Growing pains for cereal trade

Date: 06/06/1996

By Michael Mann

DESPITE their preoccupation with the continuing 'mad cow' crisis, EU farm ministers are nonetheless gearing up for their annual battle over how much of the Union's cereals land should be left fallow in the coming season.

This year, the ritual will take on an added piquancy, for European agriculture finds itself in an entirely unaccustomed situation.

Its infamous grain mountains are a thing of the past, prices are buoyant and the global political climate has been redefined by the passage of the US Farm Bill, with its pledges to reduce agricultural support and free up production in the only market against which the EU measures its own policies.

While deeply unexciting for the uninitiated, the ministers' decision on the rate of arable 'set-aside' for the 1996-97 season is crucial not just for cereal farmers, but also for livestock farmers, food manufacturers and a number of powerful trading houses throughout the Union.

The major players are already beginning to lay down their negotiating positions. France, to whom the very idea of idle land has always been anathema, wants every last field to be put back in production. Germany, which with France so often forms the axis of agricultural deal-making, would be happy to leave the set-aside rate at 10&percent;.

Early discussions in the Special Committee for Agriculture suggest a likely compromise of 5&percent;, a fairly typical halfway house in the strange world of the Common Agricultural Policy (CAP).

The Commission has promised to be “in a position to make a proposal” before the end of June, but maintains that it cannot do its sums until data is available on the state of the harvest in the US.

In reality, it will want to avoid allowing itself to be tied to any firm commitments when a package of other policy measures are decided by ministers at the end of June.

While such reticence is understandable, the Commission has long been the target of considerable criticism for its handling of a market which has undergone sweeping changes since the CAP reform came into operation in mid-1993.

Although criticism is rife, it says something about the secretive nature of the market that few of those offering harsh words are prepared to do so “on the record”.

Suggestions that the weekly cereals 'management committee' remains the personal fiefdom of Guy Legras, the French head of Directorate-General VI (agriculture), are firmly denied. Officials do accept, however, that of all the policy areas falling under his control, cereals is Legras' number one love. His defenders explain that such interest is natural, given that cereals are the basis of all agricultural policy and the centrepiece of the 1992 reform. To cynics, it has more to do with the fact that France is a major grain production region.

The major grumble of both traders and the EU's trading partners is that the Commission has proved unable or unwilling to adjust to the new post-reform situation.

While it continues to trumpet the success of the reforms in cutting surpluses and bringing Union prices closer to world market levels, the Commission's management techniques have remained stubbornly unchanged.

“The Commission has got into the habit of managing a market instead of administering a market policy,” says a senior manager at one of Europe's biggest trading houses.

One US diplomat puts it rather more starkly: “There is still this Cold War mentality, where the management committee tries to manage the market. CAP reform finally created a genuine market, but the management committee has still not caught up with that fact.”

Meeting every Thursday, the committee has complete control over deciding which bids are granted prized export licences for sale on to the world's growing cereals market.

Traders wanting to export apply to their national authorities. These bids are then submitted to the committee, made up of member state experts and Commission officials, for approval or rejection depending largely on the level of export refund or - latterly - tax the traders are willing to accept.

Since late last year, the Commission has attracted the wrath of both exporters and the US government by taxing exports of the major cereals to prevent traders starving the domestic market of much-needed stocks.

Anyone wanting to sell common wheat outside the Union market can reckon on paying an extra 45 ecu per tonne above the EU market price for the privilege. Barley exports attract a 25-ecu levy.

Well used to prices on the cushioned EU market being above world market levels, traders have suddenly been confronted with world-wide shortages and the unusual situation of European grain being cheaper than its foreign equivalent.

But this has not encouraged the EU to become a bigger player on the world market. The Commission has had its hands tied by an undertaking from ministers to give domestic cereal consumers preferential access to Union grains and Commission officials estimate that total exports so far this season are at 60&percent; of 1995 levels.

The famous MacSharry reforms (named after former Agriculture Commissioner Ray MacSharry) were sold to member states on the basis that lower cereal prices would allow the EU's livestock sector to survive the strictures of the GATT Uruguay Round world trade agreement.

With Union stocks at their lowest levels for 20 years and prices high, the Commission underlines that its first priority is to keep European cereals at an affordable price for manufacturers of animal feed. This is only achievable if stocks stay within the EU's borders, say officials.

“Exporters understood this situation right from the start. We need these weapons to have a firm hand over exports,” insisted one, rejecting traders' accusations that the EU is failing to honour its international commitments and adding: “We are also committed to exporting at the minimum cost to taxpayers.”

But the European grain trade association COCERAL dismisses the Commission's export tax policy as positively damaging. According to an official, “not only are prices not decreasing as a result, but it is also sending out a psychologically-bad signal to the world market”.

US officials maintain that if Europe wants to gain a role as a major foreign policy power in the new global order, it must also be prepared to play its part in feeding the world. “Just as world grain stocks are low, the Commission is trying to cut off its export channels,” explains one.

Another widespread criticism is the lack of openness in the way the Commission manages the tender system.

“There's a total lack of transparency and it is impossible for us to know whether our bids will be accepted,” claims a Dutch trader, echoing COCERAL's view that the Commission needs to improve contacts with representatives of the trade. “This highlights the European attitude to professionals. When policy is discussed in the US, a large group of professionals are brought together and consulted. We have to work through back-door unofficial contacts,” says a COCERAL official.

Clearly, the large players in the market - the likes of Continental, Cargill, Töpfer, Dreyfus and Glencore - need a high degree of security when negotiating valuable deals with foreign importers.

But the Commission insists that the five officials concerned with administering the grains management committee regularly consult the trade.

“Signing a big contract for 1.5 million tonnes of grain without the Commission's knowledge would be commercial suicide. The money involved is so great that they cannot risk going ahead without the Commission's knowledge,” says an observer.

Trade sources claim that falling barriers to international trade have led to greater concentration in the sector, particularly in Germany, where small traders have lacked the capital and international contacts to operate effectively in the world market-place.

For large traders, the formerly generous margins on handling grain are no longer there. The unusually difficult situation this year has also made life very difficult for cereals cooperatives in the member states.

Meanwhile, EU cereal farmers are generally accepted to be the greatest beneficiaries of CAP reform, receiving generous compensation payments for cuts in institutional prices that have not been reflected in the market.

With a reduced rate of set-aside operating this year, market analyst Strategie Grains predicts a Union harvest of 185 million tonnes compared with 176 million tonnes last year.

The Commission will ask itself whether it is politically feasible to accept restrictions on plantings for next year's harvest while shortages on the world market continue.