INTERNATIONAL AGRICULTURE AND TRADE (EUROPE UPDATE) July 9, 1997 Approved by the World Agricultural Outlook Board ------------------------------------------------------------------------------ INTERNATIONAL AGRICULTURE AND TRADE is published four times a year (plus one update for Europe and for the Newly Industrial States & the Baltics) by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. WRS-97-S-3. Please note that this release contains only the text of INTERNATIONAL AGRICULTURE AND TRADE -- (EUROPE UPDATE) -- tables and graphics are not included. Subscriptions to the printed version of this report are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #WRS, $26/year. ERS-NASS accepts MasterCard and Visa. ------------------------------------------------------------------------------ U.S. Farm Trade Balance with EU Hits 8-Year High, Bulk Commodity Sales Surge to CEE Following a record 23-percent gain in 1995, U.S. agricultural exports to the European Union grew another 8 percent in 1996, to $9.3 billion. The increase was led by continued growth in soybean exports, which benefited from high grain prices and an EU-wide ban on use of meat-and-bone meal. The 2-year gain of more than 30 percent parallels overall U.S. farm exports, which reached a record $60.4 billion in 1996. The net balance of U.S.-EU agricultural trade reached its highest level in 8 years, despite record U.S. imports of EU farm goods. In 1996, U.S. exports to Central and Eastern Europe (CEE) totaled $439 million, driven up nearly 50 percent from 1995 by a surge in bulk commodity sales. Although total U.S. exports of high-value products (HVPs) declined, certain HVP exports such as variety meats, nuts, and vegetable preparations continued to grow rapidly. U.S. Exports to EU Post Second Year of Growth U.S. agricultural exports to the European Union experienced another year of strong growth in 1996, exceeding $9 billion for the first time since the early 1980s. Following a record 23-percent gain in calendar year 1995, U.S. agricultural exports to the European Union grew another 8 percent last year, establishing a 13-year high. The increase was driven by strong demand for U.S. soybeans and a rapid growth in almond exports due to lower tariffs and a larger import quota. The 2-year gain of more than 30 percent reverses an earlier decline in export receipts during 1992-94. The surge in exports to the EU parallels overall U.S. farm exports, which totaled a record of $60.4 billion in calendar year 1996. The robust growth in U.S. exports launched the U.S. agricultural trade balance with the EU to an 8-year high. Net U.S. agricultural exports to the EU were$2.8 billion in 1996, despite another year of increasing imports of EU farm products. Although the European Union remains a key market for American farm goods, its relative importance has declined steadily over the last 15 years. From a peak of greater than 30 percent in 1982, the share of total U.S. agricultural exports going to the European Union has declined to just 15 percent, where it has held steady for the past 3 years. This relative decline is a reflection of the rapid growth of exports to other regions, particularly Canada, Mexico, and East Asia, and of stagnant exports to the EU. Nevertheless, Europe is still the leading export market for several major commodities. The EU accounts for nearly 75 percent of U.S. exports of corn byproducts, two-thirds of U.S. almond exports, roughly half of U.S. exports of dried fruit, wine, and tobacco, and roughly 35 percent of U.S. soybean exports. Soybean Exports Remain Strong The largest category of U.S. agricultural exports to the EU, in value terms, continues to be oilseeds and products, which account for $3.1 billion or one-third of the total. Oilseed exports continue to outpace overall export growth, despite smaller shipments. Export sales increased 13 percent in value in 1996, despite a sharp 8-percent decline in volume. Soybeans remain the single largest U.S. commodity export to the EU, with a value of $2.6 billion in 1996, just short of 30 percent of the total. In 1995, soybean exports increased 35 percent in both value and volume terms, due partly to the shortage of European corn following the Spanish drought. In 1996, higher prices yielded 19 percent larger receipts for roughly the same volume of soybeans. Demand was largely unaffected by higher soybean prices because of reduced availability from South American suppliers, and the effects of the BSE (bovine spongiform encephalopathy, "mad cow" disease) crisis. EU efforts to combat BSE included a ban on using meat-and-bone meal as feed, which increased demand for soybeans as an alternative protein source. Sharp declines in beef consumption across Europe were balanced by increased demand for alternative meats. The biggest beneficiaries were pork and poultry, both of which are more feed-intensive than grass-fed cattle. Consequently, the shift in consumption preferences buoyed soybean demand. While U.S. soybean exports held steady at their high 1995 levels, soymeal exports returned to their recent trend. In the early 1980s, almost 25 percent of U.S. oilseed exports (by volume) were in the form of processed oilcake and meal. By 1996, that ratio had fallen to less than 10 percent. Wine, Almonds Anchor Another Good Year for Horticultural Exports U.S. horticultural products (a category comprising fruits, vegetables, nuts, and wine) continued impressive export growth in 1996. Exports to the EU increased 10 percent, posting their seventh successive increase. However, results in the horticultural sector were uneven in 1996, with strong growth in wine, almonds, fresh fruit, and fresh vegetables partly offset by declines in dried fruit, fruit juices, peanuts, frozen vegetables, and pulses. Wine and almonds were particularly strong performers, up 54 percent and 38 percent, respectively. Wine exports to the EU have doubled over 2 years to a record $144 million in 1996, mainly due