European grain trade after Gatt

by Teresa Acklin
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Although European agriculture will reap long-term benefits, prospects for the rest of the 1990s are uncertain.

   The Uruguay Round is finally over, and an agreement on world trade is in place under the General Agreement on Tariffs and Trade. Agriculture will never be quite the same again.

   For farmers, it should mean they will be more exposed to market forces and less exposed to the meddling of politicians. GATT could be the turning point, when governments withdraw and economics takes over.

   At this moment, the changes still seem unreal. European farmers are basking in the warm glow of compensation payments awarded under the reform of the Common Agricultural Policy, while U.S. farmers are enjoying a temporary freedom from acreage restrictions. The cuts agreed under the Uruguay Round don't start to bite until June 1995, and even then, they will be stepped up gradually so that the full effects won't be felt until the end of the century.

   By then, agriculture and trade should be operating very differently. In the first assessment of the impact of the Uruguay Round on U.S. agriculture, a study released in March by the U.S. Department of Agriculture predicts that agricultural production in the U.S. will rise, exports will increase and government support for agriculture will decline. Limitations on production will be reduced, and the incomes of U.S. farmers will rise substantially by the turn of the century.

   The report also forecasts that levels of European grain exports on world markets will fall long term by more than Uruguay Round targets because the internal price will still be above that on world markets. At the same time, the U.S. share of world grain markets will return to the levels of the mid-1980s.

   But the report warns that the early years will not be so easy. World trade levels will fall and any price increases will be very small.

   Long term, the picture is relatively clear. But at the moment, the real problem for farmers, traders and planners is trying to work out what will happen in terms of production and trading patterns in the next five years. In Europe, the imponderables center on the reform of the CAP, how farmers will respond and what will happen to production and demand in Eastern Europe and the former Soviet Union.

   The first steps to reform the CAP began a year ago, and without the reform, a GATT agreement would not have been possible. CAP reform marks the start of a huge move to switch support for farmers from subsidized prices to income support.

   The aim is to bring internal E.U. prices closer to world market levels, while at the same time providing farmers with sufficient income to stay on the land and maintain rural communities and the environment.

   It is the structure of the compensation payments system that is the cause of so much uncertainty. Instead of separating — decoupling — farm incomes from product prices completely, the CAP reform still links prices and compensation.

   In Europe, opinions are sharply divided between those who believe CAP reform will cut production to the agreed limits of GATT and those who believe it will not. The latter group also thinks more price cuts and production restrictions will be inevitable.

   Under the GATT agreement, the E.U. will have to cut subsidized cereals exports to 25 million tonnes by 2000. Cereal production currently is running at just under 166 million tonnes; of this, 136.7 million tonnes are used internally and 35 million are exported.

   The European Commission calculates that production will increase by 1% to 1.5% to 175 million tonnes by 2000, while consumption will increase to 153 million tonnes, mainly because of an additional 10 million to 12 million tonnes used in animal feed. The remaining surplus available for export will be about 25 million tonnes.

   The Commission's calculations are based on a reduction in the area under cultivation to 32 million hectares and an average yield of 5.5 tonnes per ha. The increased use for animal feeds assumes that as the price comes down, feed compounders will use more wheat and less non-grain feed ingredients and that consumers will eat more pork and poultry meat.

   The Commission believes that the reduction in market prices, plus the incentive of area compensation payments, will stop farmers from trying to maximize yields and outputs. Farmers will cut back on inputs because the pressure to go for maximum yields is reduced. The Commission cites the decline in fertilizer use, which has dropped by 27% since 1988-89, as an indication of input trends.

   This view is backed by Cargill, the major international grain trading company, according to David Nelson-Smith, vice-president of public affairs for Cargill Europe. At the European Outlook conference in London earlier this year, Mr. Nelson-Smith said the company expected grain production and consumption to stay within the GATT agreement, as the basis of the area and price compensation payments rewards farmers who produce below-average yields. Land prices will fall as more farmers leave the land and land changes hands at lower prices, reducing the cost base and the pressure to maximize production.

