This document discusses the exposure of EU farmers to the financial crisis based on a 2014 presentation. It provides background on the anatomy of the crisis, including the US subprime crisis in 2007, sovereign debt issues in Europe, and responses by central banks and governments. It then analyzes the potential impacts on EU farmers, including credit constraints, reduced demand hurting incomes, and public spending cuts. The presentation goes on to review agricultural structures, financial indicators from FADN data, interest rates, and estimated returns on investments for different EU countries to understand how farmers were affected.

1. Exposure
of
EU
Farmers
to
the
Financial
Crisis*
by
Mar:n
Petrick
and
Mathias
Kloss
Mathias
Kloss
3rd
Leibniz
PhD
Forum
Sec4on
B|
03
–
04
July
2014
*based
on:
PETRICK,
M.,
KLOSS,
M.
(2013):
Exposure
of
EU
Farmers
to
the
Financial
Crisis,
Choices
-­‐
The
magazine
of
food,
farm,
and
resource
issues,
Vol.
28,
No.
2,
pp.
1-­‐6.

2. www.iamo.de
2
• Following
headlines
from
crisis
countries
– Fears
of
credit
crunch
in
Italian
farming
sector
– Spanish
food
producers
worried
about
crumbling
domesMc
demand
Ø European
economies
and
the
EU
were
and
are
in
deep
trouble
• Against
this
background:
Ø How
severely
were
farmers
hurt
by
the
recent
crisis?
Ø How
much
were
farmers
exposed
to
the
threats
emanaMng
from
the
epicenters
of
recent
economic
turmoil?
Background

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3
Anatomy
of
the
crisis
I
•
ATer
years
of
expansionary
monetary
policy
of
FED
– massive
default
of
highly
leveraged
real
estate
loans
àoutbreak
of
the
U.S.
“subprime
crisis”
in
spring
2007
• Loans
distributed
globally
in
form
of
structured
financial
products
Ø hurt
porWolios
of
banks
and
insMtuMonal
investors
Ø Loss
of
trust
in
financial
system
• Large
losses
for
financial
insMtuMons,
difficulMes
in
borrowing
– Epitomized
by
collapse
of
Lehman
brothers
in
September
2008
• ReacMon
by
centrals
banks:
– Lending
rates
cut
– Increased
assets
on
their
own
balance
sheets
– Liquidity
for
the
banking
sector

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4
Anatomy
of
the
crisis
II
• Governments
guaranteed
solvency
of
financial
ins4tu4ons
and
set
up
sMmulus
packages
• Government
bailouts
and
na4onaliza4ons
à
explosion
of
sovereign
debt
• Problems
in
debt
exposure:
Greece
(December
2009),
Ireland,
Portugal,
Spain
(2010),
Italy
(mid
2011)
• GIIPS
countries
moved
to
center
of
interest
in
genuine
Eurozone
crisis
• Eurozone
governments
in
response
– EFSF
àESM
– ECB:
buy
unlimited
amounts
of
government
bonds
(August
2012)

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Anatomy
of
the
crises
III
• Series
of
crises:
banking,
growth
and
compeMMveness,
sovereign
debt
• crises
are
interlinked,
cannot
be
dealt
in
isolaMon
• Severity
is
not
the
same
in
all
countries

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Impact
on
EU
farmers
• The
banking
crisis
may
cause
a
credit
crunch
for
agricultural
borrowers,
by
spoiling
the
funcMoning
of
rural
financial
markets
• Economic
recession
and
dwindling
demand
for
income-­‐elasMc
food
products
may
lead
to
a
reducMon
of
farm
incomes
• Constraints
on
public
budgets
may
lead
to
spending
cuts
in
agricultural
and
rural
policies

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Agenda
• ProducMon
and
Banking
structure
in
EU
agriculture
• Farm
Financial
Indicators
(2000-­‐2009)
• Lending
rates
in
the
general
Economy
and
Agriculture
• EsMmated
return
on
the
last
Euro
invested
in
Farming
• Summary