to strong demand in northern Europe. Since 1989, U.S. wine exports have increased fivefold. While the U.K. continues to account for more than half of the EU total, exports to German, Dutch, and Irish markets have expanded even more rapidly than the EU average. Several factors have helped spur this rapid growth. First, European consumers, particularly in countries without a long tradition of wine production and consumption, increasingly favor wines from beyond Europe (especially South Africa, Australia, Chile, and the United States). Also, market promotion programs have helped boost sales of U.S. wines, which have earned a reputation as a good value for the money and are beginning to expand into higher price categories. Much of the wine exported to the EU is marketed as a "house brand" by local supermarket chains. The scope for further export growth for this type of wine will depend on supplies available for export and increasing price competition from non-U.S. wines. Nut exports to the EU surpassed $900 million for the first time in 1996, and have nearly doubled the 1986-90 average. Exports of almonds, which comprise 70 percent of the total, have increased steadily over the past decade, posting a record $671 million in 1996. Almonds are predominantly used as an input in confectionery products and snack foods, many of which are destined for re-export to third markets in Central and Eastern Europe and the Newly Independent States (NIS). The United States is far and away the EU's largest supplier of imported almonds, with 170,000 tons in 1996. The major market is Germany, followed by Spain, the Netherlands, and Britain. U.S. almond exports benefited from improved access to the EU market, negotiated as part of the Uruguay Round, and lower EU production. The European Union reduced almond tariffs 50 percent, and opened a tariff rate quota for 45,000 tons. The ad valorem customs duty for shelled almonds is just 2 percent for imports within the EU-wide quota, and 6.8 percent for imports over the quota. U.S. exports have also benefited from the long-term decline of the Italian tree-nut industry, short crops in recent years in Spain and Italy due to unfavorable weather conditions, and record high almond prices. Exports of walnuts also have increased steadily, if less dramatically, in value terms. Despite no change in the volume of exports, export receipts for walnuts increased from $90 million in 1994 to $115 million in 1996, indicating that higher prices have not adversely affected demand. Pecans, pistachios, filberts, and other nuts have generally paralleled this upward trend, albeit in lesser magnitudes. In contrast, U.S. peanut exports hit a 16-year low in both value and volume due to a poor U.S. crop and competition from other nut varieties. Cattle Products Hurt by BSE; Records for Chicken, Eggs, Cheese Despite the strong overall growth of U.S. exports to the EU, two categories animal products and grains and feeds suffered setbacks in 1996. The total value of animal product exports dropped 3.7 percent from their recent high in 1995. Exports in this category totaled $713 million in 1996, led by hides and skins, fats, oils, and grease, and miscellaneous products. The EU s BSE crisis disrupted European meat markets, including markets for non-meat animal products. The sector affected most strongly, in terms of U.S. exports, was fats, oils, and grease, which plummeted 35 percent due to the EU's ban on using meat-and-bone meal as a protein supplement in animal feed. Exports of fresh and frozen beef, already at low levels because of the EU's beef hormone ban, also dropped 26 percent. Meanwhile, horsemeat exports dropped to half their 1992 level, due to the EU s preferential access agreements with associated countries in Central and Eastern Europe. Not all animal product exports declined in 1996, however. In fact, several smaller sectors posted records. The biggest gainer in absolute terms was hides and skins, which established an 8-year high of $146 million. The surge was led by calf skins, which doubled their 1995 value to post record highs in both value and volume. Other growth sectors were poultry products (chiefly fresh and frozen chickens and eggs) and pork. Growth in pork and poultry exports is attributable to a shift in demand away from beef in the aftermath of the BSE scare. The U.S. continues to have some success with cheese exports to the EU, with a fivefold increase since 1993 to nearly $4.7 million. In 1996, they consisted mostly of grated and powdered cheese, an intermediate product used in snack items and other final consumer goods. The U.S. has not yet greatly benefited from improved access to the EU market for pizza cheese adopted as part of the Uruguay Round. The tariff rate quota increased from 961 tons in 1995/96 to 1,499 in 1996/97, and will rise to 5000 tons in 2000/01. The tariff applied within the quota is roughly 5 percent of the out-of-quota tariff. Most of the imports under the tariff rate quota in 1995/96 were not supplied by the U.S., and probably did not meet the precise description of pizza cheese. U.S. pizza cheese exports could rise significantly by the year 2000 if current efforts to improve the way EU customs services classify cheese products are successful. Higher Grain Prices Moderate Decline in Export Volume After setting a 10-year record in export volume in 1995, U.S. grain and feed exports to the EU fell back to normal levels in 1996. Poor weather in southern Europe led to U.S. exports of over 14.3 million metric tons in 1995, mostly destined for Spain, where severe drought ruined domestic crop yields. Better weather and a recovery in domestic production limited U.S. export opportunities in 1996, as grain and feed exprts fell back to 10.4 million tons. Higher prices for feeds also probably explain part of the drop in exports. Despite the sharp 27-percent decline in export volume, U.S. grain and feed export receipts declined only 4 percent from 1995 