CAP Reform and the E.C. animal feed industry

by Teresa Acklin
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   By Brian Rutherford, president, International Feed Industry Federation. Mr. Rutherford is a past president of the European Feed Manufacturers Federation (FEFAC) and the Grain and Feed Trade Association (GAFTA). He was chief buyer for BOCM-Silcock.

   The year 1992 was a momentous one for the Common Agricultural Policy (CAP). A fundamental reform was agreed upon, which will have far-reaching repercussions on the feed industry and on the raw materials used in the European Community.

   E.C. compound feed production in 1991 is estimated at 107.9 million tonnes, up 1.5% from 106.24 million tonnes in 1990. But, the increase in production was not uniform. Eastern Germany continued to experience severe problems in catching up with the rest of the country. As a result, overall German production declined to 20.4 million tonnes. France continued to increase production with a dramatic increase of 1.3 million tonnes. Substantial increases occurred in Italy and the Netherlands. There were small increases in the U.K., Ireland and Denmark, and very small reductions in both Spain and Portugal.

   Indications are that production in 1992 dropped to 1990 levels, mainly because of a further substantial fall in Germany of about 2 million tonnes. Production remained stable in the other E.C. countries, with the exception of Denmark, which recorded a 400,000-tonne increase in output. Regrettably, E.C. production statistics still do not include Greece, where 1992 production is thought to have been about 2 million tonnes.

   The changes in the CAP that will be described below should help maintain a steady increase in compound production of about 1% each year. And, the abolition of the cereal co-responsibility levy (C.R.L.), which has been of such concern to the feed industry, should inhibit cereal use on farm and further stimulate compound feed production.

   Total raw material use in animal feed in the E.C. in 1992-93 is projected at about 175 million tonnes; of this amount, about 108 million tonnes will be used in producing compound feed with the balance being fed on farm or by integrated enterprises that may have large compounding units but do not sell compound feed commercially.

   About 50% of the raw materials used in feed are cereals. Of the 82 million tonnes of cereals projected to be used in 1992-93, only 2 million tonnes should have to be imported. More than 50% of the E.C. average ration is non-cereal. More than 50 million tonnes of non-cereal ingredients are projected to be imported in 1992-93. Manioc imports, which mainly come from Thailand under a quota agreement, should total almost 7 million tonnes.

   Byproducts, whose use is forecast to reach 31 million tonnes in the year, are residues from industries like flour milling, starch manufacture and sugar production. Domestically produced wheat offal should account for more than 10 million tonnes of the byproducts used in 1992-93. Maize gluten should account for almost 7 million tonnes. About 5.5 million tonnes of the maize gluten will be imported, mostly from the United States. Some 6.4 million tonnes of sugar beet pulp, of which 5.2 million tonnes should be domestically produced, will be used. About 1.9 million tonnes of citrus pulp is expected to be imported for use as a feed ingredient. About 1.5 million tonnes of maize germ will be used, of which 1.3 million tonnes will be imported.

   Total use of molasses and fats in 1992-93 is projected at 5.8 million tonnes. About 4.4 million tonnes will be molasses, of which 3.2 million tonnes will be imported.

   Vegetable protein use is projected at 45.2 million tonnes. The major protein to be consumed, at a projected 21.3 million tonnes, will be soybean meal, with rape meal, sunflower meal and “others'' projected at about 4.4 million tonnes each. The balance will be made up of peas, beans, milk powders and 4.7 million tonnes of dried forage.

   The 175 million tonnes of raw materials consumed by animals in 1992 is estimated to have produced a total of 31.3 million tonnes of meat, 300,000 tonnes less than in 1991. The reduction matched the level of the fall in beef and veal production. The forecast is for a further small fall in 1993. The longer-term indicators are that beef production will continue to decline mainly because of the higher relative cost of red meats compared with those of pig and poultry meats.

