We maintain our overall cautious outlook for growth in the German agribusiness sector as a slew of factors - ranging from a changing regulatory environment to weak demand and unfavourable market pricing - will deter significant increases in production. Our core view for the sector envisages livestock and dairy industries posting very lacklustre growth over the forecast period to 2017, owing to ongoing reforms in the EU Common Agricultural Policy and stricter safety and quality standards. Meanwhile, we see relatively more room for growth in the sugar and corn segments on the back of growing demand for biofuels and expected reforms in these segments.
- Corn production growth to 2016/17: 13.0% to 5.22mn tonnes. Corn yields have been improving significantly in recent years as an emphasis on increased output has led farmers to adopt more productive practices. Biofuels will also be a main driver of crop production over the coming decade.
- Poultry consumption growth to 2017: 6.4% to 1.74mn tonnes. We expect poultry consumption to gain ground as consumers are attracted to the meat's healthier image and lower price.
- Sugar production growth to 2016/17: -4.0% to 26.8mn tonnes. Unfavourable base effects from a strong 11.4% year-on-year (y-o-y) growth in production during 2011/12 will make it difficult for the segment to sustain this growth in the short term. However, sugar output is expected to recover somewhat as the abolition of the sugar production quotas by 2015 encourage farmers to plant more sugar.
- 2013 real GDP growth: 2.0%, up from 0.4% in 2012 and forecast to average just over 2% from 2013 until 2017.
- Consumer price inflation: 2.4% y-o-y in 2013, up from 2.1% in 2012.
In January 2013, Bastian Fassin, executive committee member of the Association of the German Confectionery Industry (BDSI), urged regulators to reform the highly regulated European sugar sector. Fassin believes this will bring relief to confectionery companies, which are otherwise struggling with shortages in sugar supply from Europe, increase in raw material prices and often facing the threat of company closures or takeovers. The association has specifically called for the lifting of the European sugar quota and a lowering the EU's protective tariffs.
Meanwhile, there is more pressure on Germany to tighten its regulatory environment for the livestock and dairy segments. In February 2013, the Ministry of Agriculture and Food of Belarus temporarily suspended import of finished meat and dairy products from Germany companies, particularly those located in Bavaria, Lower Saxony and North Rhine-Westphalia provinces. The suspension comes following inspections carried out by the Belarusian department of veterinary and food supervision, which concluded that some of these firms failed to meet the product safety guarantees provided by the Federal Ministry of Food, Agriculture and Consumer Protection of Germany.
Similar concerns were also raised by Russia in November 2012, which at that time also revealed that it was planning to ban imports from some Bavaria-based firms. As many as 21 Germany dairy product suppliers, out of the total 103 dairy suppliers listed for export to Russia have already been slapped with bans, Rosselkhoznadzor estimates.
The EU-27 2013/14 wheat crop is set to face downside risks, as UK output is expected to be downgraded on the back of excessive rains. Although we are maintaining our forecast for a mild increase in the EU crop to 132mn tonnes, even a small downgrade to production would take the market into deficit for the 2013/14 season following a nearly 40mn tonne deficit in 2012/13. A downgrade to the EU crop would also lead to an increase in the spread between benchmark Paris and Chicago prices. The subdued forecasts for EU production growth inform our forecasts for higher average wheat prices in 2013.