European Feed Update
April 01, 1994
by Teresa Acklin
Brian Rutherford examines the effects of CAP reform and the Uruguay Round trade agreement under GATT
Brian Rutherford is president of the International Feed Industry Federation. He is a past president of the European Feed Manufacturers Federation and the Grain and Feed Trade Association, London.
World agribusiness in 1993 experienced a momentous year. In December, 117 countries signed the final act of the Uruguay Round negotiations under the General Agreement on Tariffs and Trade. The agreement comes into force in mid- 1995 and will affect agriculture beginning with the 1995-96 marketing year.
The agricultural obligations on Europe under terms of the Uruguay Round agreement are significant and are broadly in line with the Common Agricultural Policy reform. Import tariffs and expenditures on export subsidies will decline by 36% over six years, and cereal export volume between 1995-96 and 2000-01 will decline by 21 % from the 1986-90 average, a reduction of about 6 million tonnes.
The current level of European Union preference for cereals will be maintained so that import tariffs will be reduced in line with price decreases under the CAP reform. If E.U. imports of non-, grain feed ingredients increase to a level above the 1990-92 average, the E.U. and the U.S. will meet to find an acceptable solution. Further market access agreements are expected to be announced, including quotas for 475,000 tonnes of wheat offals (millfeed); at present, there are no imports because of high tariff barriers.
EFFECTS ON DIFFERENT INGREDIENTS.
The implications of the GATT agreement and the CAP reform are that cereals will become cheaper, cereal production will (or should) decline, and some of the non-grain feed ingredients and protein in E.U. feed may be displaced by cereals. So let us first compare the E.U. use of raw materials in 1984-85 with the current 1993-94 crop year.
Table A shows that the use of cereals in animal feed has declined by 6 million tonnes, while the use of manioc and sweet potatoes, both controlled by quotas, has increased by 700,000 and 500,000 tonnes, respectively.
Domestic E.U. production of byproducts has increased by 1.7 million tonnes, based on small production increases in corn gluten feed, wheat offal sugar beet pulp and other products. Meanwhile, imports of byproducts have increased by 4.3 million tonnes, including a 1.4-million increase in corn gluten feed, despite a 900,000-tonne decline in wheat offal imports because of high tariffs.
Vegetable proteins have seen a dramatic increase in both the domestic crush and in imports. All of these figures illustrate the concern of the Union to maximize the use of its own raw materials, especially cereals, and to minimize imports, while the rest of the world, especially the U.S., wishes to maximize its exports to the Union.
The effects of CAP reform and the GATT agreement on E.U. agriculture will have repercussions throughout the world. Some estimates are that E.U. cereal use could increase by perhaps as much as 10 million or 11 million tonnes in just three to four years. I expect some balancing decline in E.U. imports of manioc, byproducts and vegetable proteins- especially materials such as rice bran, palm kernel meal and copra meal, which have high freight costs and can enter other markets nearer to home.
EFFECTS ON PRICES.
CAP reform already has affected E.U. prices dramatically. I will use U.K. prices as an example, as we have found that to amalgamate E.U. prices in either Ecus or U.S. dollars distorts the result.
In November 1992, U.K. feed wheat was priced at ,130, delivered to the compound feed mill; in November 1993, the price was ,100. In early January 1994, the price for April-May-June delivery was no more than ,105.
The declines are mainly due to reduced price-support levels and to slow U.K. exports. Lastly, there is no support or intervention price for feed wheat under CAP reform.
In these circumstances, feed wheat now is some 5% cheaper than barley, much to the compounder' s advantage. Further price declines should occur in the coming years as support levels are reduced, as shown in the accompanyirig chart (left).
EFFECTS ON PRODUCTION.
As cereal prices have fallen, so has cereal production. But remember the farmer is subsidized for his income loss through the set-aside arrangements.
E.U. cereal production hasdeclined to 165.8 million tonnes in 1993 from 180.7 million tonnes in 1991, but we must bear in mind that E.U. cereal consumption is only 140 million tonnes and that imports are about 5 million tonnes. So even in this crop year, there was an over-supply, or export availability, of 30 million tonnes and record-high intervention stocks of 33 million tonnes on July 1, 1993.
Unlike cereals, 1993-94 production of peas and beans was higher, at 5.5 million tonnes, compared with 4.7 million the previous year. Peas are an especially useful feed ingredient, although predictions are that production will decline because of poor price relationships with cereals.
E.U. dried forage production also has been increasing significantly. In 1986, production was only 1.5 million tonnes, increasing to 4.1 million in 1992 and 4.3 million in 1993. Expansion seems set to continue, with 4.5 million tonnes expected in 1994, but concerns over the costs to the CAP have prompted suggestions that production should be limited to about 3.5 million tonnes.
For oilseeds, 1993 production is estimated at 10.8 million tonnes, compared with 11.9 million in 1992. The Blair House accord on oilseeds is now being implemented; farmers will face penalties if plantings exceed by more than I % the allowed base of 5.12 million hectares less the 15% set-aside. I believe it is fair to say we have seen the peak of E.U. oilseed production, which was 13.1 million tonnes in 1991.
In Table B on page 15, you will notice that the E.U. in 1993-94 is expected to use 41 million tonnes of major oil meals, while U.S. use is estimated at only 27 million, even though both have similar populations. The figures suggest the E.U. is over-using protein because of the high-priced cereal regime, but the trend is changing; it is interesting that the 199394 estimate reflects a 2 million-tonne, or 5%, decline from the previous year.
