Global Grain Outlook
August 01, 1999
by Teresa Acklin
By Diane Montague, European correspondent
Grain prices will remain at their current low levels for at least another two years but should start to rise around 2002, driven by rising demand from the recovering "tiger" economies of Asia and by increasing prosperity in India and China, according to speakers at the International Grains Council's annual conference in London in June. Given the opportunities for the world's grain trade, the new round of World Trade Organization talks in September in Seattle, Washington, U.S., also will be crucial in whittling down trade barriers and distorting subsidies.
Huub Spearings, president of Cargill Europe, predicted that "short of a real weather problem affecting particularly the huge U.S. spring crops … there appears little chance for today's low grain prices to make a major move upwards before about 2001 or 2002." By that time, demand from Asia and possibly Russia would begin to lift markets, he said.
The present situation, in which production continues to increase despite very low price levels, is due to interference by governments that continue to intervene and prevent producers from responding directly to market signals, Mr. Spearings said.
"The marketing loan in the United States, high support prices in China for domestic grain production and the European Union's price levels still clearly above world markets are all to blame for the world grain markets not getting back in balance quickly," he said.
Longer term, there could be a reversal of the traditional pattern of agricultural expansion followed by industrial development, he said. To take full advantage of the rapidly changing economic and production trends, countries should abandon the drive for self-sufficiency and move instead toward an agricultural system based on comparative advantage, Mr. Spearings said. This would mean concentrating labor-intensive industrial production in most of Asia and other developing countries, leaving a significant proportion of their food to be imported from countries that are land-rich.
The Australian Wheat Board also is confident that there will be a steady upturn in the Asian economies, which will trigger an improvement in the world grain trade. Trevor Flugge, AWB chairman, said that while the financial difficulties of the past 18 months had caused a tremendous amount of pain, he believed the Asian economies would emerge stronger and more sustainable.
This recovery is expected to lead to a steady increase in the proportion of people living in towns. Recent World Bank statistics showed that between 1980 and 1997 the urban population in Indonesia increased to 37% from 22%; in Malaysia to 55% from 42%; in the Philippines to 56% from 37%; and in Thailand to 21% from 17%. In the longer term, this would mean a swing away from traditional rice diets to more wheat and meat-based diets.
The changing social and economic structure in India is likely to lead to increased trade in feed grains, according to Kenneth Hobbie, president and chief executive officer of the U.S. Grains Council.
Mr. Hobbie pointed out that India had the world's second-largest middle class. Milk and egg consumption are rising and India has overtaken the United States as the world's largest milk producer. Poultry production in India also is increasing and being marketed in new, more "user-friendly" ways, he said.
Partly as a result of these changes, India has started to import maize and could become a significant force in world coarse grain markets, Mr. Hobbie said. China also is expected to become an important export market, he added.
Mr. Hobbie said he also was confident that new industrial markets would open for maize in the manufacture of bioplastics and biofabrics. The technology is already on the commercial market in Japan, he said, where maize-based biodegradable plastic film is being used for mulch.
Russia should provide an outlet for world grain supplies for the next several years, according to Andrei Sizov, director general of SovEcon Ltd., although he added that most of this will be in the form of food aid. The stability of the Russian grain market is maintained largely through food aid support from the United States and the European Union and through the growing commercial imports from Kazakhstan, he said.
Mr. Sizov said that by the beginning of the 1999-2000 season, Russian grain stocks were expected to be virtually exhausted. The 1999 grain harvest should reach 65 million tonnes and possibly 70 million tonnes if the weather is good, he said. Although this is considerably higher than the very poor harvest of 48 million tonnes in 1998, it is still lower than the average production of 68 million tonnes from 1996 to 1998, he said.
For this reason, Russia's grain market will remain in a critical position for the 1999-2000 marketing year, and demand for imports will be relatively high, Mr. Sizov said. Most imports, however, will have to be in the form of food aid, he said, since Russia is not able to finance imports on a commercial basis.
Much of the potential expansion in the world grain trade depends on the success of the next round of trade talks, many speakers noted. World agriculture is still encumbered with too many conflicts and barriers, said Mr. Hobbie of the U.S. Grains Council. "We still have too many instances where policy skews the marketplace," he said.
The consensus among the speakers at the I.G.C. conference was that the next W.T.O. negotiations needed to find a round of way to end export subsidies, to further restrict internal supports to encourage farmers to grow crops best suited to their own conditions and to harness state trading.
Mr. Spearings from Cargill said that while the Uruguay Round had reduced tariffs to only 6% on industrial goods, there was still a long way to go in cutting the 30% to 40% tariffs on agricultural goods. This will be more difficult, he said, because opening up domestic markets to lower-priced international competition creates risks of long-term access to sufficient food supplies.
This does not mean that some countries should stop agricultural production completely, Mr. Spearings said. But it does not make economic sense to try to grow 100% of basic crop needs when there are better economic uses for some resources, he said.