levels, as average prices of exports to the EU jumped 32 percent to $182 per ton. A good example of this price effect is the case of the feed and fodder sector, which includes a key export, corn byproducts. Prices for U.S. feeds and fodders increased nearly 30 percent, and export volumes dropped to their lowest level since 1985 (6.9 million tons). The feed and fodder sector has historically comprised roughly two-thirds of total grain and feed exports to the EU, in both volume and value. Corn byproducts are second only to soybeans as the most important single export commodity. Both market and policy developments influence U.S. agricultural exports to the EU. The disruption caused by the BSE crisis will continue to buoy EU consumer demand for pork and poultry, and result in greater use of feed grains and soybeans. A number of important EU policy developments will also affect U.S. exports. These include measures taken to deal with BSE, a recently negotiated veterinary agreement with the United States, and the continued implementation of Uruguay Round commitments. Oilseeds, grains and feeds The BSE crisis is affecting feed markets in two major ways. First, it has encouraged increased consumption of pork and poultry. Because hogs and chickens are fed more intensively than cattle in the EU, greater production of pork and poultry would demand an increase in overall feed demand, despite reduced beef production. Second, meat-and-bone meal has been banned as an ingredient in EU feeds, and feed compounders will have to find a substitute for this protein source. An increase in pork production spurred by the BSE situation would lead to increased demand for soybeans and meals, important components in hog feed. However, the EU pork sector has been hit by a serious epidemic of swine fever this year, and large numbers of animals have had to be slaughtered. This development may prevent a further increase in U.S. soybean exports, at least in the near term. Furthermore, soybean meal prices are higher currently than a year earlier, and corn and barley prices lower, which would indicate that compounders will increase their use of grains at the expense of soy. By contrast, corn gluten feed prices are roughly the same as last year. Corn gluten feed could substitute for the recently banned meat-and-bone meal, allowing U.S. exports to increase. After a considerable delay, the EU has opened a tariff rate quota for malting barley, designed as compensation for markets lost when Sweden, Finland, and Austria joined the EU. The quota is for 30,000 tons of malting barley, and the tariff that applies within the quota is 50 percent of the usual tariff rate. The EU has also adopted a Cumulative Recovery System (CRS) for brown rice. Under the CRS, exporters of husked rice to the EU will be compensated if they pay an import duty higher than that specified in the Uruguay Round Agreement. This could encourage more U.S. rice exports. Meat and animal products The most significant development affecting U.S. animal product exports was the veterinary equivalency agreement reached between the United States and the EU on April 30, 1997 (see "Sanitary and Phytosanitary Measures and U.S.-EU Trade"). The agreement covers beef, pork, eggs, and dairy products. At this time, the two sides have been unable to resolve all outstanding issues with respect to poultry. As a result, U.S. poultry will have to overcome serious obstacles to gain access to the EU market. U.S. poultry meat exports constitute only a small part of total exports to the EU, but had been increasing steadily in the past 10 years. Once the agreement is implemented in October, it will be a little easier for beef and pork plants to meet EU criteria. In the past, plants had to implement costly changes to adhere to EU requirements. For example, slaughter facilities will not be required to use cove molding between the wall and the floor. They can use an alternative method to ensure that sanitary conditions are maintained. Companies that are not now shipping to the EU may decide to enter the market now that compliance has been made less onerous. U.S. pork exports, in particular, could benefit from the new conditions. As part of the Uruguay Round negotiations, the EU has opened tariff rate quotas for a number of pork products. The tariff that applies within these quotas is considerably lower than the protection offered under the EU s previous system. For example, the in-quota tariff for pork tenderloins is slightly more than 25 percent of the rate that applies outside the quota. U.S. imports of EU agricultural products reached a record high of $6.5 billion in 1996, 10 percent above a year earlier. The rise marked the third straight increase and was 45 percent above the 1986-90 average. Since 1986-90, the fastest growing U.S. imports in percentage terms have been fresh and frozen fruits and vegetables, vegetable oils and waxes, sugar products, and pasta products. In 1996, the leading imports from the EU were wine, malt beverages, dairy products (especially cheese and casein), vegetable products, and vegetable oils and waxes. In 1996, U.S. agricultural imports surpassed $1 billion from three countries: Italy, the Netherlands, and France. Italy s exports to the United States surged ahead 23 percent, led by strong gains in wine and vegetable oils, which together comprise more than half of total U.S. imports from Italy. In the 1990s, Italy has been the fastest growing EU supplier of U.S. agricultural goods, with 1996 receipts more than doubling the 1986-1990 average. For the first time since 1992, Italy led all EU countries, with exports to the United States totaling $1.31 billion. The Netherlands, historically the largest EU source of agricultural exports, had a relatively lackluster performance in 1996. Exports to the United States increased only 5 percent, to $1.18 billion. The leading Dutch export continues to be malt beverages, which account for 40 percent of the total, although