German farm prices low

Over the past year, German farmers have experienced the dark side of global markets, as farm-gate prices for their products have crashed, with a global oversupply facing weakened demand.

One major factor was that Russia imposed an embargo on imports of European Union food products in August 2014. It was Moscow's tit-for-tat response to EU economic sanctions against Russia, imposed in connection with the geopolitical competition for influence over Ukraine.

Another factor was that the EU dropped its system of dairy quotas in April of this year - leaving European dairy farmers fully exposed to the vagaries of global supply and demand. It's a move they may have cause to regret.

"The Russian embargo cost German farmers about a billion euros [$1.1 billion] in revenue over the past year," said Michael Lohse, an official with DBV, the German Farmers' Association. "That, coupled with weaker demand in Asia and increased production in New Zealand and the US, has left dairy farmers and others facing an oversupply problem in their main European markets."

The net result has been an average drop in revenues per farmer for all types of farm of 28.3 percent year-on-year, with dairy farmers' revenues down even more, by 38 percent. Low farm-gate produce prices are expected to last well into next year, perhaps much longer. That's likely to drive some small farmers out of business.

Low produce prices paid to farmers haven't translated into lower retail food prices in Germany - in fact, they rose by 2.3 percent year-on-year between November 2014 and the same month in 2015. Retailers' profit margins have benefited from low farm-gate commodity prices - the pocketbooks of German retail consumers haven't.

Wine and organic produce are exceptions

While dramatically lower incomes have hit most kinds of farms over the past year, there are two exceptions: Wine-grape growers and organic farmers.

Gross income per wine-grape farmer increased 6.1 percent year-on-year, and for organic farmers, known as "bio" farmers in Germany, it went up by a whacking 10 percent, according to DBV statistics.

"Prices for organic produce have uncoupled from the prices of conventional produce in recent years," said Lohse. "They've become separate markets. Since there's too little domestic production of organic produce, prices have stayed relatively high."

Organic farming took root earlier in Germany than in most countries, with unconventional variants such as "biodynamic" farming that mixed practical farming techniques with spiritual concerns.

"Bio" farms cover more than a million hectares of farmland, or 6.3 percent of the nation's total. There are about 23,300 organic farms in operation - that's 8.5 percent of all German farms. Because organic farms are on average smaller than conventional farms, however, organic farmers' revenues were only 4 percent of all farm-gate income - about 1.6 billion euros in total. Retail organic food sales totalled 8 billion euros in Germany last year.

A shortage of available land

During the past several years, the average size of organic farms has declined slightly and total acreage hasn't grown - despite rising demand for organic produce. There are three reasons, according to Gerald Wehde, an official at Bioland, a German organic farmers' association.

"First and foremost, the problem is competition over agricultural land," Wehde told DW. "Organic farmers can afford to pay between 350 and 500 euros land rent per hectare per year. But maize farmers can pay 800 to 1,000 euros for the same land in some regions."

The reason, Wehde explained, is that over the past 10 years, heavy federal subsidies for biogas have led to about 800,000 hectares of agricultural land being converted to maize monocultures, with the corn-cobs fed directly into biogas digesters to produce low-carbon methane.

Over 60 percent of farmland is leased rather than owned by farmers in Germany. Owners generally lease to the highest bidder - and that often turns out to be a farmer looking to plant huge fields of maize in order to benefit from federal biofuels subsidies.

Biofuels subsidies are environmentally and economically dubious, according to critics, when all their costs and consequences are taken into account. Maize monocultures reduce biodiversity; repeated cultivation of maize on the same soil risks exchausting the humus layer; row spacing favors soil erosion; and the number of jobs per hectare generated by biofuel maize plantations is much lower than the jobs created if the same land is used to produce organic vegetables, dairy or meat.

Prices and incentives

A second reason for the dearth of farmers willing to convert from conventional to organic agriculture in recent years has been price signals. The past year's crash in prices for conventional produce is a new phenomenon - though Wehde expects it to be a lasting one. As recently as 2011, prices for conventional produce were very high, and farmers had little financial interest in making the considerable efforts entailed in switching to organic farming.

A third factor is that although the federal government long ago set a target of 20 percent for the fraction of agricultural land devoted to organic farming - a number that was originally meant to have been attained by 2010 - it hasn't followed up with adequate incentives capable of motivating conventional farmers to convert to "bio".

Wehde said there's plenty of opportunity to displace imported with domestically produced organic produce. The key, however, will be to change subsidies regimes and regulations so that organic farmers can gain access to acreage.

The good news, Wehde said, is that the past year has seen an uptick in applications from conventional farmers to convert to organic farming. If the prices for conventional produce remain stuck in the basement, that trend is likely to grow organically.