However, if countries are to be persuaded to open their markets and reduce targets of self-sufficiency, "they must have a guarantee that the tap will never be turned off," Mr. Spearings said. Future export taxes or food bans must be excluded, he said. Supply assurance is the new challenge of the millenium, but these come with serious obligations, he said.
"As exporters, we have fought for the right to export and increase trade," Mr. Spearings said. "We must also recognize the obligations that come with it."
Despite the potential seen by the commercial sector in dismantling trade barriers, many expect some tough political battles to be fought at the W.T.O. talks in Seattle. Export subsidies, producer aids and other forms of disguised market support will loom large.
Richard Rominger, U.S. deputy secretary of agriculture, said it was critically important to move forward with trade reform. The fragile global economy plus record production and a strong U.S. dollar has combined to produce the worst farm crisis since the mid-1980s, he said. The world's major exporters are facing a decline of more than U.S.$40 billion, or 15%, in agricultural trade in the next three years.
With the world awash with grain but short on buyers, farmers are bearing the brunt of economic circumstances largely beyond their control, Mr. Rominger said. The future of U.S. agriculture hinges on the strength or weakness of export markets, he said, highlighting the critical importance of progress with world trade reform.
Mr. Rominger defended the U.S.$6- billion emergency relief package for U.S. farmers. He acknowledged that other countries regarded it as backtracking on the decoupled support mechanisms of the 1996 Farm Bill, but insisted that the U.S. had nevertheless stayed within the bounds of its W.T.O. obligations. At the same time, he said, the U.S. has responded to the income crisis in other countries by increasing export credit guarantees by 40% and stepping up international food aid to 10 million tonnes from 3 million tonnes.
Looking ahead to the new W.T.O. round of talks, Mr. Rominger said no industry stood to gain as much as the grain sector from the opening up of 21st century markets. This is why it is essential to resolve trade battles, he said.
At the top of the list are export subsidies, he said, which must be eliminated in order to avoid remaining a major block in the move toward trade liberalization. Farm subsidies also need to be more strictly controlled so they do not distort trade, he said.
Mr. Rominger also criticized the E.U.'s new Agenda 2000 reforms for failing to go far enough. Instead, he said, Europe was again relying on the world grain market to solve its surplus problems.
Mr. Rominger's criticisms of the E.U.'s grain policy were firmly rejected by Guy Legras, director general for agriculture at the European Commission. Mr. Legras said the set-aside program introduced with the 1992 reforms of the Common Agricultural Policy took around 250 million tonnes of wheat and coarse grains out of the world market — equivalent to an entire year's crop of U.S. maize.
He added that the new program of reforms agreed upon in Berlin included a 15% cut in grain prices over two years, which would only be 50% offset by income subsidies; a 10% set-aside regime that would take 6 million hectares out of production; and a cut in the support price for oilseeds, bringing it down to the same level as cereals. Total annual support for E.U. agriculture would be frozen until 2006, he said.
Mr. Legras said the E.U. would enter the new round of trade negotiations with a "very open spirit." The E.U. is not interested in being protectionist because it needs an open global market, he said. Everything should be put on the table for discussion, he said, including export credits, refunds and food aid.
Both Mr. Legras and Mr. Rominger had no doubt that biotechnology and its impact on trade would be a major issue at the next trade talks.
Mr. Rominger criticized the E.U.'s regulatory system and its effect on trade. He accepted the need for emergency action to safeguard the health of consumers in the case of the dioxin contamination of animal feeds in Belgium, but said the E.U. still had 15 different systems operating throughout Europe, meaning that it that it takes much longer to decide on clearing new products. Biotech products are taking up to two years to clear in the E.U., compared with only nine months in the United States, he said.
The E.U.'s lengthy and complex approval process cost the United States about U.S.$200 million in 1998 in lost maize exports to Spain and Portugal, Mr. Rominger said. And since several U.S. biotech maize varieties remain unapproved in the E.U., it is possible that the U.S. will not export any maize to the E.U. this year, he said.
Regarding the role of biotechnology in overcoming world hunger, the U.S. is committed to reducing by half the number of undernourished people in the world by 2015, Mr. Rominger said. But gains from traditional research are at a plateau and new technologies are needed, he said.
The U.S. regulatory system is strictly controlled, open and inclusive, Mr. Rominger said. "Once the American public is satisfied that the science was sound, they recognized that not moving ahead was a step backwards," he said.
Mr. Hobbie of the U.S. Grains Council acknowledged that U.S. agriculture had a bad habit of viewing technical changes strictly from the viewpoint of the U.S. farmer. To survive, any new developments must benefit the producer and customer, he said, but technology is still in its infancy.
Looking beyond the problems in Europe currently affecting Bt corn and Roundup Ready soybeans, biotechnology is already delivering major benefits in other sectors, he said, such as pharmaceuticals, which have been widely accepted.
Mr. Hobbie said there was great potential in using bacteria to combat industrial pollution, in vaccinating the world's children against diseases through food and in delivering a new "green revolution."
"We cannot afford to reject this technology out of hand," he said.