Source: MTT Agrifood Research Finland

The accession to the European Union (EU) ten years ago was for the Finnish agriculture and food sector an unprecedented rapid shift from closed and regulated markets to open and more competitive ones. Finnish farmers faced a change in output prices, relative prices and direct support which were of exceptional magnitude compared to that of any other country which had ever joined the EU. Commitment to the Common Agricultural Policy (CAP) lowered the producer price level in Finland by 40-50% right at the beginning of 1995.

On market prices alone, the survival of Finnish agricultural production would have been very difficult. A comprehensive package of compensatory payments was therefore agreed to facilitate the adjustment. Various forms of support payments have played a central role during these first ten years in the EU in ensuring that Finnish agriculture succeeded in common EU markets. In 2004, support payments rose to €1.8 billion, which was 45% of the total return on agriculture and horticulture (€3.97 billion).

Despite the growth in direct payments, agricultural income has been falling in Finland. According to figures from MTT Agrifood Research Finland, agricultural income at fixed prices was almost 34% lower in 2004 than in 1994.

Rapid progress in structural development

Membership of the EU has not lead to any significant changes in the volume of Finnish agricultural production. However, the structural development of agriculture has been very rapid. The number of farms has fallen by more than 3% a year, and those engaged in livestock production even more. For example, the number of farms specialising in milk production has decreased by almost 7% a year. There were over 100,000 farms in Finland in 1994. Now, ten years later, there are but about 71,000 farms left. “There are no indications that the structural change will be slowing down in the long term. On the contrary, trade liberalisation will continue to call for further concentration in the sector. By 2020, there will be less than 40,000 farms left” says Jyrki Niemi, an agricultural economist at MTT.

Even though the structure of Finnish agriculture has changed quite rapidly, the development of agricultural productivity has been relatively slow. In 2004, the same use of production inputs yielded about 12% more than in 1992, showing that productivity grew by a little under 1% a year. The new economic environment has not promoted agricultural productivity development as was expected.

Food prices have risen less than the other prices

The consumer price of food fell, on average, by 11% when Finland joined the EU in 1995. Between 1995 and 2004, food prices rose by 11% in nominal terms, while the general consumer price index rose by 13.4%, which means that food prices are below the level in 1995 in real terms.

Membership of the EU has clearly reinforced the position of the retail trade in the food chain relative to primary production and the food industry. The share of the retail sector in the consumer price of food has increased by a few percentage points in recent years.

May 3, 2005

Downward trend in agriculture will continue as sales revenues decrease

The average profitability of farms and horticulture enterprises will weaken this year. The decrease in profitability will continue in nearly all production sectors in 2004 and also in 2005. Even increased subsidies will not compensate for the decreasing sales revenues and rapidly rising production costs. This year, an entrepreneur's return on own labour will total around five euros and 2.2 per cent interest on capital. Entrepreneurs will reach the APW wage in only three agricultural enterprises out of one hundred.

The results have been calculated using a profitability forecasting system for farming and horticulture developed at MTT Economic Research. The calculations are based on farm-specific forecasts from profitability-bookkeeping farms. The weighted results represent the development of agricultural enterprises throughout the country.

Gross return increasing only slightly, production costs up by 4.3 per cent

The sales revenues for farms and horticulture enterprises will decrease by two per cent in 2005 compared to 2003, and subsidies will increase by 4.4 per cent. The sum of the sales revenues and subsidies, i.e. the gross return, will decrease slightly in 2004 and rise by around 0.8 per cent, or EUR 99,500 per farm in 2005. The proportion of subsidies in the gross return is 40.5 per cent.

The gross return has only increased by 0.5 per cent since 2003, while agricultural production costs have risen 4.3 per cent. Production costs, which include compensation for the entrepreneur's own labour and equity, will increase this year to about EUR 126,800 per farm. Business profit, which is the difference between the gross return and production costs, is negative: the loss for 2005 will be an average of EUR 27,300, which represents an accrual in losses of EUR 4,700 more than in 2003. Grain farms have the smallest losses at EUR 15,000 and dairy farms the largest at EUR 35,000.

Agricultural income will decrease by EUR 2000

Agricultural income, i.e. the compensation for the entrepreneur's labour and equity, is predicted to decrease by nearly 10 per cent in 2004 and increase by around 1.6 per cent to EUR 20,700 in 2005. Therefore, agricultural income this year will be about 8.5 per cent or EUR 2,000 less than in 2003. Grain farms have the lowest income at around EUR 7,300 and pig farms the highest at around EUR 30,900.

The coefficient of profitability used in internal comparisons in agriculture is calculated by dividing agricultural income by the sum of the interest claim on equity and the wage claim for the entrepreneur's work. In 2003, the coefficient of profitability was 0.5, but in 2004 the average was 0.44, and in 2005 it will be about 0.43. Thus, under half of the wage and interest claims are met. In the cattle farm production sector (excluding the dairy sector) and for pig farms, the coefficient of profitability is about 0.55, and for grain farms 0.32. The difference in profitability between support areas will only be 0.17 units in 2005.

In comparison with other professional groups, the five per cent equity interest claim is deducted in full from agricultural income. This results in earnings that amount to about EUR 11,000 for 2005. If earnings are divided into working hours, the earnings per hour for 2005 work out to be EUR 3.50. Entrepreneurs achieve the average hourly wage of agricultural workers in only seven enterprises out of 100, and out of these only 3 achieve the AWP wage. Return on equity, an indicator used in the business world, is actually negative in agricultural production, -9 per cent.

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