HDR1011800402000719951500 INTERNATIONAL AGRICULTURE AND TRADE (EUROPE--Preliminary) July 19, 1995 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- INTERNATIONAL AGRICULTURE AND TRADE Situation and Outlook is published four times a year by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. Please note that this release is preliminary to the scheduled publication of the Europe report on December 4, 1995. Subcriptions 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, $20/year. ERS-NASS accepts MasterCard and Visa. ----------------------------------------------------------------------------- EUROPEAN UNION EU Reforms the Agrimonetary Regime Recent changes to the EU's agrimonetary regime--the system by which agricultural policy prices and payments in ECUs are converted to national currencies--will make the system more transparent, reduce its inflationary tendencies, and reinforce the shift from support prices to payments as a means of providing support to producers. However, the changes threaten to create disparities in the support provided to producers in different member states. Revisions to the EU's agrimonetary scheme adopted in late 1994 took effect on February 1, 1995. Problems raised by the new system led the EU to reconsider certain aspects, and the agrimonetary policy was again amended in June 1995. The main result of these changes is the elimination of the switchover mechanism. Under the previous system, the switchover mechanism prevented declines in policy prices and payments in national currencies when a currency was revalued against the ECU by inflating the value of the ECU used for agricultural policy amounts--the so-called "green" ECU. With the end of the switchover mechanism, the green ECU has also been eliminated. Green rates (expressed in units of national currency per 1 ECU) have been reduced by 20.7509 percent, the value of the switchover coefficient. Prices, payments and other CAP amounts have been increased by the same percent. As a result, support levels in national currencies are unchanged. However, by eliminating the switchover mechanism, the EU can avoid the built-in increases in CAP amounts that resulted from the mechanism's application, and any increases in CAP amounts due to agrimonetary factors are made more transparent. The system of green rates, the exchange rates used to convert agricultural prices, payments, and other CAP amounts from ECU to national currencies, has been preserved. Agricultural policy amounts (prices, compensatory payments, levies and subsidies) fixed in ECU will continue to be converted to national currencies until a single currency is adopted. With a single currency, CAP amounts could be set in that currency, and would thus obviate the need for a separate system of agricultural exchange rates to prevent price and payment variability due to fluctuating market rates. Some of the more complex changes in the policy relate to the rules for modifying green rates. Movements in market exchange rates cause green rates to deviate from the market rate for currencies. This difference is called the monetary gap. When these gaps become large, green rates must be adjusted to avoid distorted trade flows. o Green rates are normally reviewed, and adjusted if necessary, every 10 days. The new policy sets a 50-day confirmation period to verify the currency trend for an "appreciable" revaluation. If the trend is confirmed, the Council of Agricultural Ministers decides the amount of the revaluation. If the appreciating currency shows an average positive monetary gap greater than 5 percent during the confirmation period, countries showing negative monetary gaps must devalue their green rates to narrow their gap to zero and reduce the spread between strong and weak currencies. This provision is designed to avoid a revaluation, which reduces the value of common ECU prices in the revaluing country, but is costly to the EU budget because it raises support prices, and may eventually increase the value of CAP payments, in devaluing countries. o In general, green rates must be changed when the green rate exceeds the market rate (a positive monetary gap) by more than 5 percent, or when the spread between the monetary gaps of weak and strong currencies is greater than 5 percentage points, with a maximum 5 percent positive gap or negative gap of 2 percent. Green rates are also revised when currencies in the European Monetary System (EMS) are realigned. Currently, currencies in the EMSū Exchange Rate Mechanism float within plus or minus 15 percent of the posted, or "central" rate, meaning a very large movement in an exchange rate would be needed to prompt a realignment. o For contiguous countries whose currencies are diverging, a maximum 5 percent spread may not be narrow enough to prevent trade distortions. In this case, the Commission may adjust green rates to reduce the spread of gaps by more than the normal requirement to avoid the risk of trade distortion. Strong currency countries may elect to revalue their green rate at a lower monetary gap (4 percent instead of 5 percent) to avoid distortionary trade flows. o Revaluing countries are given protection from losses resulting from uts in direct payments. For any appreciable revaluation taking place between June 23, 1995, and January 1, 1996, CAP reform payments will continue to be converted from ECU to national currencies at the green rate prevailing on June 23. For those countries undertaking a revaluation prior to January 1, 1996, green rates are frozen for the purpose of converting direct payments until January 1, 1999, the deadline for implementing a single currency under the Maastricht treaty. The provision does not prevent weak currencies from devaluing during that period. o Revaluing countries are also compensated for income losses due to lower support prices that result