this figure includes transshipments of German beers through Dutch ports. The Netherlands is also a major exporter of cut flowers, nursery stock, and other greenhouse items. U.S. agricultural imports from France surpassed $1 billion for the first time in 1996, growing at roughly the EU rate of just over 10 percent. Imports of French wine totaled a record $620 million, making up nearly 60 percent of the total. The other major export category was dairy products, where cheese and casein eports each totaled roughly $63 million. Cheese was unchanged, while casein imports increased 37 percent. Casein is a milk or cheese protein used in the production of plastics, adhesives, paints, and foods. Total casein imports from the EU were a record $266 million in 1996, with Ireland and France the leading suppliers. Germany's exports to the United States increased 10 percent to $775 million, with a more diverse mix of commodities than the three largest exporters. Key exports include malt beverages, fruit juices, processed grain products, and prepared vegetable products. Spain s exports of $520 million are heavily concentrated in the horticultural sector, with vegetable products comprising 40 percent, wine roughly 16 percent, and fruit products another 12 percent. Calendar year 1996 was particularly good for exports of fruits and vegetable oils and waxes. United Kingdom exports to the United States have also doubled since 1986-90, with robust growth in exports of sugar products, malt beverages, and processed grain products. BEGIN BOX 1 Sanitary and Phytosanitary Measures and U.S.-EU Trade Agricultural trade is frequently affected by the differences among countries in the measures adopted to protect human, animal, and plant health. These sanitary and phytosanitary (SPS) measures are particularly sensitive, because they are ostensibly designed to protect the health or safety of domestic consumers or the domestic farm sector (livestock, fish, crops and other plants). In some instances, however, SPS measures can be used as a barrier to trade. In the case of U.S. exports to the EU, it is primarily animal products that have been affected by SPS measures. Often these measures make exporting difficult by requiring exporters to meet EU standards in addition to U.S. standards. For example, beef and pork exports have been hampered by the EU Third Country Meat Directive that required U.S. slaughterhouses to adhere to very specific requirements. Other measures ban a product or production process that may be used in the United States, the most well-known case being the EU's ban on imports of meat from animals treated with hormones. SPS Measures in the WTO Framework The negative effects of SPS measures on international trade formed a key part of the Uruguay Round negotiations. An Agreement on Sanitary and Phytosanitary Measures was adopted, that aims to reduce the trade distortions that SPS measures can cause by encouraging countries to base their SPS measures on existing international standards, and to recognize other countries standards, as long as they achieve the same degree of protection. The SPS Agreement also imposes certain obligations in determining what measures to adopt to safeguard health. Under the Agreement, SPS measures must be applied only to the extent necessary to protect human, animal, or plant life, and be based on scientific principles and on an assessment of the risks posed to health. They may not discriminate unjustifiably between countries where the same conditions prevail, or be applied in a way that makes them a disguised barrier to trade. Disputes between contracting parties regarding the requirements of the SPS Agreement are to be dealt with under the established WTO consultation and dispute settlement procedures. These procedures were strengthened as part of the Uruguay Round, in an effort to make the decisions of the dispute settlement panels more binding. For disputes involving scientific or technical issues, the panel ruling on the dispute should seek advice from experts, and may establish an advisory group of technical experts. Veterinary Equivalency and U.S. Exports The U.S.-EU bilateral agreement on veterinary standards reached on April 30 was the outcome of some 3 years of negotiations between the United States and the EU. The negotiations examined both parties inspection standards for the entire range of animal products and byproducts, including live animals, meat, poultry, and dairy and egg products. The talks aimed at developing mutual recognition of systems that provided an equivalent level of food safety protection. Essentially, each party would recognize that one country' s measures, although different, achieve the same degree of protection. Bilateral agreements on veterinary equivalency are an aim of the SPS Agreement, but in this case agreement was also necessitated by new harmonized EU standards that went into effect on April 1, 1997. Without an equivalency agreement, U.S. animal product exports would have been halted, at least until U.S. plants could demonstrate conformity with the new standards. The agreement will allow EU exports of meat, dairy products, and egg products to continue as before. The agreement will make it easier for U.S. firms to exports beef and pork by lightening the burden of complying with EU standards. U.S. dairy and egg product exports will continue as before. However, U.S. poultry exports will see few benefits from the agreement as the two sides were unable to resolve all outstanding issues. Negotiations on poultry standards continue. The Hormone Ban Since 1989, U.S. beef and variety meat exports to the EU have been significantly affected by the EU s ban on the use of hormones in beef production. U.S. sales of beef and veal and variety meats in 1996 were 70 percent below 1988 levels. The United States has always protested the ban, and is challenging it in the WTO, where a dispute settlement panel is now examining the issue. The United