   There was a further decline of 200,000 tonnes in pork production in 1992, but that trend is expected to be reversed in 1993. Chicken production continues to increase year by year, by 200,000 tonnes in 1992. A further increase is expected in 1993. Production of lamb and other meats like rabbit and goat is virtually static.

   Egg consumption also is projected to remain stable, at about 5 million tonnes per year. Milk production is constrained by the E.C. milk quota regime, and production is expected to continue to decline.

   The main agricultural problem in the E.C. for almost 20 years has been the overproduction of cereals. Support prices have been very high, encouraging E.C. farmers to produce more and more grain. It is this situation that led to the reform of the CAP and to the difficulties in concluding an E.C.-U.S. agreement within GATT. The high cereal support prices have led to an excess production of cereals. Surpluses have been exported at heavily subsidized prices. The E.C. feed industry has imported massive tonnages of manioc and cereal byproducts — the so-called cereal substitutes — because they have been more economic ingredients in animal feed than cereals.

   E.C. domestic consumption of cereals is fairly static at 140 million tonnes, and imports are now only 5 million tonnes. Thus, any production over 135 million tonnes has to be exported or held in Community intervention stores.

   In 1991-92, the Community's cereals production was 181 million tonnes, leaving a surplus of 46 million tonnes. About 32 million tonnes was exported, and the balance of 14 million tonnes went into the intervention stores. Because of drought, 1992-93 production was only 163 million tonnes, and exports of 28 million tonnes will balance the books. It seems that exports will exceed this figure, so intervention stocks will be drawn down. As we move forward to 1995-96, cereal production should be lower and consumption higher, so byproduct imports will decline, all because of the reform of the CAP and GATT.

   As the production of E.C. cereals becomes more balanced with internal demand and exports, one must expect greater volatility in the marketplace. This will not be to the advantage of compound feed manufacturers, whose customers like a steady price for their compound feed. It implies that even more attention will have to be paid to purchasing and to raw material function, as extreme volatility may apply to cereals and byproducts, as well as to proteins.

   The E.C. agricultural agreement within GATT should be accomplished within the restrictions placed on E.C. agriculture by the reform of the CAP. But, as this article was written, the GATT Uruguay Round had still not been finalized or ratified.

   The main GATT requirements for the E.C. are:

   1 — Cut money spent on exports by 36% based on 1986-1990 levels; a 21% reduction in the volume of subsidized exports (not including food aid) for all commodities over six years.

   2 — A 20% cut in farm support (base 1986-88).

   3 — The “tariffication'' of import levies and other border protection measures and a 36% cut in these tariffs (base 1986-88). Each individual tariff must be cut by at least 15%.

   4 — Oilseed plantings to be limited to a maximum of 5.128 million hectares. This is as in the reform package and could reduce production that had reached 13 million tonnes to about 9 million tonnes.

   5 — A 10% set aside.

   6 — The U.S. will monitor exports of the so-called cereal substitutes.

   7 — Only 1 million tonnes of oilseeds will be allocated for industrial use.

   8 — Binding arbitration has been built into the agreement in case of dispute concerning excess production.

   9 — There will be no subsidized exports of beef to Asia.

   What exactly is the reform of the CAP, and what are the main changes? On May 21, 1992, the E.C. Ministers of Agriculture agreed to the support prices for 1992-93 and the basic principles of the reform of the CAP. These changes are said to be the largest and most far-reaching in the 30-year history of the CAP, and the substantial reduction in cereal prices will have a significant effect on the feed industry.

   The cereal co-responsibility levy has been deleted as of July 1, 1992. This is good news for the compounder because he no longer is penalized by the 8% levy; thus, the compounder's price for ex-farm cereals is now the same as that paid by the on-farm mixer. This should inhibit movement from sale compounders to on-farm mixing.

   Cereal prices are reduced in three stages in the 1993-94, 1994-95 and 1995-96 marketing years. The 1992-93 and reform years prices are presented in Table 4.

