US gears up for subsidy confrontation

Date: 14/11/1996

By Michael Mann

WITH EU subsidies on grain exports continuing to rise, the Clinton Administration faces renewed conflict with the

Union just two weeks after its re-election.

US Agriculture Secretary Dan Glickman's call for an end to EU subsidies is expected to receive little sympathy from Agriculture Commissioner Franz Fischler when the two meet in Rome this week on the fringes of the World Food Summit.

Last week's decision to raise refunds on wheat exports from 19.98 to 22.35 ecu per tonne was a clear indication that the European Commission intended to take every opportunity to make its presence felt in this highly-competitive market.

The US has made no effort to hide its displeasure, and American officials insist the sabre-rattling of the past few months has been more than mere electioneering.

Glickman will warn Fischler that continuing heavy Union exports on to world markets will depress prices everywhere and put severe pressure on the US.

He will claim it marks the latest chapter in a highly-inconsistent EU policy. Last year, at a time when the world was desperately short of grain, the Commission did everything in its power to prevent supplies from leaving Union shores.

But Fischler's officials insist that subsidies are necessary if the EU is to maintain its presence on the world market. “Exports are still lagging behind more normal years, and we could be subsidising to an even greater extent. Fischler will tell Glickman we are doing the US a favour,” said one trade source.

US diplomats claim that Glickman will give serious thought to reintroducing US export subsidies under its export enhancement programme (EEP) next spring if world market conditions make this necessary.

They also warn that the Union will run into severe financial problems if it continues to support weekly exports of 250-300,000 tonnes of wheat at current refund levels.

The vast cost of the beef crisis and moves by EU governments to strip 1 billion ecu from the Union's farm budget mean the amount of money available to spend on export refunds will become tighter and tighter.

“EEP is a real option in the spring, depending on the way the crop is looking. We have not spent our money yet, while the Commission may have shot its bolt. If we start being aggressive, the Commission's hands will be tied,” said a US official.

But market analysts say this would merely restrict supplies within the US even further and spark imports from the great rival Canada, with whom the Americans have battled for several years.

The world cereals market in late 1996 is a very different beast from that of earlier this year.

Just a few months ago, the Commission was taxing cereal exports in a desperate attempt to keep supplies in the Union and prevent prices for millers and animal feed manufacturers going through the roof.

But with an unusually large crop at its disposal, it has returned to the more traditional practice of awarding export refunds to bring higher EU prices into line with those on the world market.

Commission officials insist they have no intention of undercutting US prices and will not raise subsidies to match cheap Argentine wheat, which is currently flooding on to world markets.

But both the EU and US will face further problems later in the season, with Australia expecting a bumper harvest after several years of drought in its western grain-growing region.

With southern hemisphere stocks due on stream soon, analysts believe the EU will have to do most of its business by December. But if prices continue to fall, new markets could open up in Russia, Ukraine and even China, a major importer over recent years.

“We cannot be accused of dumping prices. It is vital for the EU to be a reliable supplier and maintain a presence in the world,” said a trade source.

The industry is also aware of the importance of taking its chances now, given that GATT-imposed limitations on subsidised exports will begin to bite hard as Europe moves towards the millennium.