States claims the ban is a barrier to trade, as there is no indication that the hormones used as growth promotants in the United States and other countries pose risks to human health. From the U.S. standpoint, the EU ban therefore does not meet the requirement of the SPS Agreement that such measures must be based on scientific evidence. This is the first dispute that has been brought since the adoption of the SPS Agreement, and the first to put together a panel of technical experts. Both parties have submitted their arguments to the panel, and the panel findings are expected in the near future. According to press reports, the panel has found that the hormone ban does in fact contravene WTO commitments. It is difficult to estimate how U.S. beef exports will be affected by a WTO finding against the EU. First, it is hard to predict how the EU would change its measure to comply with the SPS Agreement. Second, the EU beef market is considerably disrupted by the continuing BSE crisis, and demand for beef has contracted. END BOX 1 Authors: Timothy J. Smith and Mary Lisa Madell Sources: Agra Europe. Various issues. Foreign Agricultural Service. Attache reports, various issues. USDA, Foreign Agricultural Trade of the United States, 1997. For further information contact Mary Lisa Madell at (202) 219-0791 or e-mail mlmadell@econ.ag.gov/, or Elizabeth Jones at (202) 219-0619 or e-mail ejones@econ.ag.gov/. U.S. Exports to Central and Eastern Europe Continue Their Recovery, But Long-Term Prospects Are Mixed Since 1989, U.S. agricultural exports to Central and Eastern Europe 1/ have shifted from bulk feed grains and oilseeds toward high-value products (HVPs) such as poultry meat, variety meats, fruits and vegetables, nuts, and beverages. High-value products may be defined as consumer-ready and intermediate goods that have been processed or require special handling. This definition includes wheat flour and soybean meal, both of which undergo processing. While bulk commodities comprised nearly three-fourths of U.S. exports to the region in the late 1980s, HVP exports have exceeded bulk commodities on average since 1991. This trend has been shaped by changes in agricultural production and consumption in the CEE countries that resulted from their transformation to a market-oriented economy. While regional demand declined for corn and wheat (for animal feeding) and hides and skins (for the production of leather goods), it grew for HVPs such as poultry meat and consumer-ready processed products. 1/ For the purposes of this article, Central and Eastern Europe refers to the Czech Republic, Hungary, Poland, Slovakia (the "Visegrad Four"), Albania, Bulgaria, Romania, and the former Yugoslav republics. A number of adverse factors affects U.S. exports to the CEE region, including higher transport costs, the large size of U.S. bulk shipments, and restricted access of importers to foreign exchange. Higher transport costs and the inability of importers to handle large volumes put the U.S. at a disadvantage against European competitors, who can ship smaller volumes economically from a shorter distance. Lack of access to foreign exchange by CEE importers mainly continues to hinder U.S. exports to Albania, Bulgaria, Romania, and some of the former Yugoslav republics. In Bulgaria and Romania, the eligibility of certain commodities for GSM-102 export credit guarantees helps to overcome this problem. The EU also benefits from trade preferences embodied in Association Agreements with CEEs. More recently, member states of the Central European Free Trade Agreement (CEFTA) moved to lower or eliminate barriers to their agricultural trade. U.S. and western European companies have invested in the CEE food processing sector, especially in Poland, Hungary, and the Czech Republic. HVPs such as chocolate, beverages, and food preparations are now produced and marketed in the CEE region. The ongoing diversification and improvement of food processing will limit the growth of consumer-ready HVP exports to the region. From the multilateral perspective, CEE countries have bound their tariff rates and agreed to limitations on export subsidies and internal support under the Uruguay Round Agreement on Agriculture. Both applied and bound tariffs on agricultural products are generally lower in the Czech and Slovak Republics. On the other hand, Romania, Hungary, and Poland managed to include high tariff bindings in their schedules. Whereas Poland s applied tariffs continue to fall well below their bound rates, since 1994 Romania and Hungary have raised their levels of protection on several products (Romania subsequently lowered some tariffs in May 1997). Since 1994, most CEE economies have stabilized through sound monetary and fiscal policies, freer prices have helped bring supply and demand into line, and economic recovery has begun. In the past 2 years, the region has witnessed a turnaround in livestock numbers and the output of domestic industries, while consumer makets continue to diversify. As agricultural production and consumer incomes pick up, demand will recover for fertilizers and feeds, and perhaps eventually for hides, skins, and cotton. Meanwhile, rising incomes will keep HVP markets bullish in the region for the foreseeable future. Because EU countries particularly Germany dominate most consumer-ready processed food markets and are highly competitive, U.S. exporters need to be pro-active in identifying and filling new market niches as they arise. Poland Remains Fastest Growing CEE Market for U.S. Exports The CEE region of 120 million inhabitants continues to import roughly 1 percent of total U.S. farm exports. This compares with an EU population of 374 million that imported 15.4 percent of total U.S. farm exports last year. In 1996, Polish imports of U.S. agricultural products nearly doubled to $231.5 million, accounting for over 50 percent of the CEE total, and were dominated by unmilled wheat, chicken meat, and corn. USDA data indicate that in 1996, $7.1 million of U.S. exports of wheat (33,000 tons) and corn (7,000 tons) were transshipped through Poland to other destinations. The former Yugoslav republics and Romania represented another 20 percent and 13 percent of the total, respectively, although they were mostly importers of intermediate products. The former Yugoslav republics mainly imported wheat and wheat flour (some of it food aid), soybeans and soymeal, and hides and skins, while Romania imported soybeans, cotton, and hides and skins. Of the 1996 total, 34,000 tons of unmilled U.S. wheat ($5.4 million) were transshipped through former Yugoslav republics to other destinations. As in previous years, a smaller share of U.S. exports to the CEE region went to the smaller countries of Albania, Bulgaria, the Czech Republic, Hungary, and Slovakia. This group can be further divided into the lower income countries of the Balkans (the former two), and the higher income countries of Central Europe (the latter three). As might be expected, the higher income countries imported a greater percentage of HVPs than did the lower income countries, given considerable differences in purchasing power. The most important U.S. exports to Hungary and former Czechoslovakia were nearly all HVPs. Last year, U.S. agricultural exports to Hungary were mostly in vegetable preparations, field and garden seeds, and bovine semen, while the list to the former Czechoslovakia was topped by almonds, bovine semen, and vegetable preparations. Meanwhile, more than half the 1996 U.S. export total to Bulgaria and Albania came from wheat alone. Traditionally, corn constitutes more than half of Bulgaria's agricultural imports from the United States. U.S. Bulk Exports Rise U.S. exports of bulk commodities mainly wheat, corn, soybeans, and cotton increased significantly to CEE in 1996; however, total U.S. bulk commodity exports to CEE remain more than 20 percent below those of the 1980s. U.S. bulk export volumes increased after CEE governments lowered tariffs in response to tight stocks. Export values rose further due to last year s high world market prices. U.S. exports of grains and feeds rose strongly to $195 million in 1996 as a result of high grain prices in Poland and insufficient stocks in Bulgaria, which led both countries to lower their grain import tariffs last year. Polish wheat prices drifted above U.S. gulf prices after March 1996, and bad planting conditions and severe winterkill led to disappointing winter wheat and rapeseed harvests. High domestic prices and insufficient projected stocks prompted Poland to suspend tariffs on grains, allowing increased imports of wheat from the EU, United States, and Brazil, and corn from the United States. In 1996, U.S. corn exports to CEE mainly to Poland and Bulgaria were more than double their 1995 level, and roughly 50 percent above the 1991-95 average. Excessive exports of wheat from Bulgaria, caused by distortive government price controls, led to insufficient stocks and resulted in a rush to import wheat and corn during the second half of 1996. Finally, the end of sanctions in late 1995 against the rump Yugoslavia (Serbia and Montenegro) facilitated U.S. grain exports last year to that country. Last year, U.S. cotton exports to CEE grew strongly to $27.5 million. Since the 1980s, U.S. cotton exports have shifted from Yugoslavia and Poland towards Romania, which in 1996 imported more than three-quarters of the CEE total. The strength of U.S. cotton exports to Romania lies in a low duty of 3 percent, GSM-102 credit guarantees, and increased demand for Romanian textile exports. While their 1986-96 trend has been flat, U.S. cotton exports represent an increased share of total CEE cotton imports. The U.S. market share for cotton has grown since the transition as CEE textile industries diversified their supply away from Central Asia. However, declining textile output in the early 1990s meant lower total imports of cotton, and competition remains strong from Central Asia and other countries. U.S. exports of oilseeds and products mainly soybeans and soymeal reached $51.6 million in 1996, up 20 percent from 1995. Romania and the former Yugoslav republics continued to be the largest CEE purchasers of U.S. soybeans. However, exports remain less than half of the 1986-90 average, principally due to lower livestock numbers. The 1996 rise in U.S. soybean exports was the result of insufficient carryover stocks and recovering animal numbers in Romania, and the end of sanctions against Yugoslavia. In Romania, low carryover stocks were due to banking problems that allowed only partial utilization of GSM-102 credit guarantees during 1995. U.S. soybean exports continue to be seriously restricted to Poland, due to Poland s zero tolerance policy on common weed seeds. HVP Exports Down in 1996 U.S. HVP exports to the region declined to $200 million from their 1994 peak of $238 million, the result of lower exports of wheat flour, soybean meal, and vegetable oils. However, the decline in total HVP exports since 1994 is somewhat misleading and masks an underlying positive trend. If wheat flour and oilmeals are excluded, U.S. exports of HVPs actually increased in 1996 and were close to the all-time record set in 1994. Meanwhile, the drop in U.S. vegetable oil exports mostly reflected the decline of food aid to Albania in 1996 compared to 1994 and 1995. For most HVPs, the trend of export growth remains positive. Exports of variety meats, beef, beverages, dried fruits, nuts, and vegetable preparations continued to rise. In 1996, the United States exported $121.1 million of animal products to CEE. Although down from 1995, poultry meat remains the most important U.S. HVP export to the region. Last year s 4-percent drop in poultry receipts came from declinesto Romania, former Yugoslavia, and Bulgaria, which were largely offset by an increase of $9.1 million in exports to Poland. The rise in Polish poultry meat imports came from domestic prices that significantly exceeded U.S. export prices throughout 1996. Romania raised its duty on poultry meat to 143 percent, resulting in a virtual halt to imports after July 1995. Bulgaria' s hen numbers began a strong rebound in 1995, but in 1996 higher feed prices forced farmers to slaughter their flocks, resulting in higher domestic production and temporarily reduced poultry imports. U.S. exports of hides and skins have begun to recover, although at lower levels than the 1980s. Exports reached $19.3 million in 1996, down sharply from the late 1980s average. Meanwhile, bovine semen exports grew another 28 percent last year to $3.3 million. Since 1994, the former Czechoslovakia has become the largest CEE market for U.S. animal genetics, passing Hungary. Although they remain small in value, U.S. exports of some HVPs have increased several fold since 1989. U.S. variety meat exports reached $11.7 million last year compared to less than $1 million on average in the late 1980s, making them one of the fastest expanding categories of U.S. HVP exports to the region. Poland is by far the largest destination, representing 83 percent of the 1996 total. U.S. exports of dried fruits, nuts, and vegetable preparations continue to grow to the higher-income CEEs, the most important destinations being Poland and former Czechoslovakia. Of U.S. exports of vegetables and vegetable preparations, the greatest market expansion is taking place in "other vegetables (preparations or preserved)," especially in packaged edible preparations, dried onions, and soups and broths. However, the EU continues to dominate this important expanding HVP market. The long-term outlook for U.S. soybean exports to the region is mostly positive. As CEE livestock numbers increase, growing regional demand for protein-rich oilmeals and a shift towards compound feeding augur well for U.S. soybean exports, especially to Poland, Romania, and the former Yugoslav republics. However, producer profitability continues to be a problem as marketing margins including processing, packaging, and distribution costs remain high. For this reason, livestock producers continue to prefer cheaper, lower-quality domestic feeds such as rapemeal or sunflowermeal, or feed whatever is on hand. Over time, investment in processing and infrastructure should lower marketing margins. Furthermore, as personal incomes rise and retail markets expand in the richer CEE countries, higher-quality cuts of meat will be in demand, making soymeal feeding more profitable. However, long-term competition from South America will be a major factor in the U.S. share of growing CEE soy markets. Finally, ERS 1997 baseline projections 2/ indicate that increasing productivity in the CEE region will lead to growing surpluses of wheat and corn, which could reduce U.S. exports of those commodities to CEE over the long run, and increase export competition for third-country markets. 2/ For a more detailed discussion of the ERS baseline projections to 2006 for CEE and the European Union, see Europe Update WRS 97-S2, April 1997. U.S. exports of some HVPs to Central and Eastern Europe have made significant gains during this decade. However, whether this trend will continue depends on a number of factors: income growth, domestic HVP production levels (tied inter alia to foreign direct investment), the degree of import protection, and expanding trade preferences with the EU. Although U.S. poultry (the most important HVP export to the region) should remain price-competitive on CEE markets, prospects are mixed for future expor expansion. On the positive side, CEE demand should continue to grow as consumer incomes rise. Meanwhile, a bilateral U.S.-Polish agreement continues to ensure market access for U.S. chicken meat at competitive tariffs. Furthermore, in May 1997, the new Romanian government reduced chicken meat tariffs to 60 percent. On the other hand, poultry production has begun to recover in Hungary and is expected to increase significantly over the medium term. As Hungary develops exportable surpluses, it should be able to take advantage of preferential CEFTA tariffs, limiting U.S. exports to the CEE region. As a footnote, it should be borne in mind that much of U.S. poultry meat exports to CEE is ultimately destined for countries farther east. Discrepancies between trade data from the U.S. Census Bureau and the Polish Ministry of Agriculture suggest that in 1996, more than 40 percent of U.S. poultry meat exports to Poland were in fact transshipped. If CIS countries lower their tariffs on poultry meat, more direct U.S. shipments to Russia, Ukraine, and Belarus are likely. Other U.S. exports of HVPs remain relatively small but have risen quickly since 1989. Although it is difficult to map their future trend, the relative success or failure of U.S. exports of these products to the EU may provide a clue as to their long-term potential in CEE markets. Because inputs for confectionery products and snack foods such as marzipan and candy bars make up a large part of U.S. exports to the EU, there may be potential in the markets of Central and Eastern Europe, particularly in Poland, former Czechoslovakia, and Hungary. Already several times above their levels of the late 1980s, U.S. exports to CEEs of nuts and dried fruits should have excellent potential over the long term. In 1996, U.S. agricultural imports from CEE countries totaled $241.8 million, the highest since 1993 but down significantly from the late 1980s average of $325 million. Before the transition, the CEE region primarily exported pork products, tobacco, apple juice, wine, and hops to the United States. In 1996, CEE exports to the U.S. have shifted towards non-animal products, particularly as CEE exports of pork products especially from Poland and Hungary plummeted as swine numbers fell. CEE swine exports to the United States declined from $179 million on average in the late 1980s to only $27.6 million