European wheat market turmoil

by Teresa Acklin
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European Commission imposes controversial tax on wheat exports.

   The European Commission in early December imposed an export tax on wheat for the first time in more than 20 years. The tax of 25 Ecus a tonne, or about U.S.$32, was implemented as world wheat prices increased to their highest levels in 15 years.

   By setting the tax, the Commission carried out its promise to intervene in markets by restricting exports in an attempt to keep down feed costs for the Union's hard-pressed livestock farmers, who are benefiting far less from the reform of the Common Agricultural Policy than cereal farmers. The Commission's action, however, was attacked by grain traders, feed manufacturers and flour millers, who think the tax is unnecessary and has added to the volatility in the E.U. grain market.

   Their anger increased at the quarterly advisory committee meeting in December between the Commission and delegates from COCERAL, the organization representing the E.U. grain and feed trade. After trade representatives put forward their estimates of the wheat supply/demand situation, Commission officials said they would not be issuing any figures themselves.

   Their reason, according to Chantal Fauth, COCERAL'S secretary general, was that member states had been too slow in providing information and that the change to the single market made it more difficult to compile accurate trading figures. Mrs. Fauth said that the Commission representatives were prepared to quote only the figures provided by COCERAL itself. The trade representatives were, she said, extremely cross and told Commission officials that their refusal to release information would create a lot of unnecessary volatility.

   Wheat supply/demand conditions and policy actions this season have created uncertainty for all sectors of the industry, including traders, processors and livestock farmers. Processors are under pressure from high raw material costs and downward pressures on prices from end users.

   Feed compounders have been using more E.U. wheat in livestock rations in response to the CAP policy of encouraging the use of E.U. cereals rather than imported cereal substitutes. In the 1994-95 marketing year, E.U. use of wheat for feed was 31.1 million tonnes, compared with only 20.6 million in 1992-93, according to the International Grains Council. The level of usage in 1995-96 is expected to remain high, at a projected 31 million tonnes, because protein prices have increased by 20% to 30% on the back of lower production of soybeans and fishmeal.

   Inevitably, the wheat feed use affected E.U. milling wheat prices, which already had been boosted by soaring levels on the world market. E.U. spot prices in December were U.S.$15 to U.S.$45 per tonne higher than a year earlier. Spain and Portugal, with crop problems and curtailed harvests, posted the largest increases and northern countries the lowest.

   But Europe's grain traders and processors think the situation was made far worse by some of the changes in the CAP and by the actions of the Commission itself during the current season; the failure to release up-to-date supply and demand statistics was seen as the latest move in creating a much more volatile market than production levels warranted.

   Bernard Valluis, director of external relations for the French-based company Groupe Soufflet and a former president of the European Association of Export Millers, described the situation as very difficult.

   “The Commission's actions to limit exports have pushed farmers and traders into believing that prices will go higher. It is very difficult to know if the Commission is leading the market or the market is leading the Commission,” Mr. Valluis said.

   The European Union's total 1995-96 grain harvest is estimated to be about 175 million tonnes. With opening stocks of 26 million tonnes, the total availability of grain this season, excluding imports, is more than 200 million tonnes. With internal consumption expected to be around 158 million tonnes, at least 25 million would be available for export.

   But it was the Commission's action in suspending export licenses in October that led many farmers to believe supplies were scarce and prices would go higher. And the system of area payments to compensate farmers for set-aside land, plus the monthly stepped increases in intervention prices, gave farmers a very positive cash flow at the beginning of the marketing year. This healthy cash position along with bullish price opinions created incentives to hold on to grain for much longer than normal supply/demand patterns would indicate.

   At the same time, traders who believed that prices could go higher were taking positions and adding to the firmness in the market. As a result, wheat market prices in December were 15% to 20% above intervention levels in France, Germany and the United Kingdom and were nearly 50% above the level in Spain and Portugal.