France has one third of all EU agricultural land, it is the world's second largest exporter of agri-food products after the US and has a proud agricultural tradition. In BMI's new France Agribusiness Report for Q3 2009 we examine how the industry gained and lost from the boom in commodity and energy prices over the past couple of years and the situation today as the country grapples with domestic and global recession. Organic production is becoming increasingly popular and the government, reflecting policy making at EU level, has introduced the concept of a 'new model for agriculture' no less, based on the promotion of sustainable practices. The Business Environment section to this report looks at this in some detail. While rising grain and milk prices in 2007 and 2008 were good news for primary producers, they hit the livestock industry and food processors hard, dramatically forcing up input costs. The recession is likely to force production levels to fall further in 2009, as export markets dwindle in the face of uncertainty and there is a cutback in consumer spending. Poultry production is forecast to fall by 1.1% y-o-y, pork production by 1.6% and beef production by 1.7%. Disease has been a constant worry for the country's livestock industry. The cattle sector has been hit by an outbreak of bluetongue disease since the summer of 2006. The disease has now spread from the North, where it was first detected in August 2006, to affect large swathes of the country and exports of live cattle were blocked through periods of 2007. The latest outbreak of avian flu was reported in January 2009. We do not expect the outlook for the French livestock industry to improve much over the next few years. Over our forecast period we expect poultry production to contract by 5.36%, while we forecast output of pork and beef to fall by 4.41% and 10.15%, respectively. There will be changes for the dairy industry over our forecast period. The EU is reviewing its system of milk production quotas, which are currently due to come to an end in 2015. Rocketing prices in the second half of 2007 led many to call for the quotas to be scrapped early so EU farmers could take advantage of the growing world demand for dairy products. The EU Council has decided to raise the quota for milk production in 2008-2009 by 1%. This is likely to be the first in a series of small increases of the production quota until it is finally completely phased out in 2015. However, the French Agriculture Minsiter Michel Barnier has been keen to point out to disgruntled French milk producers, worried that prices could fall even further, that nothing is set in stone and has said that meetings are planned in 2010. The freeing up of the dairy market will present both challenges and opportunities for dairy farmers in France. Large, efficient producers will be able to expand and increase output, but this may come at the expense of smaller, less efficient operators who are unable to compete in a free market. The government may find itself having to offer assistance to ease inefficient dairy farmers out of the market. In March 2009 Monsieur Barnier spoke of the introduction by the EU of a payment linked to milk production in mountainous zones and the Piedmont although all the details have not yet been worked out. On the grain front, France had a bumper year in 2008. Cereal production is estimated by Eurostat at over 70mn tonnes, the highest in Europe and the biggest harvest since 2005. Wheat production rose by 18% to 39mn tonnes. However, France was not the only country with a bumper crop and world wheat supply is considerably higher than in 2007. Combined with the current world economic woes, this lead to a slump in wheat prices at the end of 2008. There was a bounce back in early 2009 but the wheat market is expected to remain volatile throughout the rest of the year. We reported in March 2009 that global wheat prices edged slightly higher to trade at USc550/bushel at one point on March 18 but we expect further downside over the coming months. As the biggest agricultural producer in the EU, France is by far the biggest beneficiary of EU Common Agricultural Policy (CAP) funds. CAP spending, including direct aid, price support and rural development, amounts to about EUR50bn and France receives 20% of this. Little wonder then that France has traditionally been a staunch supporter of CAP and fought hard to preserve advantages for French farmers. Crop growers have been beneficiaries of massive wheat production and export subsidies, helping the country to export to less developed markets as well as enjoying robust trade within the EU. The 2008 food crisis - whereby global food prices soared in the first half of the year before plunging to one-year lows - led to great levels of disagreement within the EU on the best strategy to sustain farmers incomes while ensuring adequate levels of affordable food. France led the cause for those countries believing that the crisis provided a perfect example of why strong regional support was needed. Domestic consumption is likely to fall during the recession affecting production across the agri-food chain. Higher cost items such as more expensive cuts of meat or premium Red Label poultry could be particularly affected. We have revised our real GDP growth forecast for France to 0.8% in 2008 with a 2.4% contraction for 2009, before improving slightly to 0.2% in 2010. Unemployment is expected to increase to 9.4% in 2009 up from an estimated 7.8% in 2008.
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