Brave new world: The grain market after GATT

by Teresa Acklin
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Heightened competition, vertical integration and new trading patterns are some of the trends predicted at Brussels conference.


   The world's grain trade began 1995 knowing that things would never be quite the same again. With more than 100 countries due to have ratified the Uruguay Round agreement of the General Agreement on Tariffs and Trade by Jan. 1, new and freer trading patterns, painfully hammered out over many years, finally came into operation.

   Long term, few doubt that the effects on virtually everyone will be good. Expensive, artificial import barriers and export subsidies are being dismantled and market forces will gradually take over. World trade is expected to be boosted by U.S.$5 trillion by the end of the century. The next few years, though, will be both challenging and difficult as the practical details of the agreement are worked out and the commercial world adjusts to the new climate.

   An insight into some of the likely changes emerged in Brussels, Belgium, at the end of October at the first World Grain conference to be sponsored jointly by Sosland Publishing Co., publishers of World Grain, and the European publishing house, Agra Europe. Its theme was “The Grain Market in the Post-GATT World.”

   Most speakers agreed that the Uruguay Round agreement should benefit developing countries as world commodity prices rose and export subsidies by developed countries were reduced. But they predicted that world trade in cereals was unlikely to expand significantly and that the battle for export markets would be stepped up.

   More opportunities will open up in markets for processed products and meat as living standards rise and overtake developments in the markets' own agricultural and food production industries. This will lead to more vertical integration as international commodity traders switch to trade in processed products.


   In an upbeat mood, Euguene Moos, undersecretary for international affairs and commodity programs for the U.S. Department of Agriculture, said the Uruguay Round was a vital, but only first step toward liberalizing trade in agricultural products. This step must be the beginning of a long term global commitment as the world enters a new era of growing food demand, he said.

   Export subsidies will be reduced, but not eliminated, and export monopolies such as wheat boards will continue. It is important to ensure that countries do not fight to maintain uneconomically high domestic production in the name of self-sufficiency or use sanitary and phytosanitary standards to replace the trade barriers that had just been negotiated away, he said.

   Mr. Moos said the new climate meant that everyone involved in agriculture must become more international in outlook. Successful agricultural sectors will need to think global in business decisions and have a clear understanding of world developments, he said.

   The United States will use all possible measures allowed under GATT, including green box and export enhancement programs, to ensure its competitiveness in world food markets, Mr. Moos said, adding that the Clinton administration planned to propose increases over the next five years to fund a combination of direct spending, direct credits and credit guarantees.

   According to Mr. Moos, the Uruguay Round agreement also would affect the direction of 1995 U.S. farm legislation, which would continue the trend toward a more market-orientated agriculture, fewer export subsidies and fewer internal subsidies. The farm bill also will be affected by budget limitations and environmental concerns, he said, and it will address wider issues including trade, rural development, food and nutrition.

   Canada's determination to maintain and strengthen its place in world trade was underlined by Ralph Goodale, minister of agriculture and agrifood.

   He said grain markets should become much more responsive to consumer demand and less dependent on government support. There should be no need for export subsidies, he said, and a good case exists for introducing zero/zero trading that would eliminate all tariff measures for specific commodities such as oilseeds and barley malt.

   Mr. Goodale defended the role of the Canadian Wheat Board, which he said operated as a fair trader and should not be expected to be any more transparent in its dealings than the privately owned international trading companies.

   With the opening of world markets, Canada is planning to increase its food exports by 50% to Canadian $20 billion by the end of the decade, Mr. Goodale said. This initiative includes helping commercial organizations develop their export trade. Much of this work will be coordinated by a new organization called the Canadian Agrifood Marketing Council, which is being set up to help with trade promotion and to provide export training for smaller organizations.


   The prospect of a more open market able to respond to consumer demands also was welcomed by the European Commission's Director General for Agriculture, Guy Legras. He said he was confident the GATT agreement would see the end of the conflict between the United States and the European Union in the agricultural sector. The situation in the wheat market has become purely political, he said, which is negatively affecting the transparency of world markets.

   Mr. Legras said the Commission's priority in the reform of the Common Agricultural Policy was to keep prices as low as possible, and he said developments in grain production and marketing in the past two years proved the reform was working.

   E.U. plantings were down to 32 million from 36 million hectares, and the 1994 harvest was down to between 161 million and 162 million tonnes, he noted. This means 20 million tonnes had been withdrawn from the world market while public grain stocks were down to 19 million tonnes in 1994 from 33 million at the end of 1993, he said. Mr. Legras said stocks would fall further to 10 million to 11 million tonnes, of which one-third would be rye, meaning the E.U. was meeting the requirements of the GATT agreement.

   This view was challenged by Brian Gardner, director of E.P.A. Associates, and a well-known commentator on the CAP. Mr. Gardner said he thought the Commission would be forced to abandon both subsidies and market support to cut production to meet the E.U.'s GATT commitments.

   He said production of cereals would increase by between 1.8% and 2% a year rather than the 1% or less favored by the Commission. He predicted that despite the fact that 30% of more of their income was now coming from direct subsidies, Europe's arable farmers would aim for maximum output.

   As a result, exports in 2001 will not be very different from 1992 levels, Mr. Gardner said. Further, he predicted a 10 million- to 12 million-tonne difference between GATT's exportable limits and actual production by the end of the six-year GATT implementation period.

   The surplus will be even higher for wheat, bringing with it the possibility of unsubsidized exports, he said. This raises the question of how competitive E.U. cereals could be in the context of world market prices, he said.