from green rate revaluation. Payments are limited to 3 years, are reduced by one-third each year, are co-financed by EU and the member state, and are subject to a ceiling. o A member country may provide a flat-rate compensation if it is able to prove that its farmers have incurred a large income loss resulting from monetary changes in other EU member countries. The aid may be granted for a maximum of 3 years, and must be degressive. The first agrimonetary policy revisions, enacted in February 1995, had also provided for a "mini-switchover". The mini-switchover increased compensatory payments, livestock headage payments, and structural and environmental payments (but not prices) in ECU when the strongest currency was revalued. Payments were to be raised so as to neutralize the effect of the green rate revaluation, and thus would have maintained the effect of the switchover mechanism on these payments. The provision would have been costly to the EU budget, because higher payments would apply to all EU member countries, not only the country whose currency is being revalued. In early 1995, turmoil in European currency markets put pressure on the Italian lira, the UK sterling, and the French franc. Strong currencies (the Deutschmark, Dutch guilder, and the Belgian franc) appreciated, while weak currencies continued to decline, leading to large and growing spreads in monetary gaps that were uncorrected because of the required 50-day confirmation period. By mid-March, revaluations had been triggered but not implemented for four green currencies: the Belgian franc, the Dutch guilder, the Deutschmark, and the Austrian schilling. The Council resisted implementing revaluations because an appreciable revaluation would have triggered large outlays under the mini-switchover. According to EU estimates, additional payments generated by the mini-switchover would have added over 1 billion ECU in expenditures to the 1996 budget. In June, the agrimonetary policy was amended to provide compensation only for income losses in the revaluing countries. Once protection was given against income declines from cuts in payments, revaluations were allowed to take place. The new policy will be more transparent; revaluing countries will be compensated through higher payments in lieu of "hidden" price and payment increases through the switchover mechanism. The system not only reduces the inflationary effect of automatic increases in support prices, but also allows support prices in strong currency countries to decline with a revaluation. For these reasons, the new agrimonetary policy could make the intervention option less attractive to producers. Freezing green rates for direct payments does, however, tend to protect CAP reform payments from reductions that would result from revaluation. This is important because producer payments now comprise a significant part of farm income. The new system thus reinforces the shift toward providing support through producer payments, and away from support through high prices. It could, however, lead to discrepancies in payment rates among countries if strong and weak currencies continue to diverge. Implications for EU GATT commitments: The compensation that producers receive to offset income loss in case of a revaluation or from monetary changes in other EU countries could have implications for the EU's commitments under the GATT. Payments to producers compensating for income loss due to agrimonetary developments would be disciplined under the EU's commitments on internal support. It is not expected that additional compensation resulting from the new agrimonetary regime would cause the EU to exceed its commitment levels for internal support. The "Peace Clause" in the Agreement on Agriculture exempts CAP reform payments from particular GATT actions (those based on serious prejudice and non-violation nullification and impairment of tariff concessions). The EU would not be protected from GATT actions under the Peace Clause if the increase in payments under the agrimonetary rules raised the level of support for a particular commodity above the levels agreed upon in 1992. This exemption is also contingent on the EU's respecting its Uruguay Round commitments. Farm Price Package Adopted The EU Council adopted the 1995/96 package of farm prices on June 22, a full 4 months after the Commission submitted its proposals. Reaching full agreement required extensive bilateral and multilateral negotiations, and a number of concessions to individual member states. The June Council meeting also addressed new agrimonetary measures, the welfare of animals in transit (see accompanying articles), and changes in the environmental set-aside program. This was the first package to be debated with three new member states, and covers the last of the 3-year implementation period for CAP reform. The package included an overhaul of the cotton regime, but no important changes were proposed for other commodities, reflecting the ongoing process of reform. The Commission's proposals contained two controversial elements, both rejected by the Council. The first was a 2-month reduction in the intervention period for grains. The Commission suggested opening intervention 2 months later (it runs from August to April in the south and from November to May in the north). The shorter period would increase the importance of the open market, and make intervention more of a safety net. The Commission also proposed a 2-percent cut in the butter price. The butter price was reduced 5 percent under CAP reform, and another 1 percent as part of the 1994/95 price package. EU butter consumption has been declining since the mid-1980s, and the Commission wanted to improve butter's competitive position against substitutes such as margarine. Cotton Regime Reformed: The EU has always limited the quantity of cotton