Southern Europe's extreme weather hits agrifood sector

Last year was the hottest on record in France, and this year is already promising more of the same. In early June, at the start of the summer, 68% of France’s groundwater levels were already in deficit.

The situation is mirrored across Southern Europe. After a similarly scorching year in 2022, Spain has received 28% less rain than expected between October and May.

Italy has also been hot and dry, but not everywhere. In May of this year, exceptional rainfall led to severe flooding in the Emilia-Romagna region in the north of the country. Italy has been buffeted by both ends of the extreme weather spectrum. It also recently experienced its worst drought in 70 years.

Inevitably, extreme weather hits the food sector hard. The floods and droughts of Southern Europe impact growers first, before low yields, delivery delays and higher prices affect businesses right along the supply chain, increasing the potential for payment delays and insolvencies.

In the rest of this article, Atradius experts assess the situation in each of the worst affected countries.

The current situation

France

In France, cereal production has been hardest hit by the hot, dry weather, followed by fruit and vegetables. Livestock breeding has been impacted by lower milk yields, as parched fields produce less grass. Many farmers have suspended breeding activities altogether.

Scarcity drove up cereal prices in 2022, but profits were cancelled out by the rising costs of fertilisers and other production costs. More expensive cereals impacted livestock farmers.

“These difficult climate conditions impact the volume and quality of crops, leading to potential supply chain bottlenecks and higher prices,” says Axelle Martin, Atradius Risk Services Manager in France. “Moreover, food prices are already high due to inflation.”

More recently the EU Commission has proposed a EUR 330 million support package for farmers in member states impacted by extreme weather and high input costs. France would receive over EUR 53 million, the third highest total after Spain and Italy. The national government acknowledged the challenges the sector faces, offering EUR 40 million of subsidies in 2023 to finance investments to protect crops against drought and climatic hazards, and there were other local grants. But eligibility thresholds mean some farmers miss out. Climate insurance is available but its high cost means few farmers have it.

All of which spells trouble for the sector. “We expect increasing payment delays and insolvencies in 2023 in the agriculture and food sector due to these difficult conditions,” says Axelle.

The wider food industry was also hit by rising commodity, transport and energy costs in 2022, leading to increasing insolvencies right down the supply chain. Food prices rose in response, but big producers are now facing government pressure to reduce costs to consumers.

Italy

Italy is still reeling from the recent flood and precise data on its impact has yet to emerge, but it is likely to be severe. The Emilia-Romagna region is responsible for 28% of Italy’s sugar production and 13% of its wheat production. It is also a major producer of potatoes, fruit, grapes and legumes.

Inevitably, the floods will lead to higher prices. Wholesale fruit prices have already jumped 23% over 2022 levels. The Rome-based Agri-Food Centre estimates reduced availability of a range of produce in the coming weeks, and a 15% increase in prices compared to May 2022.

The Italian state has been quick to offer help to affected households and businesses. That includes wage supplements for workers and the suspension of loan and mortgage repayments for businesses, among other initiatives. Italian farmers would also receive nearly EUR 61 million from the planned EU support package.

That state aid is working, at least for now. “It is early days but we are not seeing an increase in the number of businesses that can’t fulfil orders or make payments,” says Nicoletta Toldo, Senior Underwriter for Atradius Italy. “In the past, similar one-off events, like earthquakes, haven’t led to a significant increase in insolvencies. State support is crucial in this regard.”

Spain

In Spain, as elsewhere, 2022 was a difficult year for the food sector even before the recent drought that led to reservoirs drying up and water restrictions across the country. Fertiliser, pesticide and energy price hikes were already hitting margins and leaving farmers in a vulnerable position.

Livestock and arable farming were both hit by the drought, with sunflower, almond and olive crops among those worst affected.

The Spanish government has provided support in the shape of EUR 636 million of direct aid, split between the livestock, arable and beekeeping sectors. Some tax reduction measures have also been approved. Spanish farmers would receive over EUR 81 million from the EU support package. The question is, will it be enough?

Supply challenges and price increases are expected. Insolvencies are likely to follow. “Payment delays and then insolvencies of affected firms cannot be ruled out,” says Beatriz Cainzos, Large Buyer Unit Food Sector Coordinator for Atradius in Spain. “Any increase would likely be concentrated on companies with weaker financial structures, and especially smaller and less diversified firms.”

Looking to the future: Resilience will be key

Were these incidents one-offs, or the new normal? There’s little doubt that floods, droughts and other extreme weather events will become more common in a warming world.

So what can be done? Various measures have been proposed, from diversifying into more drought-resistant crops to developing more efficient water collection and irrigation systems. The problem, says Axelle, is money. “Those changes require investment and financing and, to attract it, they have to ensure the profitability of the agriculture involved. That’s hard to guarantee in such uncertain times.”

Local solutions must meet local needs. In Italy, Nicoletta says leaking water pipes are a major problem, with 42.2% of water in the system lost before it reaches taps. There are calls to collect more rainfall too, because while rainfall patterns have changed, overall precipitation levels have not significantly reduced.

As for flooding, there is clearly a need to create more resilient environments. “Many hectares of land in Emilia-Romagna have been covered by concrete for new construction in recent years, making the region more vulnerable to flooding, because excess rainwater can’t be absorbed,” says Nicoletta. “Creating flooding resilience is one potential area of investment.”

Spain is investing in solar-powered desalination plants to ease water shortages, and its new Law on Climate Change and Energy Transition will prioritise the management of water.

Will these measures be enough? At the moment, it’s impossible to say. But recent events have shown that Southern Europe’s agri-food industries need coherent extreme weather strategies that accept the inevitability of climate-related challenges and create resilience in the face of change. For that, significant investment will be required.       

Find out more about the agri-food industry balancing sustainability and efficiency in our new report: Clean Energy Transition: Agri-food