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German farmland: good investment or consolidation tool?

13 January 2021

Today, German agriculture is generally represented by two different agricultural production systems with small-scale family farms prevailing in the West and large-scale corporate farms dominating the agricultural and farmland markets in the East of the country. What drivers influenced the structural development of agriculture in Germany in the past decades? Does a scale gap between East and West remain stable today or have there been any shifts in this area lately? Are there any potential risks associated with the proliferation of large-scale farms? In an attempt to answer these questions, has prepared the overview of the most significant trends and developments in German agriculture since early 1990s until today.

The post-socialist transition in the agricultural sector of East Germany after Germany’s reunification in 1990 started with legitimization of private land ownership and transformation of former large state-owned collective farms into privately-owned farms. The first decade after reunification in East Germany was marked by a decline in the average farm size alongside increase in the number of farms, including the establishment of small, medium and larger family farms. Starting from early 2000s, this trend has reversed. In the period from 2000 to 2016, a total number of farms in Germany decreased from 472,000 to 275,400. Accordingly, the average farm size rose 26% to 234 hectares in East Germany and 58% to 52 hectares in West Germany from 2007 to 2019. Although the agricultural enterprises in the Eastern regions of the country tend to have larger scale, West Germany also shows a clear consolidation trend. Nevertheless, western German agriculture is still dominated by family farms, while in the East four main farm types - family farms, partnership farms, corporate farms, and cooperative farms – control nearly equal land areas.

Alongside farmland consolidation, changes in the ownership structure of farming enterprises have become an increasingly important issue in German public discourse over the past decades. In compliance with the German land transfer law, farmland plot acquisitions must be officially approved by local authorities. In addition, if two investors from farming and non-farming industries want to buy the same farmland plot, the farmer has the pre-emptive acquisition right. Meanwhile, some studies point to the increased presence of non-local cross-regional investors in East-German agricultural enterprises. 

In the view of low interest rates set by the European Central Bank and uncertainty in the EU financial markets, there is a growing interest in farmland as an asset on behalf of external investors from pharmaceutical, energy, bank, wood processing and other non-agricultural industries. They indirectly control thousands of hectares of farmland through the acquisition of shares in local companies that operate these farmland plots. This phenomenon is known as Share Deals and has gained a lot of attention in German mass media over the last years due to its increasing prevalence. In 2017, non-local investors owned major stakes in 30% of East-German corporate and cooperative farms, of them 50% came from non-agricultural industries. Among German holding companies that have been actively investing in farming enterprises (and thereby, indirectly, in land)  in the recent years are related to the retail networks Aldi and REWE, furniture producer Steinhoff, pharmaceutical company Merkle, producer of heating equipment Viessman, logistic company Fiege and others. Since 2007, farmland prices have tripled in East Germany and doubled in West Germany. Some sources outline external investment activity as the main driver of this process, the others point to farmers’ activity as the key pricing factor.

Additionally, hectare-based farm subsidies provided by the EU’s Common Agricultural Policy (CAP) allow large-scale farmland owners to receive millions of euros of support annually. Of a total volume of EUR 65 billion allocated by the EU for agricultural subsidies annually, Germany receives EUR 6.2 billion. Civil society and mass media constantly require the EU to reorganize its agricultural policy. Among the main steps expected from European Commission is limitation of subsidies received by holding companies. 

Another point of criticism on the part of NGOs and mass media is legislation within Germany that, in their opinion, makes large land-based investments across the country even more attractive. For instance, the acquisition of less than 95% of an agricultural enterprise exempts a buyer from paying land transfer tax, which comprises 3.5% to 6.5% of the worth of a farmland plot. These norms raise concerns in German society about the fairness of resource distribution and equal access to the land market on the one hand. On the other hand, the investors actually buy farms and not farmland alone. Accordingly, as long as they continue production, the sales price is actually that of the farm and not just that of the land. Also, for legal reasons a reform is difficult. Possible changes of the above regulations would complicate all kinds of deals with shares, not just those related to agricultural companies.

It seems fair to say that the rise of large-scale farms in East Germany mainly roots into socialist history of the Former GDR. However, from today’s perspective, the large farms survived 30 years of German reunification. What is currently changing is the ownership of farms. Concentrated land ownership is mainly associated with larger farms, including family farms. Land ownership of non-farmers is quite fragmented.

During the past decade, there have been lots of political debates on the national and regional levels around the topic of land market regulation.

Recently, some of German federated states, e.g., Brandenburg and Saxony Anhalt, have started developing draft Laws on Agricultural Structures aiming to improve the competitiveness of smaller and local farms by regulating farmland acquisitions in the regions. will inform about these initiatives in greater detail in our upcoming publications. 

By Anna Feshchenko