Export subsidies have reared their ugly head again in the world wheat market and Canadian wheat growers could pay the price.
After an 18-month hiatus, the European Union has resumed subsidizing wheat exports.
“It is going to have a negative impact on Canadian producers, depending on the level of the export refund,” said Peter Watts, grain market analyst with the Canadian Wheat Board.
The size of the subsidies was to be announced Feb. 3, too late for inclusion in this story, but market watchers said they would likely start out in the range of $5 to $10 US a tonne.
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The initial tender is for two million tonnes of milling wheat for shipment between February and June. Under terms of the World Trade Organization agreement, the EU can legally subsidize exports of around 14 million tonnes annually.
The resumption of subsidies likely won’t have a significant impact on the price of high quality wheat, which is in tight supply globally.
That would normally mean prairie farmers would be spared the effects, given Canada’s traditionally high quality crop.
“Unfortunately, Canadian farmers don’t have a lot of high quality wheat this year, so they’re competing in that mid-quality market that will be impacted by the EU subsidies,” Watts said.
The EU stopped subsidizing exports in 2003 because production problems resulted in a small wheat crop of 106 million tonnes and limited exportable supplies. Production bounced back in 2004 to a record 137 million tonnes and carryout stocks June 30 are projected to more than double to 19 million tonnes.
Given that, the resumption of subsidies wasn’t totally unexpected, said several market watchers.
“Basically they’re drowning in wheat in the EU,” Glenn Lennox of Agriculture Canada.
The high wheat stocks and stiff competition from low-priced soft red winter wheat from Argentina and Russia in traditional EU markets in North Africa have lowered EU wheat prices.
EU administrators feared that without the export subsidies, farmers would sell their surplus wheat into government-financed storage, known as intervention stocks, which could become an expensive proposition for the EU treasury.
Despite all that, Watts said he was surprised given the possible trade implications.
There was no indication last week how the U.S. government might respond to the EU’s action, although analysts said they don’t expect the Americans will resurrect their own dormant export subsidy program. They said any negative impact on U.S. farm prices will be offset by domestic support programs.
The president of U.S. Wheat Associates, that nation’s leading wheat trade promotion organization, described the EU move as an unwelcome complication in world wheat trade.
“Once again, the EU is adjusting to their supply-demand imbalance by shifting the burden to the rest of the world,” said president Alan Tracy.
He said EU prices are already low enough to compete with Argentina and warned that if Argentina loses sales because of the EU subsidies, that wheat will move into other markets at even lower prices, disrupting regular trade patterns and perhaps prompting even larger EU subsidies.
Watts said one of the main factors in the decision to reintroduce subsidies might be the recent entry of Hungary and the Czech Republic into the EU. Both had large crops in 2004 and, being landlocked, are uncompetitive.
“So you have massive applications in Hungary and the Czech Republic to deliver wheat, barley and corn into intervention stocks.”
Watts said the subsidies are a symptom of excessive production resulting from overly generous domestic support in the EU as well as the United States.
Lennox said he doesn’t expect much impact on Canadian prices this year, noting that in its latest pool return outlook, the board didn’t change its price forecast for medium quality wheat.
However, if Europe has another big crop, stocks remain high and subsidies continue in 2005-06, then it’s anybody’s guess what might happen to world markets.
