Using the WACC methodology to improve the assessment of projects in the french farming industry. Empirical evidences from farm's results of Isère

1.3 A New Approach to Find

The CAP has created an artificial market for French farmers. As seen in Figure 8, the guaranteed wheat price (in blue) was well above the world market price (in red) before 1992. The price volatility of agricultural commodities has always existed, with a fall from 165 €/T in 1988 to 80 €/T at the end of 1990, but French farmers were protected from this high volatility.

Figure 8: Volatility of the price of wheat after application of Agenda 2000 Source: Offre et Demande Agricole

In fact, French farmers were affected by the world market price in 1995/96, when the prices reached 180 €/T, and in 2007 when all agricultural commodities prices soared... The price fall of 2008 and the new peak in 2011 and 2012 illustrates well that the volatility is not coming to an end.

Another element will modify the market for French farmers: the end of the quotas for milk and sugar beet producers in 2015 (Pinson, 2012; Hénin, 2011). Nowadays, the volume of production is limited for each European milk and sugar producers, in order to avoid surpluses and price falls. This suppression of the quotas will modify the milk and sugar market, and price volatility will surely increase ( terrenet.fr, 2012; Hénin, 2011).

Moreover, many other countries are more competitive than France for milk production (Rhein, 2009). The example of Germany is often cited in France because the price of milk is lower, farms are bigger, more productive and specialized (You, 2010; Waintrop, 2010). However, even Germany is considered as non-competitive in the world market (Rhein, 2009). In fact, both countries are declining in terms of market share for total agricultural products exportation (see Figure 9). However, the case of France is more complicated, as from the second world exporter in 1995 we lost market shares almost continuously because of a lack of competitiveness (Momagri, 2012).

Figure 9: Fluctuation of the share of agro-food exports by key countries in the global volume of agro-food exports

Finally, the CAP shall be reformed once more in 2014-2015: the decoupled payments should converge at the European average and more dependant to environmental conditions (Le Boulanger, 2011; Hénin, 2012). The effect will be important for French producers, as the decoupled payments will be reduced on average, particularly for grain producers. Moreover, these payments will be conditioned to environmental obligations which are not always respected so far.

Therefore, this is essential for farmers to analyze the source of their actual profitability if they want to face the challenge of a globalized agriculture combined with the reduction of subsidies! It is necessary to evaluate each projects and farms with more accuracy than before, because all indicators suggest that the market risk will increase.