Consensus and Conflict

by Teresa Acklin
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Global grain outlook bright, but contentious issues divide market participants.

By Diane Montague, European correspondent

   Grain experts from around the world may differ on many issues, but the two things on which they agree at the moment are that demand for cereals will continue to grow and that markets will be volatile. It is over the way in which demand is met and markets are managed that opinions vary.

   The perspective from the International Grain Council's annual conference in London in June was one of considerable optimism for the future of the world's cereals industry. It was tempered, however, with concern that the recent welcome moves to freer trade and reduced state involvement might be hampered by alternative measures to protect home markets. And the usual spat surfaced between the United States and the European Union over the export tax/subsidy mechanism, as well as over health-based import restrictions.

   For a very large number of grain producers, prospects are encouraging. Dramatic increases in demand, mainly in Asia, will provide expanding export markets. Many developing countries will need more grain than they can produce themselves even if a reduction in political conflicts allows production to increase.

   Traders now have much better opportunities to operate in a free market. Processors, too, can look forward to a steady growth in demand for grain-based foods and beer.

    Less encouraging, though, is the situation in the European Union, where farmers and the Commission are caught between the pressures of relentlessly increasing production, high farm support costs and limitations on subsidized exports. The European Commission's strategy for dealing with the situation with export taxes and refunds met with almost universal criticism — not least from within the European Union itself.

   French trader Michel Rouge, president of Continental Co. and a fierce critic of the Commission's handling of the cereals market, said the tax underlined its “stop/go” policy, hindering any concerted planning and forcing European traders to relinquish their standing as reliable suppliers. As a result, he said, the European Union suffers from a lack of transparency, which increases market volatility. The export tax not only penalizes foreign buyers, it hinders the alignment of domestic prices for agricultural raw materials with world prices, he said, adding that the tax was an obstacle to foreign trade and a form of indirect subsidy for exporting industries.

   Undaunted by the barrage of criticisms, David Roberts, Deputy Director General of the European Commission, said the export refund/tax mechanism was not just a short term measure. Included in the E.U.'s agreement with the World Trade Organization, the mechanism is designed to avoid excessive fluctuations on the domestic market caused by volatility in the world market, he said, and is intended to operate in tandem with the longer term measure of a gradual reduction in the rate of area set-aside.

   The policy changes introduced by the Commission in 1992 have brought stocks down from nearly 33 million tonnes at the time of the changes to only 2 million by the end of the 1996-97 marketing year, Mr. Roberts said. But even if world demand remains high, world prices will not rise enough to allow the European Union to export without refunds, he added.

   Another of the E.U.'s marketing policies came under attack from U.S. Secretary of Agriculture Dan Glickman, who said the greatest threat to free trade was “phony science” that threatened to replace tariffs and other barriers to trade.

   In particular, he criticized the E.U.'s policy on genetically modified crops and said sound science must be the sole arbiter of public health decisions. European consumers' concerns are understandable, he said, but they must be prepared to accept the assurances of scientists. And because of these assurances, the United States is not prepared to accede to European buyers' demands for segregation of conventional and genetically modified crops, he said.

   “We will not be pushed into allowing political science to govern decisions,” Mr. Glickman said, adding that without advances in biotechnology it would be impossible to produce enough food to keep pace with the world's increasing population. The stakes for the world are simply too high for this technology to be limited, he said.

    Just how much world demand is likely to grow was spelled out by speakers from Indonesia, Japan, India and Russia. Piet Yap, director and general manager of Bogasari Flour Mills in Indonesia, said Indonesia's per capita flour consumption had increased from 7 kilograms per year in the early 1970s to the present level of about 13 kg. Over the same period, Indonesia's flour milling capacity has increased from 11,000 tonnes per day from three mills to 17,000 tonnes from four mills, and a fifth mill, with a daily capacity of l,000 tonnes, also is under construction.

   Bogasari's own two mills in Jakarta and Surubaya account for 15,000 tonnes of the current daily production turned out by 843 roller mills, Mr. Yap said. To handle this quantity of grain, the mills now have 233 vertical silos with total storage capacity of 600,000 tonnes. At the Jakarta mill, two separate wharves are capable of discharging 3,500 tonnes per hour using five pneumatic loaders. Mr. Yap said he expected Indonesia's wheat import requirements to rise from this year's 4 million tonnes to at least 5 million in 2000.

   One of the world's largest wheat importers, Japan, is concerned that even developments in biotechnology will not be sufficient to meet the demands of the growing world population, said Hirofumi Ueno, former Japanese Vice Minister of Agriculture. Additional doubts about the level of future production increases stem from pressures to reduce the use of fertilizers and pesticides, he noted.

   Although Japan has the money to buy food, “we cannot eat money,” Mr Ueno said. Concern in Japan is increasing about the country's low level of self-sufficiency in food, which currently is running at only 42%, Mr. Ueno said. Consequently, moves to increase domestic food production are beginning.

   Mr. Ueno said he did not totally agree with the argument of concentrating production in areas of comparative advantage. “In my view, it is more desirable that individual countries pursue sustainable production, each fully utilizing its own domestic natural resources,” he said.

   Describing the grain producing policies of India, which has successfully moved towards a high level of self-sufficiency, Raghuvansh Singh, Minister of Food and Consumer Affairs, said a combination of pricing policies and technical developments had increased food grain production from 76.67 million tonnes in 1959-60 to 191.50 million in 1994-95.

