EUROPEAN MEAT MARKETS AND LIVESTOCK PROJECTIONS …Bretagne and Pays de la Loire and in the German...

Brussels, 22 March 2006 O/REF: UECBV-N-020-2006-EN

EUROPEAN MEAT MARKETS AND LIVESTOCK PROJECTIONS 2005 - 2012

EUROPEAN LIVESTOCK AND MEAT TRADING UNION / EUROPÄISCHE VIEH- UND FLEISCHHANDELSUNION

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UECBV – 81A rue de la Loi (box 9) – 4th floor – 1040 Brussels, Belgium Tel : +32 2 230 46 03 – Fax : +32 2 230 94 00 – Email : [email protected]

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Executive Summary This report forecasts the developments in the European meat and livestock markets from 2005-20121. The medium-term perspectives for the European meat sector are positive for pig meat markets, while beef meat production is expected to decline as a consequence of the CAP reform and strong competition from the world market. The European Commission considers the development for the poultry market to be positive over the medium term, however in the short term the severe impact of the Avian Influenza in 2006 has le d to a drastic trade shock and sharply declining prices and imports. Overall per capita meat consumption is projected to increase by 2.2 % by 20122. Poultry and pig meat projections have been revised slightly downwards compared to previous forecasts in view of the latest short-term expectations. Changes to the historical statistics of the new Member States have triggered a downward revision of beef and sheep and goat production projections. The latest available trade figures have lowered expectations of beef and poultry exports but raised the level of pig meat exports foreseen over the medium term. European livestock projections for 2005 – 2012 expect the total EU-25 cattle herd to decrease due to the quota-driven structural decline in dairy cow herd size, but also as a consequence of beef meat production abandonment mainly in the Member States which have fully decoupled their cattle premiums. In 2012, most of the EU-25 cattle herd would be located in the traditional dairy producing regions along the Atlantic bow and the North Sea coast and in south-eastern Germany and northern Italy. The biggest suckler cow herds would be found in Ireland, in the French regions Pays de la Loire, Bourgogne, Limousin, Auvergne and Midi-Pyrenees and in the Spanish regions Castilla y Leon and Extremadura. White meat production is expected to increase further, especially in Denmark, Spain, western Poland, northern Italy, in the French regions of Bretagne and Pays de la Loire and in the German regions of Weser-Ems and Münster. As regards the analysis of the differentiated impact of alternative decoupling scenarios, it can be concluded that the status quo policy implementation as notified by the EU Member States is already considerably advantageous with regard to the sectors’ regional competitiveness, market orientation and income situation in comparison to the full coupling scenario. However, additional benefits could be gained by decoupling to the full extent in line with current policy provisions. It is projected that full decoupling would raise the overall EU-25 agricultural income by 0.8 %. Full decoupling would reduce the production and market distorting policy effects enabling a more efficient allocation of resources. Producers would furthermore benefit from greater market orientation in their production decisions and from higher prices, which would broadly compensate lower levels of production.

1 This report does not take into account the recent decisions adopted in the framework of the Doha Development Round of trade negotiations in Hong-Kong in December2005 and the conclusions of the Council of the European Union adopted in December 2005 in Brussels on the 2007-2013 financial perspectives. 2 It should be acknowledged that these relatively positive projections for the meat markets do not take into account any effects of the Avian bird influenza since December 2005 nor the potential dramatic impact that an Avian influenza outbreak in the EU could have on the EU markets, with disrupted production and consumptions patterns, trade flows and a pronounced effect on market prices.

