high product prices over the past two years show that Austrian agriculture profits indirectly from substantial increases in global market prices. Nevertheless, producer prices in important segments are still below the level from the mid-1990s. For example, in the first nine months of 2012, an average of 5 per cent less was paid for slaughter pigs than in 1994, and wheat is at least 25 per cent cheaper depending on the quality.
Revenues rising, subsidies falling
Roughly two thirds of agricultural revenues in Austria are funded by subsidies. These not only serve to secure the supply to the population and stabilise the agricultural market in accordance with the main EU treaties. Ultimately, they are also remuneration for the sector's services that are not regulated by the market, such as the preservation of rural structures and the provision of region-specific food. Of the EUR 1.6 billion that were paid out to agriculture in the form of subsidies last year, the main part (EUR 1.3 billion) came from EU funds. This amount corresponds to 2.3 per cent of the EU agricultural budget. According to Bank Austria economist Günter Wolf, "Due to the difficult structural conditions, Austria's farmers profit substantially from the EU agricultural regime. In comparison to its 1.9 per cent portion of EU agricultural production, the sector receives an above-average portion of the agricultural budget. The planned changes to the Common Agricultural Policy in the next budget period from 2014 to 2020 will not make any fundamental changes to the system: Although the subsidy portion of agricultural revenues will decline further, losses will remain moderate because the EU agricultural budget is likely to see only small cuts in nominal terms." In other words, Austria's agriculture does not have much to fear when it comes to funding cuts. However, the high level of revenue growth in the past two years (17 per cent in 2010 and 15 per cent in 2011) was independent of subsidies. The proportion of agricultural revenues made up by funding has been declining for years. In the past ten years, the subsidy portion has fallen from an average of 75 per cent to 62 per cent. The amounts paid out in the last five years have also fallen.
Austria's food benefits from regionalism and freshness
"The prospects for Austria's agriculture are positive. Demand for food is growing slowly but steadily: over the short term, as a result of regional and freshness factors, which play a big part in the decision to buy fresh foods – much more than price. And over the long term, due to the persistent rise in the number of consumers," said Wolf, discussing the positive future prospects for Austrian agriculture. In other words: Austria's consumers are buying Austrian products. The demand for regional and fresh foods is another reason why Austria has become increasingly self-sufficient over the years when it comes to meat, dairy products and vegetables. The long-term demand for "Made in Austria" is also secured by the rising number of consumers. In the next 20 years, the population of Austria is expected to grow by 600,000 to more than 9 million people.
Since its high in 1997, Austria's trade deficit in food has fallen by roughly EUR 200 million to EUR 1 billion in 2011. In total, EUR 6.4 million worth of food from Austria was exported last year and EUR 7.4 million worth of food was imported. According to sector analyst Wolf, talking about the competitiveness of Austrian food: "Ultimately, there is not much risk that Austrian agriculture will lose larger market shares to foreign competitors in the future. Although the food balance will slide slightly further into negative territory again in 2012, Austrian food remains competitive. In the last ten years, the foreign trade balance for food has deteriorated in just three product groups: fish and shellfish, fruit and vegetables, and coffee and spices." However, only fruit and vegetables and the products made from them are of competitive relevance to Austrian producers because fish, coffee, tea and spices are predominantly imports. But as the growing self-sufficiency in fruits and vegetables in recent years shows, this product group is also not seeing a substantial increase in competition.
Demand for organic foods continues to grow
With roughly 16 per cent of farms producing organic goods, Austria is already one of the largest organic countries in Europe and worldwide in relative terms. In light of the growing pressure on the agricultural budget and therefore also on agricultural revenues, switching to organic production is still a promising alternative for the long term. Demand for organically produced foods has grown dramatically in recent years; last year, turnover from organic products rose by 8 per cent to EUR 1.2 billion. Austria's consumers spend roughly EUR 118 per capita annually for organic products, putting Austria in fourth place in Europe behind Switzerland, Denmark and Luxembourg. "As measured by the EUR 14 billion in total spent by Austrian households on food, the amount spent on organic products is still relatively small and will increase further. We also expect the market for fresh organic products – which has hit a growth threshold of roughly EUR 300 million in the retail food industry in recent years – to grow again. However, this will require that consumers gain more confidence in the quality of these products," concluded Wolf.
Enquiries: Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0) 50505 - 41954
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