   If one compares the situation in the 1992-93 crop year with that of the 1995-96 crop year, there will be a large reduction in the target price. A 31.5% reduction in the buying-in price for feed grains (35% for common wheat) and a 23% reduction in the threshold price. The difference between the threshold and intervention price, or the “Community preference,'' of 55 Ecu/tonne means almost the same protection against cheaper imports as at present. In conjunction with the total reform package, it does infer greater potential volatility in the domestic market should the E.C. get short of cereals.

   These substantial reductions in the E.C. cereal support prices are balanced with direct compensation to farmers to cover the shortfall in their incomes together with a set-aside scheme.

   The compensatory payments will be made on a per-hectare basis, calculated on average regional yields over the years 1986-87 to 1990-91 (the average of the five years excluding the year with the highest and the year with the lowest yield, multiplied by 45 for the year 1995-96). There are two schemes for these payments: a simplified scheme and the general scheme.

   A grower who applies for aid on less than the area equivalent to the production capacity of 92 tonnes (based on the regional yields) will receive compensation for all his arable area.

   A farmer exceeding this threshold will be obliged to set aside 15% of his arable land in order to qualify for compensation, which may vary for oilseeds, pulses and cereals.

   Base areas for compensation and set-aside payments will be calculated as the average of the areas put down to cereals, oilseeds and protein crops or publicly-funded set-aside schemes during 1989, 1990 and 1991. These will be calculated on a regional basis. In the case where aid is claimed for an area in excess of the regional base area, producers in that region will be penalized in the form of reduced compensation.

   The Commission has made allowance for changing compensation payments, set-aside payments and percentage area set-aside obligations “in the light of developments in production, productivity and the markets.''

   There are two further changes that may have significant effects on the market: 1 — the potential use of set-aside land for non-food crops; 2 — the minimum quality standards for intervention (from July 1, 1993, only bread wheat, feed barley and rye are eligible).

   The new arable scheme also includes oilseeds and pulses. The special compensation payments for these products will only be payable to producers who register under the general scheme; in other words, they must set aside 15% of their base area to qualify for the differentiated payments.

   The basis of the new oilseeds regime is already in place this season with the aim of bringing equal levels of support for oilseeds and cereals. Briefly, the Commission adopted a ratio of 2.1 to 1 between oilseeds and cereals. Growers have to sell on the domestic market at the world price. To make up the difference, they should receive a deficiency payment.

   It is believed that farmers will maximize set-aside on oilseeds in order to minimize cereals set-aside, with the overriding objective of maximizing their income, because oilseed margins will decline substantially more than those of cereals. A French study indicates falls in margins of 29% for rapeseed and only 12% for wheat between 1991 and 1996.

   For pulses, the Commission has worked out a ratio of 1.4 pulses:1 cereals. There is a calculation modified by regional average cereal yields, and only producers under the general scheme are eligible. But it is believed that pulse production will be fairly attractive to growers in appropriate areas, at least for the first two years.

   To turn from the arable sector to livestock, the surprise is that there is no reduction in milk quotas. In fact, there was no change in 1992-93; however, the Commission “will submit reports to the Council before the beginning of the 1993-94 and 1994-95 quota periods, on the market situation with proposals.'' It seems that the Commission aims to reduce the quota by a further 2% by 1994-95, although the reform package confirms that the quota system will continue to the year 2000. Butter prices are to fall 2.5% in 1993-94 and 2.5% in 1994-95, but there is no change in skimmed milk powder prices.

   For beef, support prices are to be cut by 15% over three years, and a ceiling has been placed on normal intervention buying-in. This starts at 750,000 tonnes in 1993 and falls to 350,000 in 1997. The beef special premium is to be raised from 40 Ecu to two payments of 90 Ecu to encourage farmers to raise beef rather than veal. The suckler cow premium will be raised over a three-year period from 50 to 120 Ecu to encourage farmers to raise better-quality beef. There will also be a calf conversion premium of 100 Ecu on the slaughter of calves under 10 days old, again to discourage farmers from raising dairy animals for the beef market. These changes to the livestock species regimes are likely to decrease feed demand for beef by 5% by 1997, discourage the production of veal and discourage beef from the dairy herd.

