Market support going against the grain

Date: 28/05/1998

The furious US reaction to a large shipment of subsidised Finnish barley is just one sign of the storm brewing over market support as the key players prepare for battle at next year's World Trade Organisation farm talks. Myles Neligan reports

AT NEXT year's World Trade Organisation talks on farm trade liberalisation, the EU will finally have to bite the bullet and agree to significant reductions in the level of market support it provides to farmers.

The US and its allies in the ultra-liberal Cairns Group of grain-exporting countries, who will lead the charge against the EU's Common Agricultural Policy in Geneva, have long insisted that reducing market support will work to the advantage of EU farmers in the long run as lower prices open up fresh export opportunities on world markets.

They also claim that the elimination of subsidies and other market-distorting mechanisms will usher in a more predictable trading environment, which will in turn boost the international grain trade.

Farm Commissioner Franz Fischler, who will lead the EU negotiating team, will have to weigh up the benefits of greater liberalisation against the political fall-out of agreeing to trade concessions which may inflict hardship on Union farmers.

But the argument that slashing market support will generate a more stable trading environment for grain and other commodities is a powerful one. It has already been advanced by some EU governments and European Commission officials as well as die-hard free marketeers like the US, Australia and New Zealand.

It is also being pushed assiduously by EU-based grain traders who handle exports of wheat, barley and maize worth an average of 2.4 billion ecu every year.

"In general, we regard government influence on grain markets as a bad thing," said a spokesman for international commodities giant Cargill. "The Commission's intervention in the markets is hard to predict, which in turn makes it very difficult to manage the risk involved in handling major commodities transactions. Deals that cannot be hedged are obviously less attractive to us."

Traders also point out that the elimination of guaranteed EU cereal prices and export subsidies would reduce the price volatility which has characterised the international grain market in recent years.

The consensus amongst grain dealers is that unless governments' scope for intervention is reduced far more than was agreed during the 1994 Uruguay Round of world trade talks, the market will remain vulnerable to periodic bouts of instability, as one country or another yields to the temptation to give its farmers a helping hand.

Although reluctant to get involved in the political squabbling which inevitably ensues, the grain trade is united in its hope that the next WTO round will put a stop to such episodes once and for all.

The need for a tighter agreement on export subsidies and other intervention measures was thrown into sharp relief earlier this year as the EU and the US, the two largest producers and exporters of farm products in the world, became locked in a game of commercial brinkmanship following the financial collapse in South East Asia.

The US fired the opening salvo in January, when it moved to secure its large Asian markets for beef and pigmeat by extending export credit guarantees worth almost 1 billion ecu to cash-strapped importers in South Korea, Malaysia, and Indonesia.

Pig farmers in Denmark and the Netherlands, who found they were losing out to their American rivals as a result, protested bitterly - but to no avail: Fischler turned down a request from Danish Farm Minister Henrik Dam Kristensen for similar measures to be introduced to support Union shipments of pigmeat to east Asia, although he subsequently agreed to raise EU export subsidies on this product generally.

US Agriculture Secretary Dan Glickman, dismayed at the prospect of a reversal in the US farm industry's recent export drive as a result of continuing financial instability in Asia, then took the unexpected step earlier this month of reintroducing export subsidies for US farm products.

Glickman's package of measures, worth some 130 million ecu, was designed to boost exports of cereals, poultrymeat, beef and dairy products, which generated unprecedented revenues of 52 billion ecu in 1997.

Commission officials argued that Washington's reintroduction of export subsidies undermined its claim to be the guarantor of free trade in farm produce, although US sources retorted that Glickman's export enhancement scheme was a drop in the ocean compared to the billions of ecu the EU spends every year on export refunds.

The Commission, anxious to avoid upping the ante any further, refrained from issuing any formal condemnation of the US move. But a week later, reports of an unprecedentedly large subsidised sale of Finnish barley to a Californian grain importer provoked a furious reaction from US barley growers, agriculture officials and Congress.

Weighing in at 30,000 tonnes, the EU shipment was large and cheap enough to drive down US barley prices, already low, by nearly 24 cents per tonne, thereby putting further pressure on beleaguered US grain farmers.

While the sale had more to do with opportunistic dealing by grain traders in California and Finland than deliberate Commission policy, it was interpreted unambiguously in Washington as an act of provocation.

US farming groups threatened to block delivery of the barley at the Californian port of Stockton, while the political representatives of major farming states issued blood-curdling denunciations of EU agriculture and trade policy.

"Europe has stuck it in our eye with this subsidised sale," said Earl Pomeroy, a Democrat congressman from North Dakota. "We need to find a proportional way to stick it back in their eye while talks go on to ensure that such sales don't happen again."

Under pressure from the US farm lobby, Glickman joined in this chorus of disapproval, calling on the Commission to abolish all export refunds for products bound for the US.

Last week, he even hinted that he might impose import duties to prevent the recurrence of subsidised grain sales from the EU, saying: "We will take appropriate action under our trade laws, as well as under US department of agriculture authority."

Since actively blocking grain imports through the imposition of punitive tariffs would run counter to WTO rules, observers do not expect the US to carry out this particular threat.

But there is genuine concern amongst Commission officials and EU grain traders that Glickman may give in to calls from influential farming groups to reintroduce a more extensive set of export subsidies.

"That would be a problem. It would undo a lot of the work we have done in improving relations with the US and would, of course, hurt us in our export markets," said one Commission official.

For now, all parties are hoping that Glickman's reluctance to abandon the moral high ground of the committed free trader will prevent him from launching a full-blown export enhancement programme.

The irony is that both Washington's export-boosting measures and the Commission's subsidisation of the controversial Finnish barley shipment are both perfectly legal under WTO rules.

Neither side has breached any of the limits on export subsidies laid down in the 1994 Uruguay Round, nor even come close to doing so.

But the furore that surrounds the episode reflects growing American antagonism towards EU farm trade practices as international agricultural markets enter a period of relative depression, and confirms yet again that Fischler is in for a rough ride at next year's formal WTO talks.

In light of that, perhaps he was wise to stay away from this month's preliminary meeting of WTO trade and farm ministers in Geneva.

Major feature on the furious US reaction to a shipment of subsidised Finnish barley. Writer says it is just one sign of the storm brewing over market support as the key players prepare for battle at next year's WTO farm talks.