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Agenda 2000 Continues Reform of EU Grain Sector
June 1999
Summary
The recently approved Agenda 2000 reforms to the EU's Common Agricultural Policy (CAP) will continue and deepen the price cuts of the 1993 reform that led to lower domestic prices, expanded use, and reduced export subsidies and import duties. However, further reforms still may be needed to redress the market inequities between current and future East European members of the European Union.
Reforms Will Mean Lower Support Prices, Higher Producer Payments
Key provisions of the reforms include:
Lower Prices Should Boost Grain Use, But Not Necessarily Limit Production
The lower intervention price should add pressure to already falling internal market prices, which will likely further boost grain use vis-a-vis imported non-grain feed ingredients (on top of a 30 percent rise since 1993). Feed-quality wheat, the only major grain not supported by intervention, would probably experience the strongest growth.
Although lower domestic grain prices might be expected to discourage production, the higher direct producer payments of nearly $70/MT will be a strong incentive to maintain production. Furthermore, the reduced oilseed producer payments will cut the profitability of rapeseed and sunflowerseed production, perhaps leading to area shifts into grains (especially wheat). More grain production would add to domestic surpluses and exportable supplies, while lower oilseed production could stimulate demand for imported soybeans or other oilseeds.
The 10 percent default compulsory set-aside rate still leaves the Commission the option to adjust the annual set-aside rate depending upon prevailing supply/demand conditions. But with low market prices and rising intervention stocks indicative of a market surplus, there will be pressure to raise the set-aside rate. On the other hand, the surplus situation helps the Commission attain its goal of stimulating domestic use.
Reforms Lower Both Export Subsidies And Import Duties
The 15 percent cut in the intervention price and a corresponding fall in market prices should help reduce the size of export subsidies. Wheat would likely need the smallest export subsidies among major grains, since its domestic prices are already closer to world levels than for barley or rye. Obviously, higher world prices would also help shrink export subsidies for all grains.
The reforms will also lower EU import duties for all grains by an estimated $30/MT, since duty paid prices are capped at 155 percent of the new, lower intervention price. That will enhance the competitive advantage of imports vis-a-vis domestic grains, and expose the EU to the prospect of expanded imports of high-quality wheats like DNS, HRW, and Canadian Western Red Spring, as well as cheap, poor-quality wheats from Eastern Europe. However, more wheat imports would also exacerbate domestic surpluses and could stimulate additional EU exports.
Further Reform Needed Before EU Expansion
Even with the changes expected under Agenda 2000, more reforms may be needed prior to expansion in the coming decade that will include new members for the first time from EasternEurope. The combination of relatively high support prices and a guaranteed market (intervention) might be expected to stimulate production, especially since Polish and Hungarian prices are still some $30-50/MT below the new intervention price.
However, if grain use in those countries does not keep pace with production growth, any future rise in production would only exacerbate the EU's growing surplus disposal problem. In that case, WTO limits on subsidized exports would push the EU to either further adjust its pricing system or take more effective production control/supply management actions.
For more information, contact Jay Mitchell of the Grain and Feed Division at (202)720-6722.
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