last year. U.S. import shares have increased for fruit juices, feeds and fodders, tobacco, and beer. While non-animal product imports have increased since the late 1980s, at $141.6 million they are down from their peak of $226.9 million in 1992. The main factor has been fluctuations in U.S. filler tobacco imports from the region. For animal products, U.S. imports of CEE cheese, casein, and feathers and down have increased significantly. Poland, Hungary, and the former Yugoslav republics continue to be the most important regional exporters to the United States, although imports as a whole from the former Yugoslav republics considerably decreased after war broke out and sanctions were imposed against Serbia and Montenegro in 1992. Although Poland s most valuable agricultural export to the United States remains pork products, the range of Polish exports has increased to include cheese, casein (used in the manufacture of plastics, paints, glues, and edible preparations), and fruit juice. Over the past few years, Hungary s main export has been apple juice, which exceeded half of its total agricultural exports to the United States in 1996. This is followed by feathers and down and pork products. Since the war began, most of the decline in former Yugoslav republics exports to the U.S. has come from decreased sales of pork products, filler tobacco, and wine. On the other hand, exports have increased for feeds and fodders as well as fruit juices. Bulgaria s agricultural exports to the United States have actually increased relative to the late 1980s, but are primarily driven by sales of filler tobacco, which regularly accounts for two-thirds or more of the total. Other Bulgarian exports to the U.S. include cheese and wine. Former Czechoslovakia has also managed to increase the value of its exports to the United States since the late 1980s. While exports of hops have fallen from their peak in 1992, reflecting bad harvests and the financial difficulties of Czech hopgardens, Czech brands of beer remain price-competitive and have found their niche in U.S. markets. Romania exported only $1.2 million last year to the United States, down from $11.3 million in the late 1980s due to a large drop in pork sales. Finally, Albania exported $4.1 million to the United States in 1996, mainly non-competitive spices and filler tobacco, up from the $3.7 million average between 1991 and 1995. BEGIN BOX 2 EU-CEE Agricultural Trade Agricultural markets in the EU and CEE countries are becoming progressively integrated. Between 1994 and 1995, overall agricultural trade between the EU-12 and the CEE region increased 30 percent. There are various explanations for this trend. Undoubtedly, the collapse of the Council on Mutual Economic Assistance (CMEA) played a role in shifting the direction of trade from East to West. The process of CEE-EU integration should be considered as a natural consequence of the re-integration of the transition economies with the rest of the world. However, in the case of intra-European trade, preferential treatment established by the Europe Agreements (EAs) has been an important factor. Despite the general increase in agricultural trade between Eastern and Western Europe, the growth in trade flows has been asymmetric. In 1995, CEE registered a trade deficit vis-a-vis the EU of ECU 1.4 billion ($1.6 billion). This was mainly due to the competitiveness of European high-value products (HVPs) and the diversification of consumer preferences. Between 1994 and 1995, EU exports of the following Combined Nomenclature aggregates preparations of vegetables, fruit and nuts (20), and miscellaneous edible preparations (21) increased 25 percent on average, accounting for 17 percent of total EU agricultural exports to CEE. Another factor that helps explains the trade deficit is unfavorable exchange rates. In 1995, due to high rates of inflation and strong currency policies, most CEE currencies appreciated in real terms, leading to a deterioration in their terms of trade with EU countries. In 1995, CEE agricultural exports to the EU totaled ECU 2.9 billion ($3.3 billion), up 3 percent from the previous year. Opposite to the general trend, CEE exports of livestock and meats decreased 14 percent and 2 percent, respectively. This can be explained both in terms of the privatization process (closing down of cooperatives and state-owned farms) and equivalency problems. CEEs have to comply with sanitary and veterinary regulations in force in the EU, which continue to limit their exports of live animals and meat. In 1995, CEE agricultural imports from the EU totaled ECU 4.3 billion ($4.9 billion), up 10 percent from the previous year. Increases were mainly in exports to Romania (39 percent), the Czech Republic (24 percent) and Slovakia (39 percent). HVPs made up the largest share of EU exports to the CEE region, and the EU took advantage of trade expansion opportunities in sectors such as fresh vegtables (43 percent growth in 1995) and fruits (7 percent). In 1995, the Netherlands remained the main supplier of fresh vegetables at ECU 116 million, whereas the primary exporters of fruits were the Mediterranean countries (Italy, Spain, and Greece), accounting for 77 percent of the total. END BOX 2 Authors: Todd Morath and Milena Messori Sources: Eurostat. External Trade of Countries of the European Union: 1988-95. Polish Ministry of Agriculture, Institute of Agricultural and Food Economics (IERiGZ). Poultry and Eggs: Situation and Outlook, December 1996. U.S. Bureau of the Census. U.S. Exports of Merchandise. 1995-96. USDA, Economic Research Service. "Central and Eastern Europe: An Emerging Agricultural Exporter. Europe Update WRS 97-S2, April 1997. USDA, Economic Research Service. Foreign Agricultural Trade of the United States database. USDA, Foreign Agricultural Service. Various CEE country attache reports. For further information contact Todd Morath at (202) 219-0651 or e-mail tmorath@econ.ag.gov/. END_OF_FILE