Common Agricultural Policy Reforms Could Cut into EU Equipment Sales

Common Agricultural Policy Reforms Could Cut into EU Equipment Sales

Since 1962, the European Union’s (EU) Common Agricultural Policy (CAP) has supported farmers in member states through a wide-ranging system of subsidies and programs, which provides:

  • income support (e.g., direct payments, subsidies, rebates)
  • market measures (e.g., initiatives that respond to a sudden drop in crop prices)
  • rural development measures (e.g., programs designed to address problems specific to rural areas)

Among its key goals, the CAP promotes agricultural productivity and global competitiveness by providing financial assistance to farmers to enhance the profitability of their operations. This might include investing in new agricultural equipment – combined Western and Eastern European demand for which totaled $34 billion in 2017.

With Brexit impending, the EU is anticipating a more than €13 billion (about $14 billion) loss in annual funds, as the UK is one of the top three union contributors. This increasingly inevitable prospect has added urgency to the numerous calls being made to adopt a more sustainable approach to the CAP.

While EU sales of agricultural equipment are expected to rebound through 2022 following a period of decline, the proposed CAP reforms currently on the table may alter that outlook.

Proposed Changes to the CAP

In 2018, the EU funded the CAP to the tune of €58.8 billion (about $66 billion) – or roughly 40% of the EU’s total annual budget – 71% of which went to income support, while market measures and rural development measures accounted for 24% and 5%, respectively.

In June of that year, the European Commission proposed a series of reforms for the 2021-2027 period designed that aim to make the CAP more efficient and affordable, including a 5% budget reduction to be phased in between 2021 and 2027.

Nine broad objectives were identified as key areas of focus for the CAP going forward, each of which consisting of numerous, more granular components:

  • climate change action
  • creating vibrant rural areas
  • ensuring fair incomes for farmers
  • environmental care
  • increasing global competitiveness
  • preserving landscapes and maintaining biodiversity
  • protecting food and health quality
  • rebalancing the power structure of the food chain
  • supporting generational renewal

These reforms also seek to make the funding allocation process fairer, such as by reducing the share of total payments that go to large farms.

Consensus Difficult as Member-State Beneficiaries Weigh In

With 27 current stakeholders (excluding the UK) to hear from, CAP negotiations have been contentious and time-consuming. While countries where agricultural activity is limited tend to support reducing the CAP budget, other nations – such as France, the largest recipient of CAP funding – are more resistant because farmers represent a critically important constituency.

Additionally, countries that line up one side of a proposed CAP reform can disagree completely on another aspect, adding to the complexity of negotiations. For instance, while Germany disagrees with the Netherlands about capping direct payments to large farms – largely due to the prevalence of large commercial farming operations in Eastern Germany – both nations oppose “convergence”, which involves equalizing the amount of money that farmers receive per hectare throughout the EU.

Furthermore, while member states may be approaching consensus in some CAP matters, the results of upcoming elections could potentially hamper that progress, or at least alter agreed details.

Although the negotiation process will likely continue to be slow and combative, the EU must come to an agreement in order to avoid destabilization of its agricultural sector. Among the types of issues being negotiated by the European Commission as of December 2018 are:

  • budget issues (i.e., size of the CAP budget and where cuts will be made)
  • competences issues (i.e., what which EU bodies will make decisions about the future of the CAP)
  • sequencing issues (i.e., timeline for the implementation of reforms)

CAP Reforms Could Threaten Agricultural Equipment Demand Growth

Reforming the CAP is essential to maintaining the economic viability of not only European farms, but also the entire EU project itself. If costs are not controlled, the CAP will soon account for more than half of the total annual budget, which will force the EU to cut spending in other critical areas.

Cuts in EU funding to local farmers could result in ramped up spending on a national basis. In France, for example, President Emmanuel Macron announced a controversial €5 billion “cultural revolution” in the agricultural sector to reduce its reliance on the EU for financial support.

While renationalizing funding will offset some losses, cutting CAP benefits will nevertheless have a negative impact on private farm incomes, the profitability of commercial farming operations, and the state of rural areas in Europe in general. As a result, EU farmers will be less able to afford productivity-enhancing new technologies – such as automated tractors and other equipment. Not only will this lead to lower slower agricultural equipment sales growth throughout the EU – the largest market for these products in the West – it will also make local farmers less competitive in global markets.

On the other hand, if CAP reforms do succeed, the program will become more sustainable and equitable to the benefit of the EU agricultural sector in general.. It will also help both private and commercial farmers in Europe to plan ahead for the long term and make strategic investments.

While details remain hazy, one thing is certain: There are big changes afoot for EU farmers.

Want to Learn More?

For more on information on the global agricultural equipment industry, see Global Agricultural Equipment, a recent study from The Freedonia Group.

About the Author:

Gleb Mytko  is an Industry Analyst at The Freedonia Group, where his work covers the global automotive, transportation, and machinery markets.