   For sheep, the existing ewe premium is limited to 500 ewes (1,000 in less favored areas) with 50% premiums payable beyond these limits. Initial quotas are reduced by 1% to create a national reserve, and there is a new simplified definition of ewe.

   In addition to the main changes, accompanying measures include environmental protection, afforestation of agricultural land and early retirement.

   The changes to agriculture, production and the raw materials used in feed are likely to be dramatic. In recent months, many eminent scholars and business people have given their projections. Production reductions for cereals of from 10 million to 35 million tonnes are foreseen, with most analysts anticipating a reduction greater than 20 million tonnes. Meanwhile, cereal consumption is expected to increase by 8 million to 13 million tonnes. The anticipated large reduction in cereals production combined with a large increase in consumption could lead to very volatile grain and raw material markets and a much reduced export availability. Analysts expect that the so-called substitutes (byproducts) will move down in price in sympathy with cereals, but protein prices are likely to remain at current levels, or at least fall much less than cereals prices.

   It will be interesting to see how the use of proteins in the E.C. changes over the coming years. The figures kindly produced by Siegfried Mielke of Oil World Hamburg illustrate all too clearly the “excessive'' use of protein in the E.C., encouraged by the high price of cereals. As cereals decline in price, it is expected that protein will become relatively much more expensive and that E.C. use and, thus, imports of proteins will decline, probably significantly.

   Mr. Klinckhammers and Mr. Banstock have commented on the changes in livestock production and suggest: The dairy yields will continue to increase by 1.5% per year, and milk quotas will continue; thus, there will be fewer cows. The cut in beef intervention will make red meat even less competitive. The outlook for pigs is fair, although lower prices should encourage consumption. Poultry meat is a remarkable growth option, but the price inelasticity will limit sales prospects for layers.

   The reforms are bad news for all involved with E.C. agribusiness and the agriculture supply industry. Margins will be under pressure. There may be a switch to less intensive farming methods, and farmers' purchasing power will be lowered by the reduced cereal prices. Public concern about pesticides and worries about the environment are likely to strengthen demands for less use of agrochemicals. There will be a restructuring of the industry. With such large reductions in the raw material prices, should the percentage gross margins remain unchanged, the actual amount of cash to run the business and contribute to profits would decline with obvious implications for the well-being of the enterprise and agribusiness generally.

Table 1 — E.C. compound feed production 1991

(million tonnes)
IrelandDenmarkSpainPortugalE.C. (12)

Table 2 — E.C. consumption of raw materials by animals 1992-93

(million tonnes)
Sweet potatoes0.600.60
Molasses & fats2.003.805.80
Vegetable proteins15.6029.6045.20
Animal protein2.400.903.30
— — — — — —

Table 3 — E.C. evolution of meat production and animal products

(million tonnes)
Beef & veal8.308.708.408.20
Other meats0.700.800.800.80
— — — — — — — —
— — — — — — — —
Consumption of eggs5.
Milk production116.60114.20114.30114.00
Due to rounding, figures do not add exactly.

Table 4

Target price206.00130.00120.00110.00N/A
Int'n price
(buying in)*146.00117.00108.00100.00-31.5%
Compensation — —25.0035.0045.00 — —
Threshold price201.00175.00165.00155 barley-23%
*Feed grains, 35% for comon wheat
From July 1, 1993, there will be one uniform price for all kinds of grain including durum wheat.

Table 5 — World use of major oil meals*

(million tonnes)
E.C. 1241.042.043.0
“East Europe”
*These are the nine major oil meals plus sesame meal, corn germ meal, corn gluten feed, fish meal.