   Mr. Nelson-Smith said he expected intensive farmers would be worst hit by the CAP reform, rather than lower output, marginal farmers. The best farmers will find their earnings squeezed and will have an incentive to cut down on inputs and grow less intensively, he said. The industry already is seeing a significant fall in inputs.

   But other experts think the CAP reform measures will not cut production to anything like the extent planned. They also think Europe's farmers will face steeper price-support cuts or further increases in compulsory set-asides.

   These experts say the Commission's yield predictions ignore the advances in technology and plant breeding that can more than compensate for lower inputs. The Commission also fails to take into account the effect on fertility of rotational set-aside, the skeptics say.

   Brian Gardner, a Brussels writer, commentator and expert on E.U. agricultural and food policies, argued that the effects of set-aside on actual output would be much less than the Commission expects. This year's decline in E.U. cereals production to 166 million tonnes compared with the peak of 181 million in 1991 has been based more on poor growing and harvesting conditions than on the effects of set-aside.

   Mr. Gardner said set-aside was likely to become less effective as each year passes simply because farmers will concentrate wheat production on their best land at the expense of oilseeds and other grains. They will idle their least productive land and concentrate on new, higher-yielding varieties, he said. More farmers also are opting for non-rotational set-aside, which means they would be able to plant their most productive land each year.

   Mr. Gardner quoted a survey by the Commission's own economists that shows farmers have much to gain from striving for higher yields of 8.5 tonnes per ha or more. Current area compensation payments are based on the average yield of 6.5 to 7.0 tonnes per ha.

   Mr. Gardner's views are shared by the National Farmers Union of England and Wales, a farmer-owned and controlled trade association, which said there is no evidence to show that lower prices will discourage farmers from aiming for higher yields. The group pointed to the fact that while the real price of cereals in Europe fell by 40% between 1982 and 1992, yields actually increased by 25%.

   The N.F.U. also estimated the increased use of E.U. grain in animal feeds will be limited through feed efficiency improvements, in the same way as production will increase through technology improvements. The group calculated that consumption will peak at 145.8 million tonnes in 1995; after that, consumption will decline, leaving the E.U. with huge stocks of 69 million tonnes by the end of the decade.

   The present gap between world prices and E.U. wheat is around U.S.$32 a tonne, and E.U. prices would need to decline much more before E.U. wheat would become cheap enough to sell on world markets without subsidy. World prices will need to increase substantially — or the U.S. dollar appreciate significantly against the European Currency Unit — before additional E.U. grain can be exported without subsidy, the N.F.U. says.

      Effects on European trade

   So what does all this mean for the European grain trade? In the short term, the changes are not likely to be very great. Some of the first signs are expected to be a gradual move away from wheat and barley production in southern Europe, as farmers switch to more profitable crops, such as sunseed.

   Spain will import more wheat and barley from the U.K. and France. The U.K already supplies 50% of Spain's wheat imports and 86% of its barley imports and is expected to supply more soft wheats in the future.

   Production of soft wheats in Spain has been falling steadily in the past 10 years at the expense of hard wheats. This, coupled with the fact that the country's main producing regions are separated from the main consuming and manufacturing areas by one of the largest mountainous areas in Europe, means that it is easier to import grain from other European countries than to transport it internally.

   Spain also is expected to cut its maize production because of its arid climate and therefore will import larger amounts. Much of the imported maize will come from North America, as the GATT agreement continues the original 1987 arrangement, whereby the U.S. was to supply 2 million tonnes of maize and 300,000 of sorghum a year to Spain and 500,000 of maize to Portugal.

   French farmers and traders are concerned at the potential loss of markets for their maize. Michel Soufflet, head of J. Soufflet, France's largest grain merchandising company, said that while he accepted that the GATT agreement was a very important step in the evolution of European agriculture, it was very difficult at this stage to predict what would happen to trade. He is particularly concerned about the lifting of restrictions on grain substitutes and the danger of increasing import levels for these ingredients.

   Immediate changes taking place in his own company mean that Soufflet will buy less grain and sell less fertilizer, crop protection chemicals and seeds. Mr. Soufflet also expects French farmers to switch from wheat and maize to the production of non-food crops.

