Germany Agribusiness Report Q3 2009

Germany possesses Europe's largest economy and is a world leader in technical efficiency and high quality production. This holds as true for the agricultural sector as it does for capital goods and manufacturing. Over the years, Germany has been the EU's most solid and well-functioning agricultural producer and easily its number one exporter, benefitting from robust EU support. However, the current climate represents one of increasing anxiety for farmers, as the global economy tanks, leading to reduced export demand and eroding profits. BMI's latest Germany Agribusiness Report analyses the challenges faced by producers as these factors play out, while looking towards future opportunities and potential caveats.

BMI predicts the German economy to record its worst y-o-y contraction since unification, of around 4.6%, with the malaise expected to permeate every corner of society. Most noteworthy in regards to the agricultural sector is the prospect of dwindling profits, as relatively low prices are unmatched by a proportionate dip in input costs, thus squeezing margins to Given the high predisposition of the German economy to global consumption demand, there is little to instil confidence regarding production growth across many of the agricultural sub-sectors in 2009, although we feel that a return of global economic health will translate into a relatively rapid turnaround, which is possible largely because of the high level of technological advancement evident in the industry.

Conversely, food consumption is forecast to remain comparatively unaffected by the downturn, despite the fact that we predict overall household consumption to fall by 2.2% y-o-y in by end-year 2009, attributable to higher unemployment and lower consumer incomes. We see the demand for food holding up quite well in the face of the crisis, possibly as lower retail prices help offset the effect of falling incomes. However, this is not indicative of a long term trend, and consumption dynamics are particularly varied across the board to 2013. The technological prowess of production leaves little scope for massive capacity growth across the board, leading us to foresee double digit production growth in just three of the categories covered in this report; pork, cheese and corn (at 17.96%, 20.09% and a whopping 58.20% respectively).

Enhanced levels of public sensitivity to health issues will have a marked effect on the consumption of sugar and other foods perceived detrimental to body. We forecast the demand for sugar-based confectionery to fall by 9.09% in value terms to 2013, contributing to a 0.29% slide in overall sugar consumption for the same period. Having said that, y-o-y sugar production growth to 2013 suggests expansion for the sugar-based bioethanol industry.

Meat eaters in Germany are among Europe's most demanding, with an estimated 33kg consumed each year. Pork consumption is particularly high, and a dietary staple, as evidenced by the ubiquity of regional hams, sausages and salamis. Pork processing and packaging is highly developed, giving consumers a spectrum of prices (and quality) to cater to every consumer income level. We predict local pork demand to increase by 4.1% throughout the projection, the fastest demand-growth meat, the maturity of the industry is a significant reason as to why we fail to predict stronger growth.

Cheese consumption is also robust, among the highest on the continent with foreign varieties, such as Norwegian Leerdammer and Dutch Edam becoming increasingly popular alongside traditional German varieties. Strong production growth is expected to be outpaced by consumer demand, at 26.69% (the fastest growing household consumption good), as consumers seek alternative sources of protein to meat as the recession bites, while diversifying their diets on the upswing. Meanwhile, the demand for butter is predicted to suffer from higher levels of consumer health-consciousness, coupled with the availability of numerous and less expensive substitutes.

Germany is losing friends in response to the government's decision to ban the cultivation of GM corn.

Agriculture Minister Ilse Aigner announced in April a U-turn on the cultivation of genetically modified (GMO) corn MON 810 in Germany on the grounds that it causes a pertinent environmental threat. With this, Germany has joined other EU countries such as France, Austria, Hungary, Luxembourg and Greece, which have also banned the crop, despite approval from the European Food Safety Authority for its cultivation.

The issue of environmental sustainability has always been an important consideration for the German economy and issues pertaining to the use of harmful chemicals have become increasingly salient in recent months, while the government is trying to raise consumer sentiment relating to organic foods. Some feel that Aigner's stance is based more on garnering political support than for the greater interests of the country, particularly prior to the European Parliamentary elections. What can be said is that, while she seems increasingly determined to make Germany a GM free zone, this resolve will be challenged more than ever in the forthcoming years, as farmers seek to raise productivity to compensate for gradually decreasing levels of support.