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Table of Contents

Executive Summary .........................................................................................2 Table of Contents ............................................................................................3 Introduction ...................................................................................................4 Part 1 European Meat market projections 2005-2012 .......................................5 1. Markets provisions for animal feed................................................................... 5 2. Projection for the beef and veal market ............................................................ 6 3. Projections for the pig meat market ................................................................. 8 4. Projections for the poultry market ................................................................. 11 5. Projections for sheep and goat meat markets .................................................. 15 6. Summary of the projections of the European Meat markets 2005-2012 ................ 16 Part 2 European Livestock projections 2012................................................... 17 1. Reference scenario: status quo policy implementation ....................................... 18 2. Alternative scenarios: full decoupling and full coupling ...................................... 20

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Introduction This note summarizes the main results in relation to the European Meat and Livestock industry of the report “PROSPECTS FOR AGRICULTURAL MARKETS AND INCOME 2005 – 2012, Update for the EU-25, Scenario analysis on decoupling” published on 9th February 2006 by the European Commission, Directorate-General for Agriculture. It also includes input from other Commission documents most notably the latest analysis from the FAO (of February 2006) to take account of the changes in the poultry sector since the large-scale outbreak of AI. This note is divided into two parts: Part 1 analyses the main trends and underlying assumptions of medium-term projections for meat markets in the European Union for the period 2005 - 20123. After briefly summing up the main developments of the markets for animal feed, the note will present detailed projections, graphs and figures of the estimated future of beef and veal followed by pig- and poultry meat as well as sheep- and goat meat. Part 2 provides for regional analyses of the future European livestock sector by the year 2012. Since the livestock markets are to be heavily influenced by different implementation options of the Member States concerning the CAP, the note analyses not one but three possible scenarios for the European livestock markets. They are:

1. Current status quo of the Single Farm Payment. 2. Fully decoupled EU-25 European Meat Livestock sector in 2012. 3. Fully coupled EU-25 European Meat Livestock sector in 2012.

3 The results presented are based on data and other information available at the end of November 2005 and constitute an update of the medium-term projections published in previous reports. In particular the projections take into account the short-term developments foreseen for 2005 and 2006 on domestic and world markets.

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Part 1 European Meat market projections 2005-2012

1. Markets provisions for animal feed Cereal feed demand would continue to expand from 152 mio t in 2005 to 156 mio t in 2012. However, compared to the previous decade when feed use expanded by more than 20 mio t, the coming years would only exhibit a moderate growth. The EU cereals market medium-term projections depict an outlook that would appear moderately positive for most EU cereals, with the noticeable exception of barley, which would only gain competitiveness on domestic markets towards the end of the decade. Cereal yield growth until 2012 would then show a more modest pattern than earlier projections suggested, with an average annual growth estimated at approximately 0.8 % between 2005 and 2012. The projected rise in cereal yields would more than offset the decline in cereal area and entail a gradual expansion in cereal production over the medium term. After a pronounced short-term fall in 2005 at 250 mio t due to drought in parts of the EU, the increase in mandatory set-aside and generally lower levels of yield, EU-25 cereal production would resume expanding to reach 271 mio t in 2012.

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2. Projection for the beef and veal market: EU to remain net importer of beef meat over the medium term

Beef production increased slightly in 2004 due to higher end-of-year slaughtering in the Member States that started applying decoupling from 2005. An expected marginal decrease in 2005 is projected to be followed by a short-term increase with the phasing out of the Over Thirty Months Scheme (OTMS) in the UK from the beginning of 2006 and a limited de-stocking of breeding animals linked to the introduction of decoupling of beef direct payments. The latter – combined with a slight increase in cereal feed prices- is expected to have a significant impact on the beef sector by reducing the incentives toward an intensive beef production system and production from unprofitable production systems. As a result beef production is expected to decrease over the medium term to around 7.6 mio t in 2012, a reduction of 4 % from 2004. The resulting decline in gross value added (income) for agricultural producers would be more than compensated by the sharp rise in the funds granted to them in the form of direct payments, national top-ups and rural development funds (estimated on the basis of the original EU Commission proposals for the 2007-2013 financial perspectives). The agricultural labour input in the EU-N10 countries is assumed to fall by 4 % on annual average over the next decade in line with the restructuring of the agricultural sector boosting the rise in agricultural income expressed per labour unit. Beef production, which has been lower than consumption in 2003 for the first time in 20 years, is expected to remain so throughout the projection period due to declining cattle herd from dairy sector,, the impact of decoupling of direct payments,, the impact of market disruptions of 2001 BSE crisis. Beef consumption is projected to stagnate over the medium term. In the new Member States the potential increase -fuelled by rising income levels- would be broadly offset by the sustained price increase and the low consumer preference for beef meat, thus increasing discrepancies between consummation and production.

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Therefore, a relatively steady demand and a very tight domestic supply due to a deficit in production are expected to result in firm prices over the projection period, attracting more imports entering at full duty, notably high-quality beef cuts from South America. Total beef imports are expected to reach 0.6 mio t by the end of the projection period. Extra-EU-25 exports will be more and more constrained by low domestic availability and lower competitiveness and -after a possible slight increase in 2006 due to temporarily increased availabilities linked to the end of the OTM in the UK- exports are projected to continue their declining trend, falling below 100 000 t by 2012.

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3. Projections for the pig meat market: Growth rates for pig meat production and consumption are expected to be lower than in the 90s

The slight decrease in EU-25 pig meat production in 2004-2005 is forecast to be followed by a steady increase over the medium term driven mostly by internal and external demand. EU-25 pig meat production is projected to reach around 22 mio t by 2012. Major contributors to this growth are expected to be the new Member States. Poland is, by far, the biggest pigmeat producer among the new MS and added 15.7% to total EU pig numbers with 18 997 030 pig slaughtering per year. That makes Poland the 4th biggest European producer (EU-25) of pork products. Hungary ranks second best with 5 082 000 heads. This is followed by the Czech Republic with 3 429 000 heads, Slovakia with 1 553 880 heads and Lithuania with 1 061 000 heads.

Pig meat is likely to remain favored by consumers as –following a slight decrease observed in 2004-2005- per capita pork consumption is projected to increase from 43.4 kg/year in 2004 to 44.0 kg/year by 2012, with a marked increase in the new Member States. The strong increase in extra-EU-25 pig meat exports of 2004 is expected to be followed by a return to more normal exports levels in 2005. Over the medium term there is scope for a slight increase in extra-EU-25 exports, while the intra community trade is projected to show stronger developments.

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4. Projections for the poultry market – FAO poultry consumption projections

for 2006 lowered by 3 million t. whilst Commission believes EU poultry production is to keep its growth over the medium term in line with growing consumption

With the latest outbreaks of AI across the world, predictions about the poultry meat market become increasingly difficult. The conclusions drawn from the research and the analysis conducted by the FAO in February 2006 are potentially contrasting the results of the Commission forecast from December 2005 to a large extent. Both organizations agree that poultry production gradually recovered from the impact of avian flu in the Netherlands during spring 2003 and reached 11 mio t in 2004. However, according to the FAO, as outbreaks of avian influenza in wilds swans in Europe are progressively reported in February 2006, European poultry markets have witnessed immediate and dramatic swings in consumer responses, increased trade bans and sharp downward price movements. Unlike 2004 and most of 2005 when the AI consumption impact was largely restricted to the Asian region, new AI detections in February 2006 in more than 12 nations around the globe have resulted in immediate and sharp consumption declines in importing countries in Europe.

Revision of the FAO 2006 Poultry Meat Outlook in light of developments of Avian InfluenzaProjected change from previous 2006 estimate

Consumption Change %2003 2004 2005 2006 p 2006r from 2006p Change

(1000 metric tonne)World 76,734 78,643 82,024 84,632 81,819 -2813 -3%

Africa 3,939 4,034 4,147 4,269 4,067 -202 -5%North America 15,960 16,563 17,034 17,447 17,291 -156 -1%Cental America/Carr 3,998 4,101 4,342 4,548 4,548 0 0%South America 9,576 10,084 10,837 11,507 11,227 -280 -2%Asia 27,904 27,909 28,953 29,513 28,896 -617 -2%Europe 11,292 11,629 11,851 12,067 10,727 -1340 -11%Oceania 895 911 950 991 991 0 0%CIS 3,166 3,410 3,906 4,291 4,068 -223 -5%

