Finnish agri-food sector outlook 2020

The coronavirus pandemic is hitting the economy hard, and the recovery is slow The coronavirus pandemic has caused an unprecedented stagnation in the international economy. It has increased uncertainty, disrupted corporate production chains and led to drastic measures in several countries to limit the spread of the virus, while securing economic recovery after the crisis. The Finnish economy is forecast to decline by around 4–5% in the current year. The estimate is based on the assumption that after the Q2 col¬lapse, restrictions will gradually be lifted, public stimulus packages will help businesses deal with the acute crisis phase, and the economy will start to grow slowly in the late summer. However, there is still a great deal of uncertainty about the success of the pandemic repression. A sig¬nificant economic recovery would therefore require an increase in demand in key export countries, which is not foreseeable before the next year. Demand for basic foodstuffs is increasing at the expen¬se of value-added products The effects of the coronavirus pandemic on the agri-food sector can be divided into short- and long-term effects. At first, the coronavirus trig¬gered a demand shock in the food market, which occurred as a shift in demand to grocery stores and long-life basic foodstuffs. Such products include rice, pasta, porridge flakes, crispbread and canned foods that can be stored in room temperature. In the long term, the agri-food industry may be affected by an econom¬ic downturn or recession, which would result in layoffs, increased unem¬ployment, loss of earnings and growing uncertainty. As a result, demand for value-added products would fall, and consumption would increasingly shift to basic foodstuffs. Consequently, less money would be entering the food supply chain, which in turn would reduce the profitability of the sector. The impact on the food sector may remain relatively small if the crisis is over within a few months, and the economy returns to a growth path. The more strongly the coronavirus hits general economic development, the bigger the impact on the food sector. Domestic food prices remain stable Food security is deteriorating in the world. In addition to the coronavirus pandemic, migratory locust swarms were causing damage in countries that are critical in terms of food security. Worldwide, the effects of the coronavirus pandemic are reflected in abnormally strong price fluctua¬tions in the coffee price, for example, due to changes in both supply and demand. Fluctuations in fruit and vegetable prices may also increase. In Finland, food prices have remained relatively stable despite the coronavi¬rus pandemic. Food prices have been steadily increasing since January 2018. In the retail trade statistics for the first quarter of 2020, the effects of the coronavirus pandemic are reflected in the growth in sales (in eu¬ros) of preserved, frozen and cereal products. In the case of canned fish and shellfish products and frozen fruit and berries, the increase in sales is as high as 25%. In beverages sold in the retail trade, grape wines and non-alcoholic and low-alcohol beers have also increased significantly. There is also a significant increase of more than 15% for rice, flour, pasta and other cereal products, and preserved vegetables. In the second quar¬ter, food sales are still increasing, but will stabilise once the restrictions due to the coronavirus pandemic start to lift. Agri-food exports have increased at a record rate Finland’s agri-food exports achieved an all-time record in 2019. The value of agri-food exports from Finland totalled EUR 1,716 million, i.e. an increase of 13% on the previous year. In addition to the new markets, the value of exports was increased by an increase in export volumes and prices. The sanctions imposed by Russia have impeded food exports in recent years but have also led companies to focus their attention on other markets. There is still work to be done in the promotion of exports, because agri-food imports into Finland in 2019 amounted to EUR 5,279 million. Imports increased only slightly, by around EUR 4 million. However, the growth in imports has slowed since 2013 and has nearly halted in recent years. High export potential in special oat products The Finnish cereals sector is self-sufficient for all cereals. With the excep¬tion of occasional milling and feed batches, the cereal processing indus¬try relies on purely domestic raw materials. Finland’s cereal stocks are high in comparison with other countries. This makes it possible in crop failure years to largely cover the demand with the previous years’ stocks. However, the high level of self-sufficiency, abundant stocks, competi¬tive disadvantages in exports and underdeveloped export channels have resulted in a low domestic price level compared with European prices. Finland has the highest export potential in oats. Special oat products in particular have good opportunities on the export market. Cereal consump¬tion is shifting from wheat to healthier cereals such as oats, the consump¬tion of which has been driven by food-related innovations, high-quality research and a diverse product range. High demand for pork exports to China Finland is almost self-sufficient in meat production. The production vol¬ume of pork and poultry meat has covered domestic demand in recent years, while beef production accounts for around 80% of consumption. In early 2020, the consumption of domestic meat has increased in relation to imports due to the coronavirus restrictions imposed on the hospitality industry, the main user of imported meat. The annual volume of imports will be affected by the speed at which the situation in the hospitality industry and industrial kitchens stabilises once the coronavirus restrictions are lifted. For the first time ever, the consumption of domestic meat shows signs of decrease. This almost exclusively concerns pork. However, pork produc¬tion is driven by exports to China, which started in the autumn of 2019 and which has also continued to be stable in 2020. Domestic