Europe's grain mountains

by Melissa Alexander
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Despite agricultural policy reforms, speakers at the HGCA annual conference say the E.U. will have a large cereal surplus

by Chris Lyddon

Europe thought it had eliminated its enormous grain mountains, but they are on the way back, according to speakers at a recent conference in London.

The changes the E.U. made recently to its Common Agricultural Policy — the biggest changes in 40 years — will make little difference to production at first, but subsidy cuts will eventually have an impact.

Those attending the Home Grown Cereals Authority’s (HGCA) annual Outlook Conference in October learned that Britain, with a high-quality crop to sell, is in a good position.

"2005 has been much easier in the U.K.," Lord Bach, the U.K. Minister for Food, Farming and Sustainable Energy, said at the conference, which brings together representatives of all parts of the grain production chain. "Yields have generally been good and the quality excellent."

Despite problems in Spain and Portugal, where drought cut production sharply, the E.U. is set to have a large cereal surplus.

HGCA Senior Economist Julian Bell said the world market for wheat, with production at 609 million tonnes, compared with 623 million last year, faces a return to gradually declining stocks.

"It could get tight if there’s any problem," he said. However, prices have stayed low and he wondered how long that will last. "Can we have continuously lowish prices and low stocks?" he asked.

Prices for British grain farmers have actually changed little over the last 12 months, Bell said.

"U.K. feed prices are actually very similar," he said. "Milling wheat and malting barley were cheaper than they had been 12 months ago, which was to be expected with a better quality crop."

Bell put the wheat crop in the U.K. at close to 15 million tonnes. That compares with last year’s crop of 15.5 million tonnes. Wheat exports should be around 2.5 million tonnes, he said.

He added that U.K. wheat quality in 2005 is drastically better than 2004. "The wheat harvest was very good," he said. "It’s not in that vintage quality perhaps, but there’s a lot of good wheat about."

Abundant supplies In Eastern Europe
While Spain and Portugal had suffered major crop losses, Eastern Europe — especially Hungary — had abundant supplies of feed wheat.

"The market does tend to compensate," Bell said.

Spain’s cereal crop has fallen by 8 million tonnes, but imports are only expected to rise by around 2 million. He said importers in Spain saw the problem coming and had already started buying wheat to go into stock in the final stages of the previous marketing year.

"They are trying to limit imports where they can," he said.

Spain is also likely to run down stocks.

"At the moment it seems they are well covered," he said.

The E.U. as a whole faces sharp growth in stocks.

"Overall, the E.U.’s still got a big surplus because we’ve entered with such big stocks," he said, noting that stocks held by the E.U. in its "intervention" stores, having almost disappeared in 2004, had already started to grow. "We could still see stocks building back to 19 million tonnes.

"Just imagine if we’d had a crop like 2004. We’d have an additional 32 million tonnes of grain, largely because we welcomed new countries into the E.U. This problem is not going to go away."

The introduction of the Single Payment Scheme, which decouples production from farm income, is not likely to make much difference to the planting decisions of U.K. farmers, even though Lord Bach called it the biggest change in European agriculture in 40 years.

"The returns from growing a hectare of wheat were already low, including the area aid," Bell said. "When it was taken away, it was the highest proportion of income since it was introduced.

"If the land’s still there and if farmers don’t produce, what are they going to do with it? It is hard to get rid of fixed costs. Farmers will find that their income is better if they maintain production."

Long-term subsidy cuts
Graham Redman, research economist at the Andersons Centre, warned that the subsidy cuts planned over the next few years would have an effect on production.

"The large, commercially-sized business is going to have a wallop taken out of its subsidy check," he said. "If you divide your IACS (subsidy) check in half, does your business still work?

"It is not decoupling which will force change in the E.U., but the fall in subsidies. Anyone who wants certainty can stay as they are, because the one certain thing is that when the next CAP reform comes along in seven years, they won’t be here to talk about it."

