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Finnish agriculture facing CAP adjustment challenge

07.06.2006
Finlands agricultural sector is facing a period of serious re-adjustment to the challenges of the Common Agricultural Policy (CAP) reform and the impending agreement in the World Trade Organization (WTO).

The application of the single payment scheme introduced in the context of the CAP reform of 2003 starts in Finland in 2006. Coupled CAP support will continue to be applied for suckler cows, bulls and ewes and starch potato, but the CAP support for arable crops will be completely decoupled from the production, i.e. about 90% of the CAP support will be decoupled in Finland. This will lead to a reduction in the cereal area by 1020% and further decrease in cereal export. The set aside area will grow from the present 200,000 ha to 500,000600,000 ha during the next decade, which could reduce the production volume up to about 10%.

Finnish farm output will fall further across the board as a result of WTO-linked reductions in border protection. Particular subjects of concern for Finnish producers are the tariff cuts for butter, beef and poultry meat, and sugar. Severe cut in tariffs plus phasing out of export subsidies would pose considerable problems especially for the Finnish dairy sector. Market prices for milk in Finland would drop and the income of dairy farmers would decline. The dairy sector is the largest and most important agricultural sector in Finland, accounting for about half of the return on agricultural production.

The above information is found in the annual report Finnish Agriculture and Rural Industries 2006 by MTT Agrifood Research Finland. The report recites the most important topical events in agricultural policy and the agricultural and food markets. The information package is a review of the previous year’s events, an update on recent trends and a probe into the future. Specific themes of the report include the impacts of the CAP reform on agricultural production in Finland, the future of locally produced food, the reform of the environmental support, and the challenges of climate change for plant production in Finland.

Rapid structural development

The structural reform of agriculture continues to be extremely rapid in Finland. The number of active farms dropped to about 69.000 farms last year, when in 1995 the number of farms with production was still over 95.000. The number of farms has been decreasing at an annual rate of over 3 percent, and even faster in animal production. For example, the number of farms specialising in milk production has dropped at an annual rate of almost seven percent. Eastern Finland has been witnessed the largest proportional decline (32%), and Northern Finland the smallest (23%).

As the number of farms has decreased, the average size of farms has grown. Between 1995 and 2005 the average size of farms grew by 44 percent from under 23 field hectares to almost 33 hectares. Approximately two thirds of the increase in farm size has been reached by means of field leasing. In 2005 approximately 31 percent, or 705.000 hectares, of the 2.24 million hectares of field cultivated by active farms was leased.

Despite rapid structural development, the productivity development of agriculture has been relatively slow. The same input as in 1992 resulted in 13 percent more agricultural production output in 2005. The increase in agricultural productivity has thus been less than one percent per year.

Agricultural income in the agricultural and horticultural sector saw the third consecutive year of negative growth in 2005. The amount of agricultural income generated was a little short of EUR 918 million. This means a decline of approximately 14 percent over the previous year, i.e. a little over EUR 152 million. The decline was caused by higher costs. The rise in oil prices in particular has increased costs in recent years, as it has a direct effect on energy costs, as well as an indirect effect on several other production inputs such as fertilizers. The prices of machinery and construction have also increased at a rate clearly higher than the general inflation rate in recent years.

Strong growth in cheese imports

Milk production in 2005 remained roughly at the same level as in the previous year. However, milk price decreased by four percent as a result of an EU policy reform which cuts the minimum prices of butter and milk powder. The profitability of Finnish dairies is also being weakened by milk product imports from the new EU countries. Imports include yoghurt from the Baltic countries and cheese from Poland.

Cheap imports cause the biggest setback for Finnish dairies in the cheese markets. Cheese imports increased by 14 percent in 2005. Already a third of all consumed cheese is imported. The largest countries of origin are Germany, Denmark and Poland. The fact that more and more domestic cheese (38 percent in 2005) is being sold to export markets is balancing the situation in the cheese markets. Furthermore, the domestic consumption of cheese has increased.

Food trade deficit increased

The value of Finnish food exports in 2005 totalled EUR 980 million, which is a little over four percent more than in the previous year. Food imports were valued at EUR 2,601 million, which is seven percent more than in the previous year.

Food prices increased by only 0.2 percent in Finland in 2005. The consumer price index changed by 0.7 percent over the previous year, so the price development of foods was slower than the average inflation rate. Nevertheless, in the 2000s food prices have increased somewhat faster than consumer prices in general. The nominal increase in food prices between 2000 and 2005 is almost nine percent. During that same period, the general consumer price index has increased by 5.5 percent.

Professor Jyrki Niemi | alfa
Further information:
http://www.mtt.fi/english/research/economic/jul106a_FA2006.pdf

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