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FAO poultry consumption projections for 2006 lowered by 3 million t Revised FAO projections for 2006 assume a continuation of the current AI crisis which implies extended poultry consumption shock in Europe. Declining international and domestic poultry prices are expected to restrict both production growth and import demand. An erosion in the previously expected gains in per capita poultry consumption will likely push down global poultry consumption in 2006, currently estimated nearly 3 million t lower than the previous 2006 estimate of 84.6 million t4. Responses among European consumers to H5N1 avian influenza found in wild bird flocks have been variable, with consumption shocks ranging from a dramatic 70 percent decline in Italy in mid-February to 20 percent in France to a more muted 10 percent response in northern Europe. These responses are similar to the European situation in late 2005 when widespread consumer concern about AI outbreaks moving progressively westward from Asia contributed to an annual one percent drop in EU-15 countries in 2005. Meanwhile, outbreaks have prompted European governments to implement wide-ranging containment measures which include establishing security zones, increased surveillance plans, and requirements that outdoor poultry be kept indoors. Policy responses from third countries to the EU discovery of AI in wild birds have ranged from bans on imports while some infected countries, such as Romania, have increased tariffs to support local prices as consumption drops. Poultry trade shocks likely As consumers look for alternatives to poultry, global trade prospects will likely erode from the 10 percent gains witnessed in 2005. FAO global poultry trade projection has been revised down 500,000 t from the previous estimate of 8.6 million t and below shipments in 2005. The newly affected regions to-date, Europe, some areas of Central Asia and the former Soviet Union, as well as parts of Africa account for approximately nearly one third of global poultry imports5. These projections, however, are largely dependent on the geographic spread of AI and the pervasiveness of consumer concerns, in particular their perspectives on the safety of imported meat compared to domestically available product. Sharp poultry price declines around the world are leading to lower chicken placements in many affected countries, pushing FAO’s production projection down to 8.2 million t, only marginally higher than that in 2005. The effects of AI on world poultry markets according to the FAO are illustrated in the tables below.

4 The projections are provisional based on market developments in early 2006. 5 In 2005, Europe, Africa, and CIS countries accounted for a respective 12%, 8% and 23 % of poultry imports.

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Imports Change %2003 2004 2005 2006 p 2006r from 2006p Change

(1000 metric tonne)World 8,225 7,224 8,086 8,598 8,029 -569 -7%

Africa 576 621 675 756 726 -30 -4%North America 171 201 190 198 198 0 0%Cental America/Carr 853 777 866 901 901 0 0%South America 83 124 220 263 263 0 0%Asia 3,645 2,922 3,285 3,373 3,228 -145 -4%Europe 1,284 890 939 1,101 777 -324 -29%Oceania 39 37 43 44 44 0 0%CIS 1,572 1,649 1,864 1,958 1,888 -70 -4%

(1000 metric tonne)Exports Change %

2003 2004 2005 2006 p 2006r from 2006p Change

World 8,163 7,480 8,054 8,626 8,128 -498 -6%

Africa 13 11 16 17 16 -1 -5%North America 2,889 2,755 2,870 2,940 2,890 -50 -2%Cental America/Carr 6 16 17 2,800 16 -2784 -99%South America 2,170 2,772 3,216 3,477 3,257 -220 -6%Asia 1,751 894 1,039 1,238 1,211 -27 -2%Europe 1,279 977 837 878 678 -200 -23%Oceania 25 26 26 27 27 0 1%CIS 30 30 33 33 33 0 0%P=previous projection; r=revised projection

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In contrast, the medium-term outlook from the European Commission for European poultry production remains relatively positive. This is due to the fact that these relatively positive projections for the poultry market do not take into account any effects of the Avian influenza since December 2005 nor the potential dramatic impact that an Avian influenza outbreak in the EU could have on the EU meat markets, with disrupted production and consumptions patterns, trade flows and a pronounced effect on market prices.

In the non-AI scenario, per capita consumption is projected to increase from around 23 kg/year in 2004 to about 24.6 kg/year by 2012, with a stronger growth in the new Member States, where it should benefit from a growing consumer preference. Extra-EU-25 poultry exports are projected to stagnate in line with strong competition on the world markets by low cost producers and unfavourable US$/€ and Brazilian Real/€ exchange rates. Poultry imports are assumed to resume growing over the longer term, with increased imports of frozen fillets and mainly cooked and processed poultry meat.