Bell put world wheat production at around 610 million tonnes, compared with 623 million a year ago, but the decline could have been more severe.

"The world has harvested a better crop than we first thought," he said. "But it’s not the record we had last year."

Bell noted that the U.S. expects its wheat exports to be down around 1.5 million tonnes. But the big change was in Argentina, which could be putting 3 million or 4 million tonnes less wheat into the market.

The E.U. would export at least 2 million tonnes more, but the big growth area was the former Soviet Union. He predicted exports from that group of countries would rise by 5 million tonnes to around 20 million.

There was also the question of the currency. A relatively weak dollar against the Euro helped to keep world prices below the intervention level.

On the demand side, Bell said he did not expect China to repeat its 7-million-tonne import total of last year because it is producing a bigger crop. The figure was more likely to be 4 million or 5 million tonnes.

U.K. export focus on North Africa
George Forbes, vice-chairman of British Cereals Exports (BCE), the committee which runs the HGCA’s export promotion arm, described BCE’s success in building new markets, with the focus on North Africa, particularly Egypt.

"It is important you realize what BCE is about," he said. "The committee is a mix of growers and traders and co-ops and merchants representing a broad sweep of the British industry. There are hard-headed men of the soil and flashy traders."

Forbes said it was emphasized to members of the group that they were all on the same side.

"The only way BCE can work is to support our traders. It’s all about salesmanship," he said.

BCE’s approach to a new market is to use both the resources of the HGCA and the local British Embassy.

"In the case of Egypt, they were very helpful," he said.

He explained why BCE had focused on North Africa.

"We’ve got a 3-million-tonne surplus," he said. "Look at how much they’re buying."

In 2005, Egypt is expected to import 7.5 million tonnes of wheat, Algeria 5.5 million, Morocco 3 million, Libya 1.5 million and Tunisia 1.2 million.

"Morocco has been a success," he said. "We’re now sending British wheat to Morocco from a standing start three or four years ago."

Forbes has high hopes for Tunisia, but its enormous imports made Egypt an important target.

"Egypt is virtually the biggest importer in the world," he said. "Obviously it’s the one we’re really concentrating on."

Egypt is also a fast changing grain market. According to Forbes, two years ago the U.S. had 52% of the Egyptian market. Last year, the U.S.’s share had fallen to 24%. At the same time, Russia’s share had risen from 2.5% to 26%.

Britain, he said, would be in a good position if it could maintain quality.

"As long as we keep producing quality harvests like this one, we will be able to expand our exports," he said.

Quality had been a sticking point in discussions with the Egyptian buyers. The agreement allows for a maximum of 14% moisture, he said.

"Every farmer will tell you, ‘I’m only taking it down if I’m getting paid for it,’" he said. "Every Egyptian will say, ‘I’m not paying to transport water halfway around the world.’

"Overall, North Africa is looking for Group Ones and Twos," he said, referring to the top-quality brands used for wheat varieties in the U.K. "There is a market for export grain. It’s a thriving market. It’s growing."

Although grain trade in the U.K. uses the National Association of British and Irish Millers group system, which classifies wheat by variety, the newly introduced ukp and uks wheat quality criteria had been a success.

"We’re now finding people are talking the language of ukp and uks," Forbes said "We’ve now got a British brand. It’s a lot easier to sell on a brand."

Ukp is a blend of semi-hard wheat varieties to suit E.U. and non-E.U. bread making while uks is a blend of soft wheat varieties, known throughout the E.U. for their biscuitmaking and breadblending characteristics.

Attending the conference were members of the E.U. cereals management committee, the group of officials that meets in Brussels each week to set the Union’s export subsidies, and Forbes had a plea for them.

"We’ve got eager customers outside the E.U.," he said. "I would (say to) the E.U. management committee that ‘surely you could encourage our exports with a little more help. Surely that would make financial sense rather than filling intervention stores.’ "

Chris Lyddon is World Grain’s European editor. He may be contacted at: