Pros and cons of EU’s grain bonanza

By Tim King

Date: 16/09/04

THE European Union appears to be heading towards a record-breaking cereals crop. Although harvesting is not yet complete in northern Europe, estimates from grains organizations suggest that taken as a whole Europe is managing a spectacular recovery from the disaster of last year's scorching summer.

During the next two weeks, organizations representing farmers, grains traders and buyers from across the 25 states will be comparing notes on the returns for 2004.

This is a moment of some significance for the European cereals industry. The EU market has expanded significantly with the addition of ten new states, including such sizeable cereals producers as Poland, Czech Republic and Hungary. In just six weeks' time, farmers in the new member states will become eligible to sell grain into intervention: they will benefit for the first time from an EU-guaranteed price.

Since grains are an important commodity, traded across continents, the health of the EU cereals harvest matters to more than just Europe. It will be watched closely by other big cereals producers, Australia, Canada, the US, Argentina, Russia and Ukraine. It will be watched also by the EU's neighbours in north Africa and the Middle East, traditional importers of EU grain.

COCERAL represents the national trade organizations of the member states, encompassing collectors, distributors, exporters, importers and agribulk storers. Next Friday (24 September) they will publish revised forecasts for the 2004 crop. COCERAL President Klaus Schumacher said he was expecting a harvest of around 280 million tonnes from the EU-25, compared with 227m in 2003 for the EU-15 plus ten. "It is a tremendous increase," he said, mainly due to "exceptional yields". France, Germany, Italy and Spain have all had markedly better harvests as have Hungary and the Czech Republic, he said.

Untimely and violent rain will have damaged some crops in some parts of northern Europe - the UK and Denmark were hit in mid-August - but reports suggest that the EU remains on course for record returns.

If it does materialize, the economic effects of a record harvest are uncertain, in part because there are so many other possible influences on the grains trade. The exchange rate is important and the strong euro has made competition in the export trade difficult. Transport costs are a big issue, both in the EU's internal market and in the export market since transport costs can add significantly to the per-tonne cost of grain. Escalating oil costs have hit the grains market as they have hit other international trades. Whereas two years ago the costs of shipping grain from the Gulf of Mexico to Rotterdam were around $7-$8 (6 euro) per tonne, currently the costs are around $31 (25 euro) per tonne. Much of that is about rising energy costs, some of it is about a world shortage of appropriate ships.

Traditionally, the EU has resorted to export subsidies to help its grains exporters compete on the world market. The thrust of reforms to the Common Agricultural Policy has been to reduce direct price support and the use of export subsidies. In the context of world trade negotiations, it would be helpful for the Commission if the EU did not have to resort to intervention and could export without subsidies. When talks to revive the World Trade Organization's Doha Round got back on track on 31 July, the negotiators set the aim of eliminating trade-distorting export subsidies.

Commission officials point out that since 1 July export licences have been issued for about 2m tonnes to go overseas with no export subsidy. That fact demonstrates, they argue, that EU grains are competitive on the world market, even without subsidies.

But Schumacher does not believe that the EU will be able to export sufficient of its production to dispose of the bumper harvest, in part because Russia, Ukraine, Romania and Bulgaria have also had good crops and will compete against the strong euro. Wheat exports will fare better than barley.

For the farmers, the prospect of a record harvest is a double-edged sword. On the one hand, farmers who had a good crop have plenty to sell. On the other hand, the market price will be lower, in a period of plenty. The EU is likely to see more buying into intervention at the guaranteed price, particularly in Germany, France and Hungary. Intervention stocks will build up again.

But the safety net of intervention is not universally available. Intervention for rye (traditionally overproduced) has been abolished from this year. And for some farmers, 1 November may come too late. Anecdotal evidence reports significantly cheaper prices in northern Hungary compared with Vienna. Some of those prices are below the guaranteed intervention price available to Hungarian farmers from November. That suggests that Hungarian farmers do not have the storage capacity to keep their grain in good condition for a couple of months so are forced to sell early and cheaply. Such is the size of the harvest in the Czech Republic and Hungary that both countries are submitting requests to the Commission for measures to help the farmers.

In the pre-EU era, the governments might have provided soft loans to farmers to buy feed and equipment to smooth any cash-flow difficulties. And they provided incentives to buyers to front-load their orders. The Commission has traditionally been reluctant to provide such assistance. Not all farmers will profit from this year of plenty.

Article discusses the effects of the 2004 record grain harvest in Europe.

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