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5. Projections for sheep and goat meat markets: EU sheep/goat sector not

to fully recover from the 2001 Foot and Mouth Disease The EU Commission has reported that production of sheepmeat and goat meat in the Community was expected to decrease in 2005 by 1.6%. Although UK slaughterings have risen, carcase weights have been lower. EU average market prices for light lambs were 23% higher in the month of November of 2005 than in the same period last year. For heavy lambs the increase was only 5%. The forecast for next year is for a rise of 2.3% in prices stimulated by a further fall in production. Total EU imports from all destinations in the period January to September 2005 amounted to 267,000 tonnes carcase weight equivalent (with live imports coming mainly from Romania and Bulgaria). In 2005 EU Sheepmeat quotas existed for Uruguay (5800 tonnes), Chile (5417 tonnes), Argentina (23,000 tonnes), Australia (18650 tonnes) and NZ (226,500 tonnes). Minor quotas for Iceland, Turkey, the Farce Islands, Greenland and Norway amounted to another 2000 tonnes in total. Some of these quotas will increase in 2006 following agreement to compensate countries for loss of markets in the 10 countries that joined the EU in 2005. Of the larger quotas, only Argentina’s remained substantially unused in 2005.

The forecast for the medium to long term is that EU sheep production will decline, whilst demand remains strong resulting in a positive outlook for the EU sheepmeat sector. Self-sufficiency in EU sheepmeat is likely to decline, which should impact positively on Irish sheep producers both on the domestic and export market. Sheepmeat prices should remain firm and the price differentials with competing meats should be maintained.

Quotas for sheepmeat agreed under the current WTO agreement with Australia and New Zealand will have a major impact on both supply and price levels. Recent sheep industry projections by the Australian meat industry forecast an increase in sheepmeat production of over 37 per cent by late 2008.

The following table can summarize the projections for the medium term for sheep and goat meat:

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6. Summary of the projections of the European Meat markets 2005-2012 In summary, the projections for the European Meat markets in the medium term are summarized in the following graph and table.

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Part 2 European Livestock projections 2012 With the previous chapter giving an overview on the medium-term development of European Meat markets, the part on hand is dedicated to complementary regionally differentiated analyses of the European livestock sector focusing on the year 2012. The developed picture of the future is greatly shaped by the implementation of the latest reforms of the Common Agricultural Policy adopted in 2003, which redesigned agricultural support. In this respect, the chapter will provide analysis for three scenarios in line with the different implementation scenarios of the Single Farm Payment (see box) on the EU-25 agricultural sector in 2012. They are

⇒ the projected situation under the status quo policy implementation (as notified by Member States)

⇒ the projected situation under full decoupling ⇒ the projected situation under full coupling of direct payments

The Single Farm Payment - revisited The Single Farm Payment – the core element of the newly reformed CAP – aims first and foremost at improving the sector’s market orientation, allocation of production, transfer efficiency and income stability. As far as policy implementation is concerned, Member States follow different approaches to adjust their systems of direct payments. All in all it can be expected that until the year 2012 around 90 % of the total amount of direct payments is granted in the form of decoupled income support, whereas the figures for beef and sheep meat add up to 78 % and 73% respectively.

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1. Reference scenario: status quo policy implementation (90 % of the total amount of EU-25 direct payments are decoupled) Starting point of the scenario analysis for the year 2012 is the so-called reference situation, in which the implementation of the reformed CAP is incorporated according to the notifications transmitted by the MS (see Annex 1 for each MS’s choice). As it was already mentioned above, it is expected that 90 % of the total amount of EU-25 direct payments are decoupled. Ireland, the UK, Germany, Luxembourg, Italy and Greece have chosen to fully decouple direct income transfer in the beef and sheep sectors. The EU-N10 countries are assumed to apply the fully decoupled regionalized payment scheme plus national “top-ups” in 2012. With regard to livestock production, the projections indicate that EU-25 cattle herd would slightly decrease to 88.1 mio animals until 2012. The forecasted reduction is mainly driven by the structural decline in the dairy cow herd size, but also by the successive phasing-out of beef meat activities in the Member States whic h have fully decoupled their direct payments in the course of the CAP reform implementation. Specialised regions in Spain, France, Belgium, the Netherlands and Austria, keeping most of their cattle premiums coupled, are expected to expand their cattle-fattening herd over the medium term. Map 3 presents the regional cattle herd sizes in the EU-25 in the reference situation in 2012.