consumption of beef remains relatively stable, and poultry meat consumption is growing strongly. Dairy exports are increasing In 2015, the volume of milk production turned to a downward trend, and it continues to adjust to market demand even today. The self-sufficiency rate of Finnish milk production, calculated according to milk protein, still significantly exceeds 100%. Towards the end of 2019, the average producer price for milk passed the 40-cent mark for the first time since 2015. The producer price increased due to the stabilisation of the imported dairy products and an increase in the value of exports. Exports to China especially have increased. However, the market uncertainty caused by the coronavirus is weakening the expectations of price increases. The global demand for milk will con¬tinue to be lower than production due to the pandemic and may lead to a relatively high stock accumulation. In Finland, however, the effects will probably remain moderate. Domestic demand has remained generally stable, except for a decrease in the consumption of liquid milk. However, one of the main challenges for the dairy industry has been adapting to the restructuring of the dairy mar¬ket due to a decrease in demand in the wholesale trade for the hospitality industry and an increase in household consumption. Some countries have struggled to receive milk collected from producers, because the process¬ing capacity has been unable to adapt to the change in demand. Shortage of labour on horticultural farms In 2020, the horticultural sector has been overshadowed by the excep¬tional situation caused by the coronavirus pandemic and the possible in¬fections of horticultural entrepreneurs and workers. The exceptional cir¬cumstances have been also causing a shortage of labour on horticultural farms. Uncertainty may also arise in the availability of imported products. For example, Finland’s self-sufficiency rate in fresh vegetables has been around 60–70% in recent years. In 2019, cucumber became the main greenhouse vegetable, followed by tomatoes. In 2020, the area of greenhouse production remained roughly at last year’s level. In particular, the cultivation area of sweet peppers in¬creased significantly. Strong seasonal and annual variation is typical of producer prices for hor¬ticultural products. The weather during the growing season plays a bigger role in the price of outdoor products than in the price of greenhouse vege¬tables. Producer prices are usually lowest during the main harvest season, and producer prices for stored products increase as the storage season progresses. Greenhouse vegetable prices, especially in case of cucumber and tomato, also tend to collapse during the main harvest season in June–July, because the market becomes congested. Average farm size increases In 2019, there were approximately 46,800 agricultural and horticultural enterprises in Finland. Since 2010, the number of farms has decreased by around a fifth, and the average farm size has increased by 10 hectares. In 2019, farms had on average 49 hectares of arable land. A good third of this area is rented. One of the reasons for the decline in the number of farms is the decreas¬ing trend in generation renewal. As fewer farms are passed on to the next generation, the proportion of young farmers is decreasing, and the farm¬ing population is ageing. Especially the number of farmers over 65 is in¬creasing. Last year, the average age of farmers was 53. Profitability of agriculture is decreasing Despite the increase in the enterprise size, the profitability trend in agri¬culture and horticulture has been declining throughout the 2000s. Accord¬ing to a profitability study by Luke, both the cultivation area of farms and the number of animals on farms have increased, as has the gross revenue of agriculture. Nevertheless, the average real value of revenue per hectare has decreased. This development is due to poor producer price develop¬ment, price fluctuations and increasing input prices. The entrepreneurial income of agriculture and horticulture has remained stagnant for years. After hitting the bottom in 2016, the entrepreneurial in¬come increased slightly in 2017 and 2018. However, in 2019, the entrepre¬neurial income decreased again, and it was sufficient to cover just under 40% of the target hourly salary of EUR 16 from agricultural work, as well as of the target net interest income from equity. The budgetary framework for the CAP reform agreed A lively political debate on the future of the EU’s Common Agricultural Pol¬icy (CAP), which significantly affects the operating conditions of Finnish agriculture, is expected during 2020–2021. In July 2020, EU heads of states and governments finally agreed on the next budget for the bloc. The CAP for 2021-27 would get €344 billion, which is below the €383 billion in fund¬ing allocated in 2014-2020, but above €324 billion originally proposed by the Commission in 2018. The deal should also pave the way for smoother CAP reform negotiations. The lack of the next EU budget has held back progress in shaping the next farming policy for 2021-27. For Finland, safeguarding agricultural funding in the EU budget negoti¬ations has been one of the political priorities. A successful result in ag¬ricultural funding is directly linked to Finland’s net contribution position, because agriculture accounts for more than 60% of total EU expenditure in Finland. In addition, the importance of support in agricultural income for¬mation in Finland is significantly higher than the average in the EU Mem¬ber States, because production costs in Finland are higher than market prices due to natural constraints. Topical phenomena The special themes of this review will introduce the reader more closely to the effects of the coronavirus pandemic on the food chain. Another special theme is the impact of the African swine fever (ASF) pandemic on pork markets. The third special theme concerns environmental evaluation and knowledge-based management in general, as well as its special role in policy guidance. Knowledge-based management refers to action

2020