Sunday, May 28, 2006

Prices rise as demand for food for fuel grows

Earlier this week I gave evidence to an informal session of the House of Commons Environment, Food and Rural Affairs Committee. One issue that was raised was likely future trends in food prices, particularly after a further reform of the CAP.

However, long before that happens, mounting competition between fuel and food could drive up the cost of food. It would be a nasty shock for western consumers who have been used to falling real food prices for a long time, but the real hit would be on poorer people living in developing countries.

The US, the world's largest exporter of corn (maize) will convert as much or more of the grain into ethanol next year than it will sell abroad according to the United States Department of Agriculture. As petrol (gas) prices climb, farmers are diverting more of their harvest towards producing fuel rather than food or feedstock for animals.

Prices of corn have risen by close to 20 per cent as world grain stocks have fallen to their lowest level since the early 1970s. There has also been a substantial impact on world sugar prices which have doubled over the past year to a 25-year high. About 10 per cent of world sugar output is now used to produce ethanol. The figure is just 3 per cent for corn but it is rising fast.

Good world harvests over the past few years have concealed the impact of rising demand for ethanol. US energy legislation requires ethanol production to increase to 7.5bn gallons by 2012, requiring about 68 million tonnes of grain, more than the total grain harvest of Canada. Keith Colins, chief economist at USDA, noted, 'We are embarking on a profound change in our agricultural economy.'

Thursday, May 25, 2006

Milk quota rules may face court challenge

Given that there's an internal market, it's always been a mystery why milk quota can't be traded across national borders (although some member states restrict trading within their own borders). Some farmers don't have enough quota, others have quota they would like to sell at a decent price and use the capital for other activities. Above all, trading quota would prevent the structure of the dairy industry in the EU ossifying in a way that made it even less internationally competitive than it is already.

Now the milk quota rules may be subject to a case in the European Court of Justice based on the principle of the free movement and trade of people, goods and services across EU borders. In February British milk quota trader Ian Potter managed to transfer several million litres of quota from Britain to Italy. Italy is only 56 per cent self-sufficient in milk production and the high price of quota is forcing dairy farmers out of business. The British farmers got more than they would have done in the depressed British market.

Potter was encouraged in this course of action by the sale of 200,000 litres of quota from Hungary to Italy last year. Following the signing of the quota transfer contracts in the Potter deal, forms were lodged with the Italian authorities and the English Rural Payments Agency. The RPA duly rejected the transfers, but the Italian authorities were less definite, saying that they did not believe that the transfer requests that were being used quite conformed to the current EU law.

While the self-styled Italian Milk Warriors wait for their day in court, the Italian authorities appear to be prepared to recognise the transfers for the time being and will not seek to collect superlevy from the fifteen Italian farms involved.

Sunday, May 21, 2006

EU may give ground on tariffs in Doha Round

The EU has indicated that it may give further ground on the crucial issue of tariffs in the Doha Round of trade negotiations which are at increasing risk of collapsing altogether. However, by doing so, they have encountered resistance from some member states, while American sources think that the likely offer is insufficient. Hence the EU finds itself caught between a rock and a hard place.

The EU's current offer is to cut farm tariffs by an average of 39 per cent, an offer substantially diluted by its insistence that 8 per cent of tariff lines should be designated as sensitive and hence exempted from the cuts. The G20 group of emerging countries led by Brazil has asked for a 54 per cent overall cut, while the US is holding out for 66 per cent.

Press reports in Brussels suggest that the EU might increase its average cut to around 50 per cent. A spokesman for EU trade commissioner Peter Mandelson said that a 54 per cent cut was out of the question, but did not deny the possibility of an offer in the region of 50 per cent. There has, however, been no indication of a reduction in the percentage of tariff lines to be designated as sensitive.

The EU is also insisting on a quid pro quo, in particular a much lower ceiling for industrial good tariffs than the 30 per cent proposed by India and Brazil. The EU and US have previously asked for 15 per cent, but may be prepared to raise that figure by a few percentage points.

However, France has made it clear that it does not want further reductions in farm tariffs or subsidies without substantial concessions elsewhere. Moreover, a spokesman for the Austrian agriculture ministry (Austria is the current president) declared that 'Member states would be very surprised should there be a new EU offer on the table. A majority of member states have grave concerns.'

The office of the USTR confirmed that the EU proposal would fall well short of American demands. The US view that the EU should agree cuts of between 54 and 66 per cent and designate just 1 per cent of tariff lines as sensitive. It is this latter issue that is the difficult one as the EU could make quite substantial cuts in high tariffs and still maintain effective protection. Charles Grassley, the Iowa senator who chairs the finance committee which has lead responsibility for trade policy in the Senate, has stated, 'If Plan B is a minimalist approach, then don't bring Plan B to me.'

There's a long way to go and time is slipping away.

Saturday, May 06, 2006

Grain mountain problem grows

The arable sector was the first commodity regime within the CAP to be reformed and it is often assumed that all the major problems are behind us, particularly with the abolition of rye intervention in the Fischler reforms, a product often grown just to sell into intervention.

Unfortunately, not all the problems have been solved. Support prices have been cut by around 45 per cent, but intervention stocks at the end of the last buying season were at their highest level for twelve years, 15,482 million tonnes and they look likely to rise again this year.

Much of current grain production in Eastern Europe is being grown with intervention in mind and doing anything about it is seen as a political hot potato as there is a reluctance to cause trouble with the new member states who are already feeling sore about other issues. Hungary has invested considerable sums of money in increasing grain storage capacity in anticipation of the increase in intervention stocks.

Franz Fischler was the first major figure to question whether one can really have a common policy in such a diverse agricultural region as Europe. A recent study for the Commission by consultants LMC argues that a single intervention price is a barrier to the flow of cereal from surplus regions, particularly landlocked regions like East-Central Europe, to the main grain deficit area, the Iberian peninsula.

The report also criticises set aside (the rate is 10 per cent in western Europe) as a blunt policy instrument which mainly benefits the United States. Set aside land is generally 30 per cent less productive than land not set aside (our local farmer has chosen his worst drained and smallest field) and producers in East-Central Europe are exempt until at least 2009. The US goverment gains because set aside pushes up world prices and hence cuts their outlays on deficiency payments.

The report has some sensible but radical solutions such as having only one intervention price based on common wheat, getting rid of set aside, limiting support payments to the grain barons and purchasing only breadmaking wheat and then just in Spain and Portugal.

Unfortunately these ideas would upset the powerful big grain producers in the EU and are hence unlikely to be adopted, so the grain mountain will just keep on growing.

EU isolated on sensitive products

The EU is looking increasingly isolated over the question of 'sensitive' products in the stuttering Doha Round, even though it may be prepared to give ground on its insistence that eight per cent of product lines should be deemed 'sensitive' and given special levels of protection. However, it is now the only major player insisting that tariff quota increases for such products be calculated as a percentage of imports rather than a percentage of domestic consumption.

The World Bank has pointed out that the designation of only 2 per cent of products in developed countries and 4 per cent in developing countries as sensitive would 'virtually eliminate the poverty impacts of a Doha agreement.'

Of course, what 'sensitive' means is 'politically sensitive in the EU and in particular in key member states'. Sugar is a very likely candidate for this treatment. However, the EU confectionery industry is arguing against further protection, pointing out that it is being undermined by imports of cheap confectionery from Asia. They argue that if sugar became a sensitive product it could cost them €1.2bn a year which would go into the pockets of the sugar industry.

As it so happens, the world price sugar is increasing anyway because of rising oil prices and the consequent diversion of greater quantities of sugar, in particular in major producer Brazil, for ethanol production.