FEED PRODUCTION TRENDS.
In 1992, 110.4 million tonnes of compound feed were produced for sale, compared with 107.9 million tonnes in 1991. Table C shows the 1992 production breakdown by country.
Three of the countries should be highlighted. Germany's 1992 commercial production of 19.3 million tonnes was 1.26 million lower than the previous year because of continuing economic problems in the former East Germany. In Denmark, 1992 production increased by 630,000 tonnes, mainly because of increased pig production.
Spain recorded an astounding 20% increase from 1991, mostly in the cattle and pig sectors. But the increase may be overstated because of the possibility that earlier figures were incomplete or incorrect.
Indications are that there were no dramatic changes in 1993 feed-for-sale production patterns, although Spain's production may have declined by about 1 million tonnes.
The total of raw materials used for feed production in 1993 was 176million tonnes (see Table A). With production of feed for sale accounting for 110 million tonnes, as shown in Table D, the remaining 66 million apparently was used"on farm."
But this term is somewhat of a misnomer that is gradually being rectified. Much "on farm" use occurs in large integrated units where the enterprise has its own feed mill to supply its own stock and does not sell compound feed to third parties. Most E.U. countries are working to get separate figures for integrated units, and thus, non-sale compound feed production figures.
The compound feed-for-sale figures do include the production from private commercial companies as well as cooperatives. In many countries, including Denmark, Ireland and the U.K., the cooperatives and private companies are members of the same national feed associations and in turn, of the European Feed Manufacturers Federation (FEFAC). In 1991, FEFAC's total membership split was 65% private and 35% cooperative, although national percentages varied from no cooperative membership in Portugal to some 50% in the Netherlands, Ireland and Denmark.
MEAT PRODUCTION AND ANIMAL PRODUCTS.
There is little new to discuss in the evolution of meat and animal product production, with the most recent figures shown in Table D.
Beef and veal production is expected to continue to decline because of the relative high cost and changes in the subsidy and intervention arrangements in the CAP reform. Pork production in 1993 should be at least 14.5 million tonnes, even though pig producers have been having a highly unprofitable time.
Chicken production continues to increase, as does turkey within that figure. Egg production and consumption seem to have reached a plateau, but salmonella problems are being overcome, and there could be some marginal increase. Milk production is controlled by milk quotas, and these will be reduced, so there is no joy for the feed industry in this area.
All of this implies that any increase in compound production of feed for sale must be taken from either integrated producers, which seems highly unlikely, or from true on-farm mixers; the latter has been the case in France, where compound production has been increasing.
Hormones: the Commission is proposing tighter controls, including a complete ban on clenbuterol other than for therapeutic treatment for horses and pets. There will be severe penalties for the illegal use of growth promoters and hormones.
B.S.T.: in early November 1993, the U.S. Food and Drug Adminstration officially sanctioned the marketing and sale of bovine somatotropin, which enhances milk yields. Just a month later, the E.U. farm ministers rejected a Commission proposal for a seven-year ban on B.S.T., but did extend the current ban for one vear, through December 1994.
Controls on feedstuffs: much time has been spent in debate with the Commission over its proposal to label all feed materials, in a framework of a merger between the straights list and raw materials list to give greater market transparency. A label or other document must follow the goods, stating name and address of seller, the statutory description of the goods, weight and certain analytical information when selling to a customer other than a registered compounder. This will add to the complexity of the business and undoubtedly will increase costs.
Inspections: a new directive will set out the principles for inspecting and checking, which will give authorities the right to enter farms and integrated units as well as commercial facilities. The trade is pressing for the use of Grain and Feed Trade Association sampling and analysis rules, which already are in place.
Salmonella: new proposals have been put forward across the Union for veterinary checks on marine and animal products. These regulations and codes of practice have applied in the U.K. for some considerable time. The U.K. has 100% checks of these materials, but the trade thinks the checks could be reduced, especially for imported fish meal, which now has a very clean record.
In addition to these issues, the directive on bio-proteins is to be revised, probably leading to the inclusion of detoxified feedstuffs. In July 1993, a directive on dietetic feed was adopted, and discussions continue on a regulation covering "conditions and provisions for the registration of manufacturers of additives, premixes and compound feedstuffs." Also currently under discussion is a directive on animal nutrition that would organize efficient import controls within the Single Market.
THE CHALLENGES AHEAD.
The European feed and agribusiness sectors are in a time of change, and margins will have to be watched closely. With falling prices, we will have new price relativities for our raw materials and signficant reductions in some imports.
The E.U. compound feed industry has to work within the tightest of legislative constraints, which do not apply to all sections of our business. This was brought out in early 1993, when we recommended that on-farm mixing operations and integrated units should be identified and that regulations governing the feed industry similarlv should be applied to those producers.E.U. use of raw materials
World use of major oil meals
|(in million tonnes)|
|Source: International Feed Industry Federation|
E.U.* production of sale compounds
|(in million tonnes)|
|Former Soviet Union||8.0||8.0||5.0||6.0|
|Source: Oil World/lnternational Feed Industry Federation|
E.U. meat production, animal products
|(1992, in million tonnes)|
|*excludes Greece and Luxembourg.|
|'*fewer than 6,000 tonnes.|
|Source: International Feed Industry Federation|
|(in million tonnes)|
|Beef and veal||8.30||8.70||8.40||8.20|
|Milk production ||116.60||114.20||114.30||114.00|
|Totals may not add up because of rounding.|
|Source: International Feed Industry Federation.|