Europe's Farmers Go Global

Remember Jose Bove, European agriculture's old poster boy? The sheep farmer and antiglobalization activist who spent his time doing things like dismantling McDonald's stores was a folk hero among Europe's 13 million farmers for his fight against foreign food imports. Powerful farm lobbies—backed by the government of France—fought EU reforms designed to open up Europe's coddled and regimented agricultural sector to greater market forces. Now, as Europe's farmers see rising profits, many of the same agro activists are singing a very different tune. The German Farmers' Union, a well-connected lobbying organization whose functionaries long beat the same drum as the French for protection and subsidies, now says its members are eagerly embracing "global market freedom." Its president, Bavarian pig farmer Gerd Sonnleitner, praises the new era of supply and demand as "a second emancipation of the serfs." Rather than protesting in the Pyrénées against global trade, European farmers these days are seeking out new international markets for their products.

Not all that long ago, it was hard to use "European farmers" and "markets" in a single sentence, unless perhaps you included the words "dumping" or "distorted." Now, thanks to the global surge in the price of food and farm products (buoyed by a new emerging-market middle class), plus a series of important reforms to Europe's 50-year-old subsidy system, market forces that haven't been felt in ages are stirring in the continent's fields, barns and meadows.

The subsidy system still exists, but its worst absurdities do not. Largely gone are the days when EU bureaucrats in cahoots with national farm ministries set prices and paid billions to buy up excess production to be stored in Europe's legendary "wine lakes" and "butter mountains," later to be dumped on world markets at a price far below the cost of production. The total Europe spends on subsidies each year has been more or less frozen at near €43 billion, even though the EU has expanded from 15 member states to 27. Export subsidies for sugar, milk and beef have been pared back from about €10 billion per year in the 1990s to €2.4 billion in 2006, and may be phased out altogether by 2013. Crucially, as of 2004, most subsidies are no longer tied directly to the production or export of specific crops. Now, farmers have an incentive to grow only what's most profitable, not what will draw the biggest subsidy check.

As a result, farmers and food producers are shifting into areas where they can get the highest returns on the world market. EU exports are dropping rapidly in sugar, poultry, cereals and other raw or nearly raw goods. But rising shipments of finished products like sausage and ham have helped Europe soar past the U.S. to become the biggest agricultural exporter.

Exhibit A are dairy products: since the European Union drastically cut export subsidies, the EU's share of global trade in dried milk powder—a relatively cheap commodity used in food manufacturing or for baby formula—has plummeted from 50 percent in 1999 to 27 percent last year. Much of that European milk is now getting made into higher value cheese, a booming global market now that the growing middle classes of Asia, Russia and the Middle East have discovered a taste for fine Gouda, Parmesan and Camembert. With its strong brands and efficient supply chains, Europe has expanded its share of the global cheese trade from 35 to 42 percent since 1999.

Of all the major agricultural powers—including the U.S. and Brazil—the EU has become the least dependent on the sale of interchangeable bulk commodities (see chart), which can be grown more cheaply in the developing world. "It's incredible," says Pierre Bascou, head of the EU's farm trade unit. "You can just watch the markets kicking in."

The politics that have prevented the reform of these wasteful subsidies finally seem to be realigning too. It's easy, of course, for lobbyists like Sonnleitner to praise markets when they're blessing his clients with high prices. And farm groups in other big agro states like France and Spain are as opposed as ever to change. Yet lo and behold, a new generation of young, entrepreneurial farmers has grown up, critical of the old system and its defenders.

Consider Hubertus Paetow, a grain farmer in the North German village of Gnoin, who grows barley, winter wheat and rapeseed on 800 hectares. Investments in cutting-edge technology have helped him boost his wheat yield to 9 tons per hectare, far above the global average of 2.5. He just got back from a trip to Brazil, where he toured the booming Mato Grosso farm belt. He's not afraid of cheaper competition from abroad, and plans to buy more land back home. "They have lower costs in Mato Grosso, but have to lug their crop across 2,000 kilometers of bumpy roads to get to the nearest port," says Paetow, whereas his seaport is one hour away. Paetow's profits are way up thanks to a tripling of wheat prices since 2006, and technology is bringing his costs down. "I've cut my labor and machine input in half over the last ten years," notes Paetow. Could he live without EU subsidies? "Easily," he says.

Thanks to a new crop of muckraking European NGOs, more and more EU voters are also starting to see through the shroud of myth surrounding agricultural aid. Transparency groups like UK-based have dug up lists of subsidy recipients, showing that the biggest profiteers are actually corporate and aristocratic landowners such as Nestlé, Unilever, and the queen of England. In a sign of the changing public mood, Dutch EU Agriculture Minister Cees Veerman barely escaped having to resign in 2005 after his undisclosed subsidy income showed up on the list. New figures also show that 80 percent of the aid goes to the largest 20 percent of farms, exposing as a sham the argument that the system is needed to support small, traditional farmers. A fresh wave of outrage will likely come in 2009, when transparency holdouts Germany and France will be forced to finally publish their lists, thanks to a new directive from Brussels.

Time also seems to be helping reform. When the 12 new member states' farm and development subsidies are fully phased in, many of the richer Western European countries that used to be net beneficiaries of EU funds will have turned into contributors—at which point they'll be keener to contain costs. Crucially, that includes France, the biggest opponent of reform so far. There is also broad agreement among member states that the total EU budget should not exceed 1 percent of the bloc's total GDP. With the EU Commission and major figures such as German chancellor Angela Merkel and French president Nicolas Sarkozy all agreeing that the EU needs more spending on military security and regional development in the EU's unstable neighborhood to the south and east, it's hard to see how the EU's biggest and least justifiable budget item (34 percent of total expenditures) can escape unscathed. Last week, EU member Sweden, which holds the rotating EU presidency next year, became the first to call for the complete abolition of agricultural subsidies.