   Although E.U. production costs are higher per hectare, the comparison on a cost per tonne basis is more favorable because E.U. growers produce higher yields. Mr. Gardner said on this basis, it was likely the E.U. could compete in a world market.


   One of the grain industry sectors least likely to be affected by GATT is flour milling, according to Bernard Valluis, director of external relations for Groupe Soufflet and president of SYMEX, the French flour exporters' group. Mr. Valluis said the tariffs that would replace the variable levies beginning in July 1995 were still protectionist.

   In terms of market access, GATT will not produce any great changes, he said. This is because only five of the 15 major flour importing countries — Algeria, Egypt, Haiti, Bolivia and Hong Kong — had signed the final act of the Uruguay Round. The other 10, who did not sign on to GATT and accounted for 45% of world flour imports, are not bound to make any changes in their market access arrangements, Mr. Valluis said.

   But he predicted some changes would occur in market share; subsidies are important in this sector, and the new rules are likely to result in some increase in share in countries that do not subsidize exports. This is underlined by the fact that the United States, which subsidizes flour exports through its Export Enhancement Program, has seen its share of world flour markets fall to 20% from 25%, he said.

   On the other hand, the E.U.'s share of world flour markets has risen to 64% from 60%, Mr. Valluis noted. This is mainly because of the efforts of Germany, Italy and France in the former Soviet Union, Central Europe and Algeria as a means of maintaining social stability, he said. He added he expected the E.U. to maintain its share of world markets at this level because the Commission would be able to allocate its 13.4-million-tonne world export limit between soft wheat, hard wheat, flour and semolina, depending on circumstances.

   An increase in trade in finished products was one of the main changes predicted by Donald Novotny, director of the grain and feed division of U.S.D.A.'s Foreign Agricultural Service. This type of trade is growing rapidly worldwide and could prove to be permanent, he said.

   Also signficant will be the increase in the use of feed grains for industrial processing, Mr. Novotny said. This is putting new emphasis on grain specifications and chemical composition, he noted.


   Although world grain trade should expand as a result of GATT, the prospects for big increases in sales to Central and Eastern Europe and developing countries are not good, according to Nick Young, managing director of CEAS Consultants. Mr. Young said demand for imports in Central and Eastern Europe would depend on how the countries managed their economic growth and the extent to which their agricultural systems developed. Over the long term, these countries had excellent potential to produce large quantities of grain for themselves, he said.

   Prospects for growth in the China market are better, Mr. Young said. Indeed, China will continue to import grain and is working toward more-open markets, according to Zhou Mingchen, president of the China National Cereals, Oils and Foodstuffs Import and Export Corp.

   Mr. Zhou said although China should produce around 440 million tonnes of grain in the 1994 season, it would continue to import and export grain as part of its policy to increase involvement in world trade. China's main export crops are rice, maize and soybeans, while its biggest imports are wheat, as well as maize, rice, barley and soybeans. But with 22% of the world's population and only 7% of its cultivated land, China is concentrating on developments in science and technology to cut down waste and increase production, Mr. Zhou said.

   An increase in the world price of food and feed grains is likely to set off an expansion of production of these crops in developing countries, according to Christian Emmrich, senior commodity specialist with the Food and Agriculture Organization. Most developing countries import cereals and export tropical products such as sugar, coffee, fruit and oilseeds. But faced with prospects of high cereal import bills, many areas are likely to look at ways of rebalancing their production of crops for food and export.

   The substantial changes in agricultural policy and world trading patterns now taking place will open up opportunities for new forms of risk management by farmers. Ann Berg, a director of the Chicago Board of Trade, said she thought European farmers could follow U.S. farmers in using futures and options to compensate for yield variations as well as provide crop insurance. Ms. Berg said the system could have enormous potential in Europe, where the intervention price made crop size the primary variable to revenue.


   Central to the new patterns of world trade will be the new organization established to police the changes. Explaining the structure of the World Trade Organization, Daniel Amstutz, executive director of the International Wheat Council, London, said the establishment of an international trade body to supersede the GATT was long overdue.

   Previous attempts to create such a body had been thwarted by the U.S. Congress because it thought such an organization would infringe on national sovereignty. But it became clear during the Uruguay Round negotiations that a world trade body was necessary.

   The W.T.O., which came into being on Jan. 1 and will run parallel to GATT for the first year, will be headed by a Ministerial Conference comprising all members of the organization. It will meet every two years. A General Council acts as head of the W.T.O. between ministerial meetings and is responsible for dispute settlements and trade policy reviews.

   Agricultural trade is covered by a Committee on Agriculture, which is one of a group of subsidiary councils and committees under the guidance of the General Council. The Committee on Agriculture's main functions are to carry out reviews of the changes to market mechanisms, provide a forum for discussion, monitor the follow-up to the Decision on Measures Concerning the Possible Negative Effects of the Reform Program on Least-Developed and Net Food-importing Developing Countries and carry out annual consultations relating to the growth of world trade.

   An important function of the Committee on Agriculture is to establish notification requirements. Although these had not been finalized, Mr. Amstutz said he expected them to cover market access, domestic support commitments and export subsidy reductions. Two other broad areas for notification would be measures required for transparency and for specific monitoring of consultation functions.

   A separate committee will deal with sanitary and phytosanitary measures. The GATT agreement recognizes that governments have the right to use these measures, but only to protect human, animal or plant life.

   Diane Montague owned and edited the U.K.'s leading agribusiness trade weekly, Agricultural Supply Industry, for 22 years. She sold ASI in 1992 and now concentrates on freelance writing and consulting.