29 March 2002

EU grain tactics attacked

By Robert Harris

GRAIN traders are questioning Brussels market management after old and new crop wheat prices dropped back to recent lows that threaten to suck in cheap Russian wheat.

Although the EU commission says it might review the way it calculates import duties and export subsidies given the effect of cheap Black Sea grain on the internal market, the trade suspects these may not go far enough.

Lars Hoelgaard, director of cereals policy at the commission, was reported by Dow Jones last Friday as saying that the EU would not reinstate the k10/t import duty surcharge on cheap wheat imports, mainly from eastern Europe. This was removed last November, which helped trigger a surge in imports.

And, earlier in the week, agricultural commissioner Franz Fischler described the levy cuts as justified and in line with WTO commitments. This suggests growers will have to get used to imports from eastern and central European countries, says Dalgetys Trevor Harriman.

The sale of 300,000t of wheat to Egypt by the US last week also added to the bearish sentiment.

In France, the EUs biggest grain exporter, markets reacted quickly. On Monday, new crop values dropped k1.5-2/t, and old crop up to half as much again.

UK prices followed, with old crop wheat futures for May trading £2/t down during the day, while new crop (November) fell 75p/t below Fridays levels. That equates to an ex-farm price of £65-£66/t for old crop feed wheat, and £60-£61/t for November, says Mr Harriman.

"We are facing big EU and world crops and good Black Sea prospects, and the market believes the commission has downplayed suggestions that it will take a new look at changing levy calculations. It will need something more than market influences to shift things now."

Richard Whitlock of Banks Cargill Agriculture describes the cereals market as a horror story. "This is the scariest situation I have faced in 25 years of grain trading. The commission seems not to care. With the production costs we have, I do not see how UK and other EU farmers can compete with eastern European growers or those in the US who are given a fix as soon as they need it. Russian wheat has been offered this week into Scotland at the lowest old crop price we can match."

He believes the commission is pushing cereal growers down the world trade route so it can redirect funding towards European expansion. "But we cant bring cost structures into line so soon. If this continues, EU cereal production could face meltdown."

But the Home-Grown Cereals Authoritys Gerald Mason says the commission has admitted it could examine reference rate calculations, given that benchmark US prices have not reflected world prices this season.

"Generally, import duties have fallen because of lower intervention prices, the rise in the world wheat market and a weak k. Meanwhile, giving export refunds to compete with Black Sea wheat would have meant seriously undercutting US prices. Changing the way import duties are calculated or pricing export refunds below US wheat could both be contrary to world trade obligations. As a result, changes may be limited."

The main issue is the large global crop looming, he adds. The latest International Grains Council forecast puts 2002 global wheat production at 597m, 18m tonnes higher than 2001 and slightly above current consumption.

"These requests for change are coming because people are very nervous, about next season. Current forward prices are back to levels seen two years ago. But the intervention base price has fallen 15%, and intervention qualities have been tightened considerably since then. Looking for a political answer is fine, but dont ignore the scenario that next season could be an extremely competitive environment." &#42

Growers need time to adapt to world conditions, says Richard Whitlock, who believes everyone has been caught by the change.