To understand the new entrepreneurial spirit taking hold among European farmers, take a look at Co-Op Farms. At 30,000 hectares, it's Britain's biggest farming operation. A decade ago, says general manager Christine Tacon, Co-Op only grew subsidized grain to be sold to commodities traders. "We had no idea where our products ended up," she says, "it was all speculative." Now, she gets a fixed check, and can grow whatever she wants, and how much she wants. "The subsidy has gone out of the equation."

As a result, Tacon has radically changed the business model for the €50 million-a-year farm. Today, says Tacon, the farm's entire production is grown to order; half of it now goes to supply the farm's own chain of Co-Op stores with produce such as potatoes and strawberries. Tacon has added pumpkins, onions and broccoli to the offerings, and set up a packing operation. Riding a huge wave of demand for locally sourced food, Tacon is researching new, better-tasting spuds and berries. She plans to invest in equipment she says will cut water use and raise productivity by a factor of three. Already, revenue is up by 25 percent compared with the pre-reform era.

Shifts like Co-Op's are now taking place Europe-wide. After the EU cut back its sugar subsidies, one third of the land growing sugar beets has gone out of production. Most EU countries have also dropped the particularly absurd subsidies for beef, which paid farmers once for each head of cattle, again for each animal that was slaughtered, and a third time to export the beef abroad. Since the end of this triple-dipping, some of the least productive livestock farmers (often those with poor grazing land and dependent on expensive grain for feedstock) have dropped out. Livestock numbers in Ireland, Scotland and Germany have gone down, while beef imports from Brazil and Argentina are creeping up. In France, milk production is getting shifted from the less productive south to the richer pastures of Brittany.

Countless family farms in Brittany provide the milk for some of France's most famous and competitive products. While artisan cheesemakers ship their Brie and Camembert to the gourmet stores of Paris and London (and, increasingly, Moscow and Shanghai), powerful dairy conglomerates based in the region have come to dominate the multibillion-dollar global cheese and yogurt trade. "The old system was very easy and very perverse," says Luc Morelon, spokesman for Brittany-based Lactalis, Europe's biggest cheese and dairy group. Most of Europe's dairy giants like Campina or Nordmilch were subsidy hounds, exporting bulk milk powder at a price guaranteed by the EU. Yet now that its subsidies have been cut by 88 percent, Lactalis is doing better than ever before. It sells its Président-brand cheese and butter in 165 countries and gets 55 percent of its €9 billion turnover abroad.

Naturally, the new system has winners and losers. High world prices for grain are great for wheat farmers like Paetow, but hellish for livestock farmers whose costs for grain-based feed have skyrocketed. Large farms find it easier to plan and invest, while small farms are under pressure. But it's not just the big farms and conglomerates that are entering new markets. In Bavaria, Erhard Schiele took over his family's vegetable farm and discovered he could make better money growing herbs. He has even developed his own machines to dry his crop of parsley and dill. Today, he has many neighboring farmers delivering their herbs as well, which are then shipped as far away as India and Japan. In the Italian city of Parma, the 171 small family companies that form the Consortium of Parma Ham have translated their tradition into a €2 billion global business, appealing to a growing number of gourmets in the developed and emerging markets. Exports to the U.S. alone soared by 24 percent last year. Slow Foods, the Bra, Italy-based organization promoting artisan foods and local production, says its members are capitalizing on growing demand for regional foods and traditionally made specialty products—a niche market to be sure, but a growing one that is proving that farmers can stick to tradition and still survive.

Of course, the shift is a culture shock to many. "I shouldn't have to invest, I should be supported," says Samuel Maréchal, a 34-year-old mustard seed farmer, working his family's 74-hectare farm near Dijon, France. He says it was all much easier in his father's day, when prices were fixed and income was predictable. These are the people who still support José Bové, who has continued to bang the antiglobalization drum. Bové ran as a far-left independent candidate in the 2007 French presidential elections. "Agriculture and economic liberalism are not compatible," he tells NEWSWEEK. "The citizens are not willing to accept the transformation of farm products into market products just because it is convenient for some. The people are more and more against the establishment of a global agricultural market." While it's not at all clear that's the case, its true that many more "will farm long after every economic signal tells them to stop, and that will cause grief," says Jack Thurston, founder of For now, high prices are delaying the tough decisions. But one EU official estimates that another 3 million of Europe's 13 million remaining farmers will give up by 2012.

Will Europe keep up the pace of liberalization? Some of the most destructive policies, like the high tariffs that restrict imports from developing countries, are still in place. Much depends on France, which has always managed to block reform until now. And so it may be a modern-day French revolution that Sarkozy has become the first French president to call for a major reform of the subsidy system. Speaking earlier this month at the Paris Farm Fair, he told farmers they must become entrepreneurs and not just work for subsidies. But in the same breath, he also called for new "community preferences" and "true market stabilization policies," which can only mean more regulation. This underscored how politicized agriculture still is. But the growing benefits that Europe's farmers are reaping from markets and trade, now that they're sowing their competitive oats, may be what keeps José Bové and his like on the fringe.

Europe's Farmers Go Global | Business