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.      

 

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  

www.iamo.de   3  

Anatomy  of  the  crisis  I  

•   ATer  years  of  expansionary  monetary  policy  of  FED  –  massive  default  of  highly  leveraged  real  estate  loans  àoutbreak  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  

www.iamo.de   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  àESM  –  ECB:  buy  unlimited  amounts  of  government  bonds  (August  2012)  

www.iamo.de   5  

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  

 

www.iamo.de   6  

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  

www.iamo.de   7  

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  

www.iamo.de   8  

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.  

www.iamo.de   9  

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  

www.iamo.de   10  

Farm  Financial  Indicators  

www.iamo.de   11  

Farm  Financial  Indicators  

www.iamo.de   12  

Farm  Financial  Indicators  

www.iamo.de   13  

Farm  Financial  Indicators  

www.iamo.de   14  

Lending  rates  in  the  general  Economy  and  Agriculture  

www.iamo.de   15  

Lending  rates  in  the  general  Economy  and  Agriculture  

www.iamo.de   16  

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  

www.iamo.de   17  

Es4mated  return  on  the  last  Euro  invested  in  Farming  

www.iamo.de   18  

Es4mated  return  on  the  last  Euro  invested  in  Farming  

www.iamo.de   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  

www.iamo.de   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  

www.iamo.de   21  

The  End.  

www.iamo.de   22  

Appendix  

www.iamo.de   23  

-50

050

100

150

Sha

dow

inte

rest

rate

% p

.a.

2002 2003 2004 2005 2006 2007 2008

Denmark FranceGermany E Germany WItaly Spain

Dots denote median; bars 3./1. quartiles.

Marginal return on materialsField crop farms

23  

www.iamo.de   24  

The  End.  

-100

-90

-80

-70

-60

Sha

dow

inte

rest

rate

% p

.a.

2002 2003 2004 2005 2006 2007 2008

Denmark FranceGermany E Germany WItaly Spain

Dots denote median; bars 3./1. quartiles.

Marginal return on capitalField crop farms

24  

www.iamo.de   25  

-40

-20

020

4060

80

Sha

dow

inte

rest

rate

% p

.a.

2002 2003 2004 2005 2006 2007 2008

LevPet WithinMarket rate %

Dots denote median; bars 3./1. quartiles.

East German field crop farms: marginal return on materialsComparison of estimators

25