European Farmers' Protests: Fertiliser, Fuel and CAP

European Farmers' Protests: Fertiliser, Fuel and CAP  

Europe has faced a wave of protests by farmers across the continent in recent months. Their actions have included the blockading of highways and the targeting of critical logistics infrastructure, such as the 36-hour blockade of the Zeebrugge container port in Belgium in late January 2024.

The resulting operational impact of these protests has been hard to quantify. For example, there has not yet been any notable direct impact on the European road freight index rates, but evidence of heightened economic costs is apparent. The Spanish Transport Association (Fenadismer) estimated that the farmers' protests in France in early 2024 caused EUR 10m in damage per day to Spanish firms due to the disruption caused to trucks crossing the Franco-Spanish border.

Regional supply chains also remain vulnerable to farmers replicating the tactics that have seen the blockading of the Ukrainian-Polish border elsewhere in the EU.  The German-Polish border, key to automotive sector supply chains, is likely at particular risk given the recent blockading of the A2 Highway between Warsaw and Berlin in March 2024.

There is a clear set of common factors driving unrest among farmers. These include the perception of a lack of state support while being undercut by cheaper imports, particularly from Ukraine. Another catalyst for their anger is the environmental regulations and targets set by the EU. The core driver behind this explosion of protests, however, has been the elevated input costs facing the agricultural sector.

Source: Eurostat

The trajectory of the "three F's" of feed, fuel and fertiliser is key to understanding the current crisis in European agriculture. The key drivers of the increased costs facing European farmers have been prices for fertiliser and diesel. By contrast, animal feed prices had more moderate increases in cost.

Key to understanding the current crisis facing European agriculture is what is referred to as the 'three F's' of feed, fuel and fertiliser and their trajectory. Currently, European farmers are struggling with steeply rising fertiliser and diesel prices, animal feed has had more moderate increases in cost.

This volatility in fertiliser and fuel prices reflects the energy price shock that has impacted Europe. Rising diesel prices can mainly be attributed to the disruption of Russian supplies to Europe. Before February 2022, Russia was estimated to account for over 50% of the EU's diesel imports. The over 200% increase in fertiliser prices between late 2020 and 2022 is more complex. This rise began in 2021, reflecting the impact of China's introduction of export restrictions on fertilisers to protect their domestic market. However, the peak of fertiliser prices in 2022 reflected the seismic impact on European fertiliser production from elevated energy costs. This shock, ironically, increased Europe's dependence on Russian fertilisers, which had benefited from lower energy costs for production.

Sources: U.S. Bureau of Labor Statistics, World Bank and Energy Information Administration

The trajectory for both fertiliser and fuel prices likely points to normalisation over 2024 if not return to pre-crisis levels due to the expected decline in energy prices. However, this forecast remains subject to significant uncertainty. Low overall levels of global stocks of diesel mean that risks are presented by any uptick in demand from North America and Europe in line with rising levels of economic activity, as well as the Ukrainian targeting of Russian energy infrastructure.

For fertiliser, planned increases in fertiliser production from both Canada and the US, announced in 2022, should also assist in lowering global prices. Upward pressure could, however, come from renewed demand for fertilisers from developing states. This is because falling fertiliser prices from 2022 were driven in part by farmers in those countries shifting to cheaper alternatives. Europe's continued dependence on Russian fertiliser presents continued risks of supply disruption. 

Even in a best-case scenario for European agricultural input costs, farmer unrest is likely to remain a feature of the political-security environment due to the likely trajectory of EU spending on agriculture. Illustrative is the bloc's Common Agricultural Policy (CAP), a EUR 55bn per annum subsidy system that farmers have viewed as inadequate given the rising costs facing their sector. While the programme encompassed around 25% of the entire EU budget in 2021, this was considerably below the 65% it represented in 1980. Demonstrating that the relative levels of state and bloc support for agriculture have declined substantially in recent decades, in line with the diminished relative importance of food security in European thinking.

This dynamic is also likely to be reflected by EU policy on Ukrainian agriculture.  Protests by farmers in central and eastern Europe have opposed the influx of cheap agricultural goods from Ukraine created by the removal of trade restrictions by the EU following Russia's invasion. This has been most evident in Poland, where farmers have implemented blockades of the border with Ukraine. So far, measures introduced by the EU on Ukrainian imports to appease farmers have been limited. This includes allowing for emergency caps on Ukrainian agricultural goods based on the 2022-2023 baseline, which triggered a previous round of farmer protests. Pressure from Warsaw may change this dynamic, but the geopolitical importance of supporting Ukraine for the EU is likely to outweigh the bloc's agricultural sector.

Farmers remain a key political constituency in most European states, meaning that these protests have impacted policy. Wider concessions have been limited, however. Most notably, the bloc's agricultural sector remains tied to climate neutrality targets for 2050, and a sustained increase in state support has not occurred. Outside of a few potential exceptions, such as Poland and France, it is likely any increase in subsidies will be prevented by the fiscal pressures facing most European states.

Fundamentally, the agricultural sector, which encompasses just 1.6% of the EU's GDP and 4% of its workforce, is likely to find itself deprioritised by the EU and the majority of its member states. Given that is the most likely outcome, the European farmers' protests should be expected for the foreseeable future.