Regional Overview - Five Key Themes For Europe Agribusiness - FEB 2018

BMI View: Reform of the C ommon A gricultural P olicy will begin in earnest in 2018, and environmental criteria will re-emerge as a key focal point. Environmental considerations could have detrimental impacts on regional palm oil consumption, while the removal of sugar production quotas will favour low-cost producers including France and Germany . EU and UK agriculture could be severely affected in the event of a 'cliff edge' Brexit. Finally, we assess the future impact of big data .

1. Elevated Threat Of A 'Cliff-Edge' Brexit

The probability of the UK leaving the EU in March 2019 with no transition arrangement or trade deal in place remains elevated. While our core view remains for a transition period of up to two years to be eventually agreed by the two sides, we look at the main channels through which a 'cliff edge' scenario would impact the UK and European agribusiness sector. In the case of a 'cliff edge' Brexit, the European meat sector could be particularly affected ( see 'Trade Disruption To Impact EU Meat Producers', December 12 2017) while UK agriculture would face mixed impacts in the first 12 months: these would be positive for agricultural subsectors that run a trade deficit and negative for those that run a surplus. The sector would face strong headwinds over 12-24 months, as food price inflation would force the government to unilaterally ease import restrictions, thus increasing import competition and placing pressure on UK producers' margins. Domestic subsidies and new trade deals would lead to a new equilibrium out to 2021 ( see ''Cliff Edge' Brexit: Agribusiness ' , November 8 2017).

2. 2017 EU Sugar Quota Removal: France Strengthening Leadership

In September 2017, the EU abolished its sugar production quota, as it did with dairy quotas in March 2015. As is the case with the dairy industry, we believe the quota removal will lead to an increase in production and declining regional sugar prices (which have traditionally traded at a premium to ICE global prices), which could hurt less competitive producers ( see 'France & Germany To Strengthen Dominance Amid Sugar Consolidation Wave', February 25). France will emerge a stronger leader after the EU removes its sugar production quotas as the country is the largest sugar beet producer and refiner globally. France will also be the largest EU sugar exporter once the bloc turns into a net sugar exporter after the post-2017 consolidation wave ( see 'France: Uncontested EU Sugar Leader, Stronger After 2017', October 21 2016).

Beet Belt Member States To Benefit Most After 2017
Select EU Member States - Sugar Beet Area (mn hectares, LHC) & Production (mn tonnes, RHC)
Note: 'Beet Belt' = France, Germany, UK, Poland, Belgium, the Netherlands, Austria and Czech Republic. Source: Eurostat, BMI

3 . IoT & Big Data In Europe's Agribusiness: Iron Curtain Divide

EU member states are well-placed to integrate and benefit from AgTech over the coming years due to large and diversified agricultural production as well as elevated subsidies. Countries in north-western Europe as well as Czech Republic and Slovakia are set to outperform. The combination of a large budget devoted to agriculture and the relative ease to implement public-private partnerships across the bloc is a key strength of the EU. Moreover, the EU hosts a strong ecosystem of research institutions, start-ups and established private players active in ICT and agriculture. The Black Sea region will underperform. Connectivity is one area where we see limited disparities between Western and Eastern Europe, which will support a more homogenous adoption of AgTech than in other regions, such as Asia. Flexible access to data generated by IoT devices in the EU as well as limited barriers to localisation and data storage will be paramount to enable precision agriculture to take off in the EU ( see ' IoT & Big Data In Europe's Agribusiness: Iron Curtain Divide ' , March 16).

Scale Of EU Agricultural Output To Benefit ICT Integration
Select Commodities - EU Share Of Global Output (%)
Source: USDA, BMI

4 . Growing Obstacles For Palm Oil In Europe Despite Sustainability Efforts

The ongoing slowdown in the EU's use of palm oil will continue in the coming years as the commodity will increasingly suffer from a poor reputation and from the ensuing stricter regulations put in place by authorities. Food use will come under rising pressure, while ongoing reform to the EU's renewable policy will cap the use of palm oil-based biodiesel in the region, which was one of the main drivers behind the strong expansion of palm oil consumption in recent years (see ' Growing Obstacles For Palm Oil In Europe Despite Sustainability Efforts', May 4 ).

Palm Oil's Market Share At Risk For Food Use, Stagnant For Industrial Use
EU Vegetable Oil Consumption By Type - For Food Use (LHC) & Industrial Use (RHC), % total
Sources: BMI, USDA

5. CAP Reform Momentum Will Pick Up

The 2018 CAP reform process has begun, and environmental criteria will re-emerge as the most contentious issue in the debate. Most observers agree that 'greening' payments over the current CAP period between 2014 and 2020 have yielded few environmental benefits, while increasing the bureaucratic burden on farmers. The post-2020 iteration of the CAP will attempt to streamline environmental regulations and increase the linkages between direct payments and the provision of 'public goods' ( see Stricter Environmental Requirements Expected In Post-2020 CAP , November 17, 2017).

  • CAP reform will focus on 'greening' payments and environmental regulations.

  • The CAP reform process will be driven by environmentalist politicians from member states and in the European Parliament.

  • The reform process will seek to streamline the bureaucratic process and introduce greater linkages between farm subsidies and the provision of 'public goods'.

  • We are maintaining our European agricultural production forecasts for now, but could revise them downwards should there be new and onerous additions to the current regulatory environment.

CAP Reform
Major Themes By Reform Cycle
Source: BMI