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Most of the EU-25 cattle herd would be located in the classical dairy producing regions along the Atlantic bow and the North Sea coast and in south-eastern Germany and northern Italy. The biggest suckler cow herds would be found in Ireland, in the French regions Pays de la Loire, Bourgogne, Limousin, Auvergne and Midi-Pyrenees and in the Spanish regions Castilla y Leon and Extremadura. EU-25 countries are expected to produce 21.9 mio t of pig meat and 11.7 mio t of poultry meat in 2012, whereas the contribution of EU-N10 in total pig and poultry meat production is 3.5 mio t and 2.2 mio t respectively. Until 2012, production is projected to increase significantly in Spain, Denmark, Belgium, Poland, Hungary, Czech Republic and in intensive livestock regions of France and Germany. Map 4 gives an overview of the regional pig herd sizes in the EU-25 in the reference situation 2012.

In the following section, the above-discussed medium-term perspectives for the EU-25 livestock sector are examined under two alternative scenarios: full decoupling and full coupling of direct payments.

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2. Alternative scenario: full decoupling

The full decoupling scenario assumes that EU-15 countries decouple their direct payments to the maximum extent in line with the current legislation. For the EU-N10, the fully decoupled regionalized payment scheme remains unchanged. In comparison to the reference scenario, full decoupling of direct payments in 2012 would lead to a decrease of 1.8 % in total EU-25 cattle herd to 86.5 mio animals. Total cattle herd would particularly decline in countries with coupled cattle premiums in the reference situation, like France, Spain, Portugal, Austria, the Benelux and Scandinavian countries (Map 7).

In Germany, where cattle premiums have already been fully decoupled in the reference situation, total cattle herd size would also decline, although only slightly by 0.9 %. This negative trend would not be reversed by a 4.6 % increase in German suckler cow herd. In Ireland, the UK, Italy and in the EU-N10, were cattle premiums have also been fully decoupled in the reference situation, full decoupling applied in the whole EU-25 would lead to a stabilisation or even a slight increase in total cattle herd size due to a more favourable price environment. EU-25 pig and poultry meat production would hardly be affected by full decoupling as these policy changes would neither directly nor indirectly influence these two sectors significantly.

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3. Alternative scenario: full coupling

In third option is the the full coupling scenario. It assumes that both EU-15 and EU-N10 countries couple their direct payments to the maximum extent in line with the effective CAP provisions. With regard to the flexible regulation in the in the beef sector, Member States are assumed to “couple” as follows: Denmark, Germany, Italy, Sweden and Finland are assumed to retain 75 % of the special premium for adult male bovines coupled. The Netherlands and the EU-N10 would fully couple the slaughter premiums for adult cattle and calves. All other countries keep 100 % of the suckler cow premium and the maximum amount of the slaughter premiums 8 coupled. In both scenarios, market measures remain unchanged. As a consequence, total EU-25 cattle herd would increase by 0.5 %. Map 10 presents the change of regional cattle herd size due to full coupling in comparison to the reference situation in 2012.

Major increases in cattle herd size of around 5 % would take place in Ireland, the UK, Italy, Germany and in the EU-N10, and thus again in countries having fully decoupled premiums in the reference situation. Due to a 3.2 % drop in producer prices as a result of full coupling, cattle herd size would particularly decrease in least competitive regions. EU-25 white meat production would not change significantly.

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ANNEX 1 Overview of the implantation of the CAP reform – choices by the Member States

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EUROPEAN MEAT MARKETS AND LIVESTOCK PROJECTIONS …Bretagne and Pays de la Loire and in the German...

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