   However, Mr. Singh said, considerable scope for improving productivity in the rain-fed areas exists by the application of modern technology and improved agricultural practices. This strategy is of vital importance in bridging the gap between availability of food grains and increasing demand arising from population growth and improvements in the purchasing power of the poor.

   Along with agricultural management, India operates a system of minimum support prices that are calculated on a number of factors, Mr. Singh said. Prices are announced before the sowing season begins so that farmers can adjust their production programs.

   Between 15% and 20% of the total crop is bought by the government, partly as a means of price support and partly to build up stocks for the Public Distribution System, Mr. Singh said. The P.D.S. is used to make grain available to the rural and urban poor at specially subsidized prices. To ensure adequate supplies and stocks, India is expected to import more than 9 million tonnes of wheat this marketing year, Mr. Singh added.

   The steps being taken to transform Russia's grain trade from a centrally operated system to a commercial business were outlined by Alexander Yukish, president of the Russian Grain Union. Mr. Yukish said that in 1990 Russia had 1,700 state-owned enterprises involved in grain handling and processing. By last year, the number had fallen to only 34 in which the state held a 51% share. Not counting primary producers and sellers, more than 2,500 organizations now are involved in trading in grain and bread products in Russia.

   The Russian Grain Union was the first of a number of organizations set up to represent and protect the interests of those involved in the grain business. Its membership is made up of 120 groups from 30 regions in Russia, as well as major grain companies in Kazakhstan and Belarus. In addition, the Moscow offices of Cargill, Tradigrain, Danton Trading and Finagrain have become active members, as have the U.S. Wheat Associates and the U.S. Feed Grains Council.

   The Russian Grain Union's objective is to help the development and operation of a “civilized” grain market in Russia, Mr. Yukish said. This is being done by lobbying for legal structures to develop market relationships and the backing for legal documentation, educating specialists in Russian grain companies and providing statistical information.

   Referring to the current harvest, Mr. Yukish said he did not foresee any great change in the production and consumption trends of the last five years. Production was estimated to come out at around 70 million tonnes, of which 35 million would be wheat, 16 million barley and 7 million rye. Imports are expected to amount to roughly 4 million tonnes, Mr. Yukish said.

   Speakers from those countries anxious to meet the expanding demand on world markets explained how they were adapting their production and marketing systems to operate in the changing situation. Ralph Goodale, Minister of Natural Resources for Canada and minister responsible for the Canadian Wheat Board, said his two key priorities were to improve the grain transport system and to bring about changes in the Board that would make it more flexible in responding to the market.

   Given Canada's unique challenge of long distances between production areas and port locations across some of the world's toughest mountains and a harsh winter climate, Mr. Goodale said Canada must aim to provide the world's best transportation system to guarantee customers' supply lines. He also said he intended to press forward with new legislation this year that would improve flexibility and farmer involvement in the C.W.B.

   The Minister said that Canada had already acted to meet its W.T.O. commitments by ending the system of subsidizing rail transport and that he was opposed to the use of either export taxes or export subsidies, which he said acted as trade distorting measures.

   Major changes also are being made in the Australian Wheat Board, according to its chairman, Trevor Flugge. To meet the increasingly specific demands of wheat processors around the world, Mr. Flugge said the Board was being restructured as a grower-owned company that would be responsible for all commercial aspects of Australia's international wheat marketing.

   All government involvement, apart from that relating to the single desk, will cease by July 1, 1999, when the changeover takes place. Growers will have ownership and control of the new company as shareholders and as a direct financial investment. The company's capital base will be of sufficient size to continue to fund a high level of payments to growers in advance of their revenue from wheat sales, Mr. Flugge said.

   As an interim measure, he said, a wholly owned subsidiary of the Board will come into operation by Oct. 1 to carry out all the current commercial activities of the A.W.B. This is being done to allow the new grower-controlled company to develop a track record over the next two years and develop its own identity in international capital markets. The single desk structure will be reviewed by the government in 1999-2000.

   Mr. Flugge said these changes would enable the Board to adapt to the changing market where technological advances in flour milling had been rapid and processes had become increasingly sophisticated. In the medium term, he said he expected markets to become increasingly volatile with demand increasing by approximately 2% a year. Trade will continue to grow, mainly fueled by demand from the Asian region, which is driven by population and economic growth and increasing urbanization, he said.

   Another country making determined efforts to meet the ongoing demand for grains is Argentina. Felip Sola, Secretary of Agriculture for Argentina, said his country was building on its natural advantages of climate and soil types by adopting modern crop technologies and fieldwork techniques. Fertilizer use now is five times higher than at the start of the 1990s, and sales of agricultural machinery have grown by more than 40%, he said. As a result, grain production reached a record 53.4 million tonnes in the 1996-97 season, an increase of 38% on the 10-year average of 38.6 million.

   Since the switch to privatization began in 1990, total storage capacity has been increased to 46 million tonnes, with 29 terminal grain elevators in ports and production areas together providing storage capacity of 4 million, Mr. Sola said. In response to the more specific demands of buyers around the world, Argentina has introduced new wheat standards for high quality bread wheat, biscuit wheat and feed wheat (see World Grain News, August 1997).

   Finally, Argentina also is expanding production of malting barley and malt.

   “Developments in barley over the last decade provide a clear example of the agro-industrial transformation which is taking place, since the increase in the area sown to barley and the increase in production have been accompanied by growing investments from local malting and brewing industries,” Mr Sola said. Production capacity for both malt and beer has grown by 200% since 1990, he added.