production it supports through a Maximum Guaranteed Quantity (MGQ). The penalties for exceeding the MGQ were not severe, and cotton production has consequently expanded. The EU has increased the MGQ a number of times. The recent reforms increased the MGQ again, to 1.013 million tons of unginned cotton, up from 701,000 tons. The MGQ is divided between Greece and Spain, the major producers. Greek cotton production is limited to 782,000 tons, and Spanish production to 249,000 tons. These levels are close to current output. Despite the increase in the MGQ, expenditure should not increase. To respect its GATT commitments, the EU will keep expenditure on the cotton sector at the 1992 level. To remain within the spending limit, the penalties for exceeding the MGQ will be more severe. The price package contained a number of concessions to individual member states to secure their agreement. Austrian durum wheat producers may receive a payment of 138.86 ECU per hectare on up to 5,000 hectares. The Portuguese and Spanish governments will be allowed greater flexibility in making payments to their producers harmed by the long drought. Aid to France's wine producers, previously rejected by the Commission, will be permitted after being approved by the Council. Pressure from the Irish prompted the Commission to allow advance payments of male bovine premiums, and to take action to improve sheepmeat prices. Set-Aside Modifications: A further modification to the EU's set-aside program was adopted along with the price package negotiations. A number of environmental set-aside and reforestation programs were created as part of CAP reform. Previously, area entered into these programs could not be counted toward the farmer's set-aside requirement. The Council agreed to allow farmers to use some of this area to fulfill the set-aside obligations under the arable crops regime. The EU estimates that up to 2 million hectares of land could be affected by this change. Not all the area in environmental set-asides will qualify. To meet the set-aside requirement, land in an environmental program must also qualify for CAP reform payments. Land under permanent pasture, permanent crops, forest, or non-agricultural uses before 1992, which is not eligible for the per hectare payments, cannot be used to fulfill the set-aside obligation under the arable crops regime. The change could allow some farmers to increase their planted area without violating their set-aside obligation. However, their decision will depend on the payments they receive for the two types of set-aside. For that area that qualifies as both environmental and arable crops set-aside, they will receive the lower of the environmental or the set-aside payment. The EU has specified that the current spending ceilings on the environmental set-aside cannot be exceeded or increased. Each holding will be limited in how much environmental set-aside area can apply toward the set-aside obligation. Farmers in some regions may not benefit from the change. Member states need not implement the modification in regions where there is a constant danger of exceeding the base area. The change was first proposed by the United Kingdom in 1993, as a way to make the environmental set-aside more attractive, and is the latest in a series of modifications over the years. Previous changes increased the per hectare payment, increased the set-aside options to include rotational, non-rotational, mixed, and voluntary set-aside, and allowed producers to pay other farmers to set aside on their behalf. The Commission was asked to consider a further modification to the set-aside. The extraordinary set-aside is an uncompensated set-aside imposed on participating farmers in regions where the base area is exceeded. Some member states, principally France, felt that the extraordinary set-aside should not apply if the base area were exceeded because of an increase in the voluntary set-aside. The Commission agreed that there could be problems with applying the extraordinary set-aside, but that some constraint on expanding area was clearly necessary. The area enrolled in the set-aside has increased, but so has the area planted to eligible crops. Additional flexibility in the set-aside program could further erode its effectiveness as a production control measure. New Rules on Animal Transport The EU has adopted a series of directives governing the treatment of live animals in transport. This animal welfare issue had been a topic of intense debate by the EU Commission and Council, and by the general public. The new measures may reduce output and raise costs to consumers. Higher production costs for EU producers may benefit U.S. livestock products competing in third country markets, since the EU can no longer offset higher costs by increasing export subsidies due to its GATT commitments. Live animal transport directives: The new directives set a maximum travel time for live animals of 8 hours. Only specially equipped vehicles may transport live animals for a longer period. These vehicles must meet certain conditions, such as: o Adequate bedding on the floor of the vehicle; o The quantity of fodder on board the vehicle must be appropriate to the kind of animals being transported, and to the length of the voyage; o Direct access to the animals must be possible; o Adequate ventilation that can be adapted to the internal and external temperatures; o Moveable partitions to allow the creation of compartments; o Permanent devices allowing connections to water supplies during stops; o Vehicles used to transport pigs must also carry a sufficient quantity of water on board to water the animals during the voyage. For longer voyages, the directive also sets the intervals for feeding and watering the animals, as well as the duration of rest periods. The feeding, watering, and rest schedules depend on the type of animal being transported. o After 9 hours of transport, unweaned calves, lambs, kids, and foals receiving a milk replacer, as well as unweaned piglets, must receive a rest period (at least 1 hour in length) sufficient for watering and, if necessary, feeding. After this rest period, they may be transported an additional 9 hours; o Pigs may be transported for a maximum of 24 hours. During this period, they must have a permanent source of water; o Domestic horses (excluding registered horses) may be transported for a maximum of 24 hours. During this period, they must be watered and fed, if necessary, every 8 hours; o After 14 hours of transport, all other animals must receive a rest period (at least 1 hour in length) sufficient for watering and, if necessary, feeding. After this rest period, they may be transported another 14 hours; o Beyond these fixed transport limits, animals must be unloaded, fed, watered, and given a rest period of at least 24 hours. Public sentiment in the Community regarding the treatment of farm animals filled the headlines as animal welfare activists blocked trucks at ferry ports and closed down air freight shipments to prevent live animal transport within the Community. The Council had debated the issue on a number of previous occasions, but could not reach a compromise. Southern member states, typically recipients of live animals, preferred unrestricted transport, while northern member states favored more stringent welfare standards. For member states that traditionally export live animals, restrictions on intra-Community transport may reduce demand for live animals, lowering the market price received by livestock producers. An increase in home slaughter of fattened animals may raise marginal costs to home country abattoirs. Restricting shipments of surplus dairy calves raises costs to dairy farmers who must allocate space on the farm for feeding out the surplus calves. Slaughterhouses may have to invest in new capital equipment to accommodate the lower-weight carcasses of calves. All of these factors raise the cost of producing veal and indirectly raise the cost of dairy operations. The transport restrictions themselves may pose problems for animal health. Loading and unloading are the most stressful and injurious occasions for animals in transit. Facilities for unloading, resting, and feeding animals in transit could become a center for disease transmission from the volume of animals passing through the facilities, and create environmental concerns about waste disposal. Other Animal Welfare Action: The EU will ban the use of sow tethers beginning in 2005. Complying with the legislative measures will raise costs to pork producers. Higher costs will lower EU pork production, lower pork exports, and raise prices for consumers. The cost of an untethered system is higher than the sow stall or tethering method for a number of reasons. Free-ranging pigs raise costs through increased management and waste disposal. Untethered facilities require straw bedding, which must be gathered and disposed of on a regular basis along with accumulated waste products. The soiled straw also raises disposal and environmental costs. Storing the straw prior to use requires additional capital investment in storage facilities. Another obstacle facing producers with untethered sows is scientifically administering feed to individual animals. Each sow requires a special ration at differing stages of her pregnancy. In an untethered environment, aggressive sows consume more than their required ration of food, possibly exceeding optimal weight during pregnancy. Less aggressive sows may be denied access to adequate nourishment at crucial times during gestation. Electronically regulated individual feeding stalls, activated by a device attached to a sow's ear, are capable of administering independent rations. However, this raises capital investment costs. The United Kingdom passed national legislation banning sow stalls and tethers beginning January 1, 1999. U.K. producers may be at a disadvantage compared with other EU producers when their national legislation takes effect. The U.K. national legislation is more stringent than the Community legislation. U.K. pork producers are seeking structural subsidies to counter the cost disadvantage of complying with national legislation. Veal production methods under fire: Current proposals, put forward by both the European Union and some member states, would outlaw some intensive veal production methods. "Veal crates" refers to tethering calves or confining them to indoor pens. Animal welfare activists prefer calves to be free-ranging in outdoor pastures. The rearing of calves in veal crates is already banned in the United Kingdom. The Commission is scheduled to address the issue of veal crates in 1997. Sugar Regime Reform Changes Little The long-awaited reform of the EU sugar regime will lead to only minor changes and will do little to reduce the price EU consumers pay for sugar. The reform will not significantly affect the U.S. sugar sector as the United States does not directly compete with the EU as an exporter or import sugar from the Community. In April, the EU Council of Ministers agreed on the sugar regime reform, and it took effect July 1, 1995. The changes will be relatively minor, but should allow the EU to meet its GATT commitments. The system of production quotas and financing will continue unchanged, at least through 2000/01. Provisions were established for reducing subsidized exports in excess of GATT limits. Sugar produced in excess of the quota--C sugar--must be exported without a subsidy or carried forward into the next marketing year as the first tranche of A quota sugar. Beet factories, specialized sugar trades, and intervention agencies receive a refund for the cost of storing all sugar carried forward or for sugar that has been reclassified due to GATT constraints. The storage rate was set at .45 ECU/100 kg of sugar per month, a decrease from .48 ECU/100 kg in 1994/95. Plans to discontinue the storage subsidy were rejected in the final compromise. However, the Commission can readjust downward the maximum quantities of B or C sugar carried forward. National aids will be phased out in northern Italy over a 5-year period, with aid declining at a more gradual rate in southern Italy than in northern or central Italy. Likewise, in Spain, national adjustment aid will be gradually phased out. The current preferential import system will be maintained under the new regime. The EU will continue to import 1.3 million tons of raw sugar annually from the African Caribbean and Pacific (ACP) countries under Protocol 8 of the Lome Convention, an important source of income for these countries. Import quotas for countries with perceived deficits for their refineries were fixed for the next 6 marketing years. Finland's quota was increased to 60,000 tons from 40,000; France's quota was set at 297,000 tons; the U.K.'s at 1.13 million tons; and Portugal's at 292,000 tons. Portugal's request for a quota increase was rejected. The Commission and the ACP countries have yet to negotiate the level of preference and the minimum purchase price for refiners. Sweden can proportion some of its quota to the island of Gotland. Under the GATT agreement, the EU agreed to reduce the quantity of subsidized exports by 21 percent--340,000 tons raw value--from the base period (1986 to 1990), to cut the expenditure on them by an average of 36 percent by the year 2000/01, and to maintain its current level of imports. Due to the hard-to- understand methodology used by the EU to arrive at the ceiling of 1.277 million tons, the EU is taking the position that any additional Lome sugar allowed into the EU will add directly to the ceiling of permitted subsidized exports. For example, if in 2000/01 an additional 340,000 tons of Lome sugar is imported, the permitted level of subsidized exports would rise back to the base level of 1.616 million tons. Also, the enlargement of the EU to include Finland, a sugar-deficit country, will likely reduce the EU sugar surplus, and thus help the EU meet its GATT commitments by absorbing some surplus domestic production. Faced with a cut in subsidized sugar exports, total EU sugar exports are unlikely to drop as subsidized exports will likely be converted to unsubsidized exports. The EU will continue to meet its current access commitments by sugar imported from the ACP countries under the Lome Convention. Imports represent approximately 10 percent of domestic consumption. ACP imports enter the EU duty free and receive the EU price. Tariffication of the variable levy is not expected to increase import opportunities for other countries due to the high level of the duty, despite widely reported fears by the EU sugar industry. EU Winter Grains Area Expands Area planted to winter grains in the EU expanded significantly in a number of member states. Estimates have been reported by national agriculture ministries and traders for Germany, the United Kingdom, France, Denmark, and Spain. The estimates indicate that winter wheat area in particular has increased. However, in drought-plagued Spain, grain production is expected down 13 percent, with particularly large drops for durum wheat and triticale. For the EU-15, USDA has projected production increases of nearly 4 percent for both wheat and coarse grains for 1995/96. A number of factors underlie the increased plantings. The EU reduced the set- aside rate 3 percentage points for the 1995 harvest, from 15 percent to 12 percent under CAP reform. Although the cut was not approved by the Council until October 25, when planting was already underway, farmers appear to have increased winter crops area instead of waiting for spring. The lower set-aside rate affects the rotational and non-rotational set-aside under CAP reform. In addition to the CAP reform set-aside, some area remains in the 5-year set-aside program begun in 1988. According to data from the Commission, 359,000 hectares left the 5-year program in 1994/95. This land can be planted to arable crops, including winter grains and oilseeds. The majority of this area was in Germany, where participation in the 1988 program was quite high. The expansion of winter grain area in some countries was at the expense of winter oilseeds, chiefly rapeseed. Because of high world prices, oilseed area expanded for the 1994 harvest. Oilseed compensation payments are designed to reflect world price levels. Under the terms of the Blair House agreement, EU oilseed area eligible for compensation payments is limited. The area limits were exceeded in Germany, France, Ireland, the United Kingdom, and Spain. Producer payments in these countries were reduced an additional 4 to 20 percent. France is by far the largest oilseed producer in the EU. Because French rapeseed area is expanding, it is unlikely that total EU winter oilseeds area will decline. Spring rapeseed area should drop considerably in response to the higher winter plantings. In addition, plantings of oilseeds on set-aside land, which exceeded expectations in 1994/95 with an estimated 635,000 hectares, is anticipated to reach around 900,000 hectares in 1995/96. This may slightly exceed the levels in the Blair House Agreement. Conditions for the 1995 crop were reported to be good. Producers were not delayed by late harvesting or bad weather, as in the previous year. Very heavy rains and flooding across most of Northern Europe in the Spring did not appear to pose problems for plant development. Increased Set-Aside Area: Despite a 3-percent drop in the set-aside rate, the area entered into EU set-aside programs increased for 1994/95. In some member states, regional base areas were exceeded in 1993/94. Where this occurred, compensation payments for 1993/94 were reduced, and an additional, uncompensated (extraordinary) set-aside was required for 1994/95. The additional set-aside would offset part or all of the reduction in the set-aside rate. The increase in set-aside area reflects higher participation by producers. As cereals prices fall under CAP reform, more farmers are deciding to participate to obtain compensation payments. The per hectare payment for set-aside was increased beginning with the 1994/95 year to encourage more participation. Furthermore, more farmers than expected have opted to set aside more than the minimum area required. Under the set-aside provisions, producers can choose between rotational and non-rotational options. The basic rate, 12 percent for 1994/95, applies to the rotational set-aside and is the lower rate. Farmers opting for the non-rotational set-aside, or a combination of rotational and non-rotational set-aside, must take more land out of production. The non-rotational rate is 18 percent, except in the United Kingdom and Denmark, where it is only 16 percent. France and Germany have the most land in the set-aside, accounting for 29 and 22 percent of the total area set aside. In France, only 55 percent of the land set aside for CAP reform was in the rotational scheme. In Germany, less than half the set-aside was rotational. Farmers can also be compensated if they decide to set aside land beyond the minimum requirement. BST Moratorium Extended The Agriculture Council of the European Commission extended the moratorium on marketing and use of the hormone bovine somatotropin (BST) in dairy operations through the end of 1999. An independent group of scientists will examine literature on BST and conduct further research on safety of BST in milk production. The Commission will permit limited testing at approved research sites. Testing will be set up and monitored by member states. The temporary ban does not include imports of dairy products produced with BST milk. EU Expansion Takes Effect Austria, Finland, and Sweden joined the European Union on January 1, 1995, bringing membership to 15 countries and increasing the EU population to 373 million. Upon accession, each new member began the difficult process of adjusting to the EU's Common Agricultural Policy (CAP), including immediate price alignment to EU levels. For the United States, the overall trade effects of accession are unlikely to be significant. Issues for U.S. Trade: The United States exports over $382 million in agricultural products to the region annually. During January-April 1995, U.S. agricultural exports to the new members remained essentially unchanged from a year earlier. However, some exports, particularly beef and veal, dropped significantly. The United States exported $4,518,775 of beef and veal to Austria, Finland, and Sweden during January-April 1994, but only $634,000 in January-April 1995. Similarly, during that same period, U.S. exports of paddy and milled rice dropped 82 percent, from $5.3 million to $957,000. Under the rules of the World Trade Organization (WTO), the United States and the European Union are negotiating permanent compensation for U.S. agricultural products adversely affected by the accession. In addition, the incorporation of the new member states' Uruguay Round export subsidy and market access commitments with the EU's commitments is an integral part of the negotiations. In practical terms, the enlargement should not increase export subsidies or internal support or restrain market access. Effect on Prices: Upon accession, new members immediately adopted EU prices, with varying results. Except for Sweden, producer prices were expected to fall between 20 and 50 percent. Sweden was much more prepared for accession, having lowered its prices to near EU levels as part of its agricultural policy reform in 1990. Unfortunately, consumers in the new member states expected to see a significant drop in retail prices, which has not occurred, so there has been limited effects on demand. During the first few months since accession, Finnish producer prices dropped sharply more than retail prices, which on average dropped only 4.6 percent. For example, cereal prices have reportedly fallen 40-60 percent. More specifically, the producer price of wheat fell 65 percent, while the price of wheat flour dropped only 21 percent and the price of bread, only 6 percent. Similarly, the producer price of pigmeat fell 57 percent while the consumer price fell only 18 percent. Similarly, in Austria, producer prices for cereals fell 50 percent, slaughter cattle prices fell 10 percent, and the price of pigs dropped 20 percent. Producer prices for milk fell more than 26 percent, which could lead to some concentration of production into larger holdings. Although some consumer prices have fallen (flour prices fell 19 percent and milk dropped 10 percent), no broad price drop has occurred. Imports have not increased for milk or flour, as prices are now below the EU average. Transitional support to compensate farmers for reduced prices is having varying results. Reportedly, in Finland, compensation measures are keeping farmers solvent as direct payments from the government offset lower returns from the market. But because the price drops have proven to be far greater than anticipated, farmers consider the level of support, determined prior to accession, to be no longer sufficient. Austrian farmers are experiencing delays in the implementation of compensation measures as many programs are still in the discussion stage. Under the Treaty of Accession, new members were to receive support for their arctic and alpine agriculture in the form of permanent and transitional regional and national support. This support