Germany Agribusiness Report Q4 2011

Damage to German grains production by drought in the spring appears to be less severe than originally thought, prompting us to revise our forecasts for 2011s harvest upwards. Over our five-year forecast period, we believe corn will be the outperformer, with production growth set to outpace that of wheat and barley. German opposition to genetically modified corn will prevent the corn industry from reaching its true potential, however. We believe it is unlikely that a recent court ruling that went against Frances ban on MON810 corn will have an effect on that of Germany.

Key forecasts

- Rain in June came in time to restore the potential of the wheat crop, which was damaged by drought earlier in the year. We forecast production in 2011/12 of 23.3mn tonnes, down 2.8% year-on-year (y-o-y).

- We are forecasting barley production of 9.5mn tonnes in 2011/12, down 8.5% y-o-y as the spring drought took its toll on yields and quality.

- Rising prices show the dairy industry is on a firmer footing. In 2011, we expect milk production to rise to 29.4mn tonnes, up 1.1% y-o-y.

- In 2011, reduced domestic demand due to the fallout from the dioxin scandal will slow growth in pork output, though not by much, and we forecast another production gain of 2.5% to 5.6mn tonnes.

- In 2011, we expect poultry production to rise 4.2% y-o-y to 1.4mn tonnes. - We have revised down our forecasts for meat consumption on lower growth expectations stemming from the EU sovereign debt crisis. By 2015, we are forecasting pork consumption of 4.2mn tonnes, down 5.0% on levels in 2010.

- Over the forecast period, we expect to see beef consumption fall 0.49% to 1.0mn tonnes by 2015.

Industry developments

In September 2011, the European Court of Justice ruled that although France had the right to impose a ban on Monsantos MON810 corn, it had based its decision to do so on the wrong legislation. Regardless, the French government has pledged to continue its ban on the crop. Given the depth of anti-GMO feeling and the strength of the environmental lobby in Germany, we do not believe the ruling will have serious ramifications on the German ban. The country is likely to find other ways to perpetuate the ban if the ruling results in the overturning of its current measures.

Talks on a free-trade agreement between the EU and Mercosur may be in danger of collapse. A report from Reuters said several EU nations faced with record-high unemployment are reportedly anxious to ensure protectionist measures such as farm subsidies and tariff barriers remain in place. Mercosur nations reportedly have their own reservations, with a forthcoming election in Argentina in October leading to calls for a brake on negotiations. The reports conclusions were largely borne out when the sixth round of talks began in Brussels in July. Neither side was willing to put market access proposals on the table, suggesting that any conclusion to the talks in 2011 is highly unlikely.

Two EU Directives are likely to raise the pressure on German pig farmers. Farms will have to comply with the regulations - one environmental, one on animal welfare - by January 1 2013. Council Directive 2008/1/EC will limit ammonia emissions from livestock farms, while Council Directive 2001/88/EC will introduce group housing of sows and require expansions of living areas for fattening pigs and weaned piglets. Some German farms do not currently comply with the regulations and will require significant investment in order to do so.

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