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Produc4on
and
Banking
structure
in
EU
agriculture
Country
Farm
structures
Degree
of
farm
commercializaMon
DominaMng
agricultural
banking
insMtuMons
Investment
in
farming
assets
Denmark
Medium
High
Commercial
banks
TradiMonally
high,
recent
decline
France
Medium
Medium
Centralised
coops
Medium
Germany
Medium
(West)
Medium
(West)
Coops,
savings
banks
Medium
Large
(East)
High
(East)
Greece
Small
Low
Agricultural
sector
bank
Very
low
Ireland
Small
Medium
Commercial
banks
High
before
crisis
Italy
Small
Medium
Commercial
banks
Very
low
Poland
Small
Low
Coops
Low
Spain
Small
to
medium
Medium
Savings
banks
Low
UK
Large
High
Commercial
banks
Medium
Sources:
Authors’
compilaMon
based
on
European
Commission
(2012)
(farm
size
and
standard
gross
margins);
Jansson
et
al.
(2013)
(banking
insMtuMons);
FADN
data
(investment
acMvity),
miscellaneous
sources.

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Data
• Farm
Accountancy
Data
Network
(FADN)
data
for
last
10
years
publically
available
• PIIGS,
Germany
(reference),
Denmark
and
United
Kingdom
(non-­‐euro
members)
• No
data
available
for
very
recent
crisis
years

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10
Farm
Financial
Indicators

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11
Farm
Financial
Indicators

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Farm
Financial
Indicators

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Farm
Financial
Indicators

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Lending
rates
in
the
general
Economy
and
Agriculture

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Lending
rates
in
the
general
Economy
and
Agriculture

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Es4mated
return
on
the
last
Euro
invested
in
Farming
• if
credit
supply
constraints
exist
à
farmers
cannot
realize
profitable
capital
investments
• return
on
last
euro
invested
>
interest
rates
on
credit
markets
• calculaMon
of
marginal
value
of
farm
capital
– esMmate
producMon
funcMon
– esMmaMon
incorporates
semi-­‐parametric
control
funcMon
to
account
for
endogeneity
(Levinsohn
and
Petrin,
2003)
– use
producMon
elasMciMes
to
calculate
marginal
return
on
working/fixed
capital
for
every
farm
in
sample

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Es4mated
return
on
the
last
Euro
invested
in
Farming

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Es4mated
return
on
the
last
Euro
invested
in
Farming

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19
Summary
I
• some
EU
farmers
faced
difficulMes
in
credit
access
aTer
outbreak
of
financial
crisis
• low
debt
levels
and
declining
interest
rates
insulated
farmers
from
excessive
risk
exposure
• Denmark:
highly
leveraged
farm
operaMons
in
the
pastà
credit
constraints
in
Ag
• Spain
and
Italy:
increasing
marginal
returns
on
working
capital
consistent
with
Mghtening
credit
constraints
• other
GIIPS:
liile
use
of
external
fundingà
no
obstacle
for
their
operaMons

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20
Summary
II
• Limited
financial
exposure
of
farmers
in
crisis
countries
result
of
liile
borrowing
Ø To
what
extent
is
agricultural
banking
subject
to
deeper
structural
problems?
• Greece:
• ag
interest
rates
fluctuated
more
than
in
other
countries
• farmers
paid
higher
rates
than
businesses
in
other
sectors
of
the
economy
Ø lack
of
financial
integraMon
with
ag
• helped
during
current
crisis
but
may
be
boileneck
for
future
development
of
ag
sector

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The
End.

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Appendix

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-50050100150
2002 2003 2004 2005 2006 2007 2008
Denmark France
Germany E Germany W
Italy Spain
Dots denote median; bars 3./1. quartiles.
Marginal return on materials
Field crop farms
23

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The
End.
-100-90-80-70-60
2002 2003 2004 2005 2006 2007 2008
Denmark France
Germany E Germany W
Italy Spain
Dots denote median; bars 3./1. quartiles.
Marginal return on capital
Field crop farms
24

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-40-20020406080
2002 2003 2004 2005 2006 2007 2008
LevPet Within
Market rate %
Dots denote median; bars 3./1. quartiles.
East German field crop farms: marginal return on materials
Comparison of estimators
25