Thursday, October 06, 2005

Grain mountain fears grow

The grain sector is the EU commodity regime where reform is supposed to have been effective, bringing EU prices close to world levels. Why, then, are the amounts of grain in intervention stores growing? This trend reminds us of the susceptibility of the CAP to euro-dollar exchange rates and the potential for increasing output in the new member states of Eastern Europe.

Although some parts of the EU were badly hit by severe midsummer droughts, seen by some as both a symptom of and a contributor to global warming, this year's harvest is well above the average level for the past five years, even if it is 10 per cent down on last year's record. Internationally, harvests have been good and prices have suffered as a result.

Against the background of the Doha Round trade talks, and already under criticism for releasing sugar on to the world market, the EU is likely to be careful about subsidised exports. This means that the grain mountain will start to grow again. If the dollar appreciates, of course, some of the pressure could be eased as this would automatically move the world price of grain closer to the EU level, but this doesn't seem too likely. But there are longer term factors at work.

The Commission sets a lot of store by the reimposition of compulsory ten per cent set aside in 2004, but farmers simply farm the remaining area more intensively, often setting aside the least desirable land (as happens on the farm nearest to me).

However, the larger problem is the prospect of increases in yield in Eastern Europe as productivity improves. Severe weather conditions in the main sowing and growing periods hit production by around ten per cent in the new member states this year.

The scope for gains in productivity is shown by the fact that wheat yields in the Czech Republic, Hungary, Poland and Slovakia are currently around 3.8 tonnes/hectare, only just over half the EU-15 figure of 7.3 tonnes a hectare. In the worst case scenario, intervention stocks could be 20 million tonnes in 2010 rather than the 3 million tonnes anticipated by the Commission. Reform of the grain regime could come back on the agenda.

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