   Bernard Foresca, director of the French maize producers' association, said the immediate effect would be the loss of a market for 3 million tonnes of maize in Spain and Portugal. He also believes Europe is facing a real threat of increased imports of maize gluten feed from the U.S. as supplies are boosted by the expansion of ethanol programs and the low level of the U.S. dollar.

   There is no question that the effects of the GATT agreement on agriculture's future development have been fudged on both sides of the Atlantic by the “green box” compensation payments, the payments to farmers not subject to reductions under GATT.

   In the E.U., payments are based on area and historic yields. In the U.S., deficiency payments are paid on a tonnage basis related to land set-aside requirements. Both payment systems remain related to production rather than income and encourage farmers to grow to take advantage of subsidies instead of growing only for the market. Both mean that products will continue to be sold on world markets at prices below the cost of production.

   Developments in the European grain trade are therefore more difficult to predict over the next five years than longer term. Uncertainty over production trends is already highlighted by the latest estimates on 1993-94 grain production.

   The European trade association COCERAL estimates the final crop at more than 166 million tonnes. The average yield was 5 tonnes per ha, but the top yields have soared to 10.6 tons per ha, outstripping all previous records. This underlines the argument that lower prices will not necessarily persuade farmers to aim for less-intensive production.

   In addition, the International Wheat Council's first forecasts for the 1994-95 crop year indicate that plantings in Europe will be slightly higher than last year, so production could start to climb again.

   Aside from E.U. production, much depends on developments in Eastern Europe and the former Soviet Union. And world demand for cereals, and wheat in particular, is certain to rise steadily as living standards rise in Asia and China and consumers demand the supply of higher quality foods.

   Daniel Amstutz, executive director of the I.W.C., forecasts that by the end of the century, 50% of world wheat sales will go to Asia and 20% to China. The Organization for Economic Cooperation and Development forecasts that wheat and coarse grain exports will rise to 208 million tonnes by 2000. All this points to increased demand and a rise in world market prices for grain.

   The trick will be to guess how farmers will respond to the changing market signals and where the market demand will develop.

   Diane Montague owned and edited the U.K.'s leading agribusiness trade weekly, Agricultural Supply Industry, for 22 years. In 1987 she was awarded the Guild of Agricultural Journalists' Netherthorpe Award as Communicator of the Year. She sold ASI two years ago and now concentrates on freelance writing and consulting.

CAP reform in brief

   • The 1992 CAP reforms were intended to reduce cereal support prices to bring them closer to world levels by 1995-96.

   • Farmers are compensated for lower support levels by direct income payments, based on area of production and historic average yields.

   • The compensation payments have been set at Ecu 25 per tonne in 1993-94, Ecu 35 in 1994-95 and 45 Ecu in 1995-96. At the same time, the intervention price falls from Ecu 117 per tonne in 1993-94 to Ecu 108 in 1994-95 and Ecu 100 in 1995-96.

   • To qualify for these payments, all farmers producing more than 92 tonnes of arable crops must agree to set aside at least 15% of their arable land. The set-aside area is eligible for compensation in 1993-94 at a rate of Ecu 45 per tonne of crops not produced, rising to Ecu 57 in 1994-95.

   • Ecu 1 = U.S.$1.15.

E.U. GATT terms in brief

   • Domestic support prices must be reduced by 20% over six years. E.U.'s set-aside and area payments are exempt from the cuts.

   • Import barriers must be converted into tariffs and must be reduced by 36% over six years, using 1986-88 as the base period.

   • Export subsidies must by reduced by 36% over six years.

   • The volume of exports must be cut by 21% over six years, using 1986-90 as the base period.

   • E.U. subsidized cereal exports are limited to 25 million tonnes annually plus 2.5 million for food aid.

E.U. Cereals supply and demand, 1992-2000

   assuming 1% yield growth, in million tonnes

1Including 2.5 million tonnes of food aid.
2Stocks figures are based on an initial estimate of total E.U. stocks for 1992-93 of 42 million tonnes (E.U. Commission), of which 31.5 million were held in intervention stores as of July 1993. These figures represent total stocks (private and public).
Source: National Farmers Union