Changes in European Community agriculture policy drafted last week are a step in the right direction, but it is a small stride on a long trip, says a Canadian Wheat Board analyst.
Peter Watts said although the cuts to the Common Agriculture Policy’s support prices were highly controversial in Europe, they do not remove the EU’s potential to overproduce.
European farm ministers last week agreed to cut cereal and beef prices by 20 percent, and dairy support by 15 percent.
But in compensation, farmers will get increased direct aid, called “blue box” payments in trade circles.
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Support too high
“It is a step in the right direction, but these blue box compensation payments that the Europeans are maintaining under this program, the support level is so high it is still going to encourage overproduction within the EU,” Watts said.
The program would force a 20 percent cut to European cereal prices over two years by 2001-2002. It would reduce the price of soft wheat from the current level of about 120 Euros per tonne or about $202 (Cdn) down to about 95 Euros or $160.
At that level, they would be close to today’s soft wheat values and would virtually eliminate the need for the EU to use export subsidies.
However, the compensation payment would increase to 66 euros per tonne from 54 euros.
“They haven’t gone nearly far enough in reining in the support for producers to avoid continued overproduction of cereal grains, which will weigh on world prices,” Watts said.
The compensation payment is paid on the basis of historical yield so the pressure to maximize yields would be partly reduced.
“But there is still an incentive to maximize yield because for every extra tonne he grows he is guaranteed a price.”
On the other hand, the agreement calls for a 10 percent set-aside for 2000-2001 and 2001-2002. But Watts said it is a default set-aside, meaning the EU could legislate a different set-aside.
“But it does indicate their tendency to have a level of set-aside that would avoid the surpluses they are currently facing in the EU.”
In the early 1990s, a big set-aside and lower cereal grain prices that encouraged more feeding of cereals to livestock did reduce the EU’s grain surpluses, he said.
Fewer rapeseed acres
Turning to oilseeds, Watts said the agreement calls for oilseed support levels to fall in line with cereal support. This could cause a big shift out of rapeseed production into cereals, he said.
Another impact of the CAP changes could be lower import duties for Canadian grain.
The policy now is that grain imported by a European buyer carries a duty payment, which is the difference between the purchase price and the target price. The target price is the European intervention price, multiplied by 155 percent.
The 20 percent cut in the intervention price would yield a $40 (U.S.) drop in the import duty, he said.
“So that could potentially make Canadian grain much more competitive in the EU.”
However, Watts said when the details are worked out, they will probably change the import system to reduce this benefit to exporters.
