Economic crises threaten farm reform

Date: 17/09/1998

Plans to cut the CAP bill are being put at risk by the Asian and Russian collapses, writes Myles Neligan

A LONG way from the boardrooms of Frankfurt and London, where institutional investors are nervously calculating the cost of the Asian economic collapse, EU farmers are watching developments in the Far East with an equally worried eye.

Lucrative meat and grain exports to Asia have slumped, and the subsequent Russian crisis has deprived the Union of its largest agricultural export markets overnight.

More concerned still are European Commission agriculture officials who are slowly realising that the 'Asian 'flu' may well sabotage their meticulously laid plans for reforming the 40-billion-ecu Common Agricultural Policy.

A much overlooked aspect of the Commission's CAP reform strategy is the extent to which its success depends on strong and growing export sales for key agricultural commodities.

The institution's long-term forecasts for the world grain, beef and dairy markets, released under the title CAP 2000 a tactical three months before the formal unveiling of the CAP reform proposals last year, laid bare the export-orientated logic of Farm Commissioner Franz Fischler's plans.

The CAP 2000 surveys argued persuasively that unless farm policy was overhauled, the combination of flat domestic consumption, EU minimum prices well above world levels and the farm sector's chronic inability to curb overproduction would lead to massive surplus stocks of grain, meat and milk by the year 2005.

The case for CAP reform was reinforced by the argument that intervention storage and subsidised exports - the traditional methods of dealing with excess production - would no longer be politically defensible after the next round of World Trade Organisation talks on global liberalisation.

The CAP 2000 documents also reiterated the point that the expense involved in maintaining the current regime would not be sustainable after the EU takes in the first five central and eastern European applicants for Union membership in the early years of the next decade.

The Commission's elegant solution to this dilemma is to lower the minimum guaranteed prices for meat, dairy and grains close to world levels, thereby simultaneously reducing expenditure on public storage and subsidised exports while opening fresh export opportunities on world markets.

While the institution admits that some restructuring of the EU farm industry will be an inevitable part of the reform process, its market analyses suggested that these fresh export opportunities would be sufficient to take up most of the Union's excess production, ensuring that European farmers' pain would be minimised.

In line with earlier market forecasts drawn up by the United Nations Food and Agriculture Organisation and the Organisation for Economic Cooperation and Development (OECD), the CAP 2000 surveys singled out East Asia as the most promising export market, and the likely destination for much of the EU's surplus production.

The region's subsequent economic demise has cast a long shadow over this rosy scenario, which many commentators attacked for being overly optimistic even before the Asian meltdown began.

While the region's crisis has had a more immediate impact on Australian and US farmers, who export far larger quantities to Asia than their European counterparts, the risk to EU agrarians, and to the CAP reform project in particular, should not be underestimated.

Experts agree that the fall-out from the Asian crisis will be felt most keenly in ministerial negotiations over the reform of the politically sensitive beef sector.

Union beef producers, many of whom are facing ruin after prices collapsed in the wake of the 1996 'mad cow' crisis, are already strongly opposing the Commission's proposal to cut the EU guaranteed price by 30&percent;.

At the political level, this is the institution's most controversial reform proposal, attracting entrenched resistance from a clear majority of Union agriculture ministers. With the outlook for the world beef market at an all-time low following the Asian collapse, many observers now expect that the Commission's reform proposal will not survive ministerial wrangling.

“The problem is that beef prices have fallen to a point where the world price is likely to stabilise well below the EU level, even with a 30&percent; cut,” said Brian Gardner, agricultural consultant at EPA Associates in Brussels. “The proposal might have been acceptable when the prospect of increased exports to Asia was realistic, but this is no longer the case.” According to Gardner, the Asian collapse has robbed the already unpopular beef sector reform of its one benefit, thereby reinforcing national resistance to the plan. “I do not expect the Council of Ministers to approve this measure,” he said.

This analysis supports the view that price cuts are an ineffective but politically feasible substitute for a truly radical programme to reduce overproduction, involving large-scale concentration of the beef industry. The Commission, for obvious reasons, has shied away from such alternatives. Meanwhile, it is putting on a brave face, vigorously defending its current strategy.

“We are concerned in the short term, but not in the long term,” said one Fischler aide. “We are working on the assumption that the Asian crisis will be history after the year 2000, which means that our projections are still on track.”

The Commission's confidence that the problem will be resolved by the year 2000 is based on recent market forecasts by the US department of agriculture and the Australian Meat and Livestock Commission which tentatively suggest that the Asian economies will have stabilised by the end of 1999.

But this optimism is by no means universally shared.

“Any prediction of a recovery by the end of 1999 has some interesting assumptions built into it,” said one Australian diplomat. “The Asian crisis has not yet bottomed-out, and there is no way of knowing how bad things are going to get.” He pointed out that Australian beef exporters, who have seen their sales to South East Asia fall by 53&percent; in the last year, take no comfort from such optimistic forecasts.

The problem is compounded by recent developments in the US, the world's largest beef exporter, which would have dragged down prices even if the Asian economy had remained sound.

American cattle ranchers are in the middle of a large-scale programme of structural adjustment designed to improve quality and reduce spare capacity. In essence, this involves the liquidation of many herds, which in turn greatly increases the amount of beef coming on to the world market.

All forecasts suggest that US production will reach a peak in the year 2000, putting further downward pressure on world prices at precisely the moment when the Commission is relying on an improvement in the market situation.

In the worst case scenario, persistently low prices on the world market and Union governments' rejection of plans for radical reductions in the EU minimum guaranteed price would force the Commission to continue propping up the beef industry well into the next decade.

The cost would put further pressure on the EU budget, already stretched to bursting point by the accession of up to five cash-strapped new members. And beef stocks would continue to grow, much to the Commission's embarrassment. Eventually, it would have to contemplate more drastic, and highly unpopular, restructuring measures.

Economic slumps do not last forever, and the Asian recovery may arrive in time to save the day. But time is short, and the Commission's room for manoeuvre is limited. Even a short-lived dip in the market could be enough to throw its forecasts out of kilter.