Business happens when someone, somewhere, uses their hard-earned cash to buy something. This is why markets are ultimately more important in agriculture than the twists and turns of support measures put in place by politicians.

There is complexity when it comes to economic theory and food.

There is little discretion about buying food – people have to eat. But demand is inelastic, in that if the prices fall or rise it does not directly affect consumption. What changes is the mix – hence the move away from high-value, profitably, premium products to value brands during the time of high inflation. That makes it good news that inflation is now at a three-year low, because people will be more willing to buy the products that deliver profits for all along the food chain.

This is what makes agricultural markets more interesting than others that follow classic economic theory. They are driven differently and bring in non-economic issues such as taste, fashion, trends, and purely subjective issues around taste, pleasure and provenance. This makes long-term forecasts all but impossible and short-term forecasts for even a year ahead a less exact science than for other sectors of the economy. That said, market forecasts for agriculture are one area where the EU excels. This is because it has lots of data available to compile forecasts from its various market observatories. It also devotes considerable resources into trying to get these right for farmers and to flag up potential problems that might force the Commission to step in with additional support.

Brussels has just published its forecasts for the year ahead and, in general terms, these look fairly positive for agriculture. In its summary, it uses the term farmers want to hear – it says that after the upheaval of inflation, triggered initially by high input costs in agriculture, markets are ‘stabilising’. It sees a big drop in inflation as positive and says agricultural markets will gain from positive economic growth in the eurozone, which gives people a greater level of discretionary spending.

This should again drive demand for higher-value food products. It stresses that while prices have fallen, they are still a third higher than in 2020. That might sound negative, but in reality agriculture needed to get prices on to a higher plateau, as it was unsustainable to continue delivering high-quality food for less than the cost of production.

Like all forecasts, this latest set comes with a ‘but’ and this time it is around the downwards drift in arable profitability. The report says it is positive that agriculture has gained from stabilising input costs, particularly for fertilisers, but it warns the arable sector is offsetting that gain. It is unusual to see the arable economy making headlines, but it remains the normally quiet driver of European agricultural fortunes.

The EU says that, along with lower prices, arable farmers bore the brunt of extreme weather events across much of Europe in 2024, with expectations that these will continue next year as the impact of climate change becomes more marked. The report sums up a disastrous year for arable farmers, driven by yields well below the five-year average as weather took its toll from the start of 2024. It prevented crops being sown, then damaged crops right through the growing season and harvest.

This has triggered forecasts of a further reduction in yields in 2025 while prices continue to fall – a classic perfect storm in Europe’s biggest farming sector. The story for the dairy sector is brighter, with modest supply increases as higher yields offset a steady reduction in cow numbers. The forecast is for more of the same. It says consumer demand for dairy products has stabilised, albeit not back at pre-inflationary levels. Cheese is the bright spot with forecasts of continuing growth in demand and Europe doing well on export markets because prices are globally competitive. It has also been a good year for butter, with prices driven by a mismatch between supply and demand in Europe and globally. This points to stability ahead, but without any big increase in prices. For meat, the forecast is familiar – a continuing ‘structural decline’ in beef as tastes change and a steady growth in poultry at the expense of both beef and pigmeat.

The report sums up perfectly the challenge of agricultural markets. It says ‘stability in an unstable environment remains key’ – confirmation that economic theory can never provide all the answers.