was to be financed through both EU and national funds. To further complicate matters, both Sweden and Finland are considering significant cuts to their agricultural aid packages due to budget pressures. Agricultural Production: Cereal production may rise in 1995 in Finland as set-aside land comes back into production. Under the Finnish set-aside scheme, over 500,000 hectares were out of production. However, under the CAP, set-aside land would be cut to 100,000 hectares, increasing cereal production by 35 percent and potentially raising exports by approximately 1.2 million tons. Because their farms are small with low reference yields, most Finnish farmers are not obliged to set aside land in order to receive CAP payments for planting grains, oilseeds, and protein crops. One of the main crops in Finland and Sweden is oats, which is of interest to the United States. In 1994/95, Finland and Sweden produced 1.2 and 1.0 million tons of oats, respectively, and together accounted for approximately only 7 percent of world production but 18 percent of world trade. Until accession, Finland and Sweden regularly shipped between 400,000 and 500,000 tons of high-quality subsidized oats to the United States. For oats exports to continue, the EU created a special export subsidy system. To qualify, oats must be grown in Finland or Sweden, shipped from ports in those countries, and exported on a tender basis. Since March, the EU has authorized export tenders for 220,450 tons of oats. No intervention system exists for oats in the EU. Spring planting was complicated by several late decisions made by the Commission. Farmers waited until mid-March for the Commission to implement the export subsidy system for oats. Planting decisions were further complicated by farmers' fears over the level of export refunds for oats in July, when further reductions were expected due to final CAP reform price cuts for other grains. If oats, which in the case of Finland represent over half the grains areas, are not viable, barley would be the most likely substitute. However, until early April, both Finnish and Swedish barley failed to meet EU intervention specifications. In April, the EU changed its specifications to accommodate Nordic barley. Pork will be one of the biggest areas of adjustment for Finland and Sweden, as cheaper imports from other member states have raised consumer demand for pigmeat since January 1. Rather than attempt to compete, producers in Finland and Sweden have begun to slaughter sows, likely a permanent reduction in the breeding stock. EU cheese production will likely rise, as the range of available cheese varieties in both the new and old members expands and total sales increase. Despite a production increase of 100,000 tons, the EU skimmed milk powder market will remain the same, as EU stocks are currently low and new members are not significant consumers. 1995 Budget Appropriations Adjustments from CAP reform are visible in the European Agricultural Guidance and Guarantee Fund (EAGGF) appropriations for 1995. Under CAP reform, farm support is shifting away from market (price) intervention towards direct (income) payments to producers. The cost to EU taxpayers for agricultural support is rising, but CAP reform should lead to lower surplus stocks of key commodities, lower market prices for some consumers, lower taxpayer expense for export subsidies, and reduced political pressure from trade partners. Reduced EU surpluses and exports may have positive implications for U.S. exports competing in third country markets. Agricultural spending has risen 30 percent over the last 5 years (1990 to 1995), although farm support as a percent of total budget expenditures is falling. Appropriations for the cereals sector in 1995 are 2.5 times higher than 5 years ago (when the set-aside program was implemented). Over 70 percent of 1995 cereal appropriations is allocated to area payments. The set-aside program is designed to reduce surplus production while maintaining farm income. Set-aside appropriations for 1995 are 27 times larger than in 1990 (first payments were made in 1989). Export refunds fell 47 percent over the same period as surplus stocks began to fall. In the meat sector, intervention stocks have fallen over the last 5 years and direct headage payments have increased in response to lower intervention prices and expansion of the direct support program. CENTRAL AND EASTERN EUROPE Increasing Barriers to U.S. Exports U.S. exports to Central and Eastern Europe (Bulgaria, Czech Republic, Slovakia, Hungary, Poland, and Romania) in fiscal 1995 are projected to decline slightly from the previous year. Oilseed exports are expected to rise significantly, with the principal customers being Romania and the Czech and Slovak Republics. However, exports of animal products and grains, which accounted for most U.S. exports in fiscal 1994, are projected to decline. Grain exports are down because of higher regional output. The outlook for U.S. animal product exports is clouded by increasingly protectionist policies in the Central and Eastern European countries (CEEs). Poultry exports, which account for the bulk of animal product exports, have been particularly affected. Poultry exports to Poland during January-April 1995 are down 31 percent from a year earlier because of Poland's introduction of variable levies on poultry meat. Under pressure from domestic producers, Romania imposed import surcharges on poultry, which effectively raised the minimum import price to $2,515 per metric ton. As a result, January-April 1995 poultry exports to Romania plunged 53 percent from a year earlier. Macroeconomic Outlook Improves CEE economies all returned to positive growth in 1994. GDP growth ranged from 1 percent in Bulgaria to 4 percent in Poland. The agricultural sectors all saw positive growth, as well; the exception was Poland, where agricultural output fell 10 percent due to an exceedingly hot, dry summer. However, growth registered in the other countries was from an extremely low level in 1993, and agricultural output is still well below the levels of the late 1980s. The outlook for 1995 is for continued positive growth overall, but still sluggish increases in agricultural output. Bulgaria is a marked exception to the generally positive trends noted in the other five countries. While Bulgaria achieved small positive GDP growth, inflation accelerated to 120 percent, compared with 80 percent in 1993, and its currency, the lev, lost close to half its value during 1994. Agriculture continues to suffer severe disruptions caused by the prolonged confusion surrounding land restitution. Problems in agriculture are exacerbated by government policies which, in the name of food security, tend to tax producers. Elsewhere, however, the positive macroeconomic indicators mask the fact that much of the population of the region has still not seen a return to its former standard of living. Unemployment hovers around 12 percent or higher in many of the countries and many people work two jobs. Food prices, after their initial surge in the early 1990's, have largely stabilized, except in Poland, where drought-reduced supplies have pushed up prices. Throughout the region, however, people spend 60 percent or more of their income on food. The resulting discontent has found expression in the election of the former Socialists in all but the Czech Republic. There is also a pronounced trend towards increasing intervention in agriculture. Wheat Production Recovers: A Mixed Blessing CEE wheat production, which suffered from 2 years of drought-reduced yields, recovered significantly in 1994/95, and many of the CEEs will realize even larger production in 1995/96. Overall wheat production in the CEE reached 28 million tons in 1994, up from 15 million a year earlier. Production in the region as a whole will be close to that level in 1995, with significant increases in the other five countries offsetting sharp declines expected in Bulgaria. Particularly sharp increases are expected in Romania and Poland. In all cases, the increases are a result of more favorable weather. Area planted has increased only slightly, and input use is still sharply reduced from pre-1990 levels. However, improved prospects for wheat output are not entirely good news for the region. Domestic demand is still flat: livestock inventories are just beginning to recover in some countries, but it will be another year or two before this leads to increased feed demand. The CEEs are thus faced with a growing surplus. The CEEs together are currently projected to export 2.3 million tons in 1995/96. Romania alone is hoping to export 1.1 million tons. Even if these exports are fully realized in 1995/96, ending stocks will be in excess of 4 million tons. And there are signs that the CEEs may have difficulties finding markets. The build-up in stocks will place severe downward pressure on domestic prices, which will lead to increasing pressure for government intervention. Most CEE governments have by now established minimum prices for wheat. In recent years, because of reduced production, market prices in many of the countries have been higher than the minimum, thus limiting the need for significant budgetary outlays to support the minimum price. However, if market prices fall significantly this year, the CEE governments will face some difficult choices. Of all the CEEs, Romania is facing the most critical wheat surplus problem. In 1994 Romania, out of exaggerated concern for wheat supplies, set a minimum price that was above world levels and imposed export controls. High support prices and good weather led to an increase in output from 5.3 million tons in 1993/94 to 6.2 million in 1994/95. A further increase is expected in 1995/96. Belatedly, Romanian officials opened a generous export quota for wheat and are actively seeking markets for over 1 million tons. But domestic prices are so high that Romanian experts estimate that such quantities can be exported without subsidies only if the world price rises to $150 per ton or higher. Ironically, the worsening outlook for the 1995 U.S. wheat crop may prove the salvation for CEE grain exporters. Reduced U.S. production could raise world prices to a level where the CEEs could export profitably. Livestock Sectors Begin To Recover CEE livestock sectors were hit much harder by the transition than the crop sectors. Meat and dairy products were heavily subsidized under the Communists, and the removal of those subsidies led to an abrupt drop in demand and severe dislocations in the livestock sector. There were sharp declines in all categories, but cattle herds were the most severely affected, falling by half between 1989 and 1995. The sector began to show signs of stabilizing in 1995. Hungary and Poland posted slight increases in hog numbers; Hungary and Slovakia realized increases in poultry. Cattle numbers are up slightly and are expected to increase further in 1995. The declines in Romania have slowed greatly, and there should be slight increases in all categories by January 1996. Only Bulgaria continues to see a precipitous decline in all categories, but particularly in cattle. Cattle numbers in January 1995 were one third the level of 1991. Printed copies of Europe Update will be available in about a week. For further information, contact Mary Anne Normile, Mary Lisa Madell, Liz Jones, Nancy Cochrane, or Victoria Chomo 202-219-0774. ------------------------------------------ Table 1--EU Grain Production 1995/96 1/ 1994/95 2/ ----Million tons---- Wheat 88.17 84.96 Corn 29.59 28.30 Coarse grains 89.90 86.61 ------------------------------------------ 1/ Projected. 2/ Estimated. END-END-END