24 May 2002

Grain export aid returns

By Olivia Cooper

GRAIN export subsidies have reappeared after a years absence, raising hopes that Brussels is preparing to take a more aggressive stance on the world market.

Grain market managers granted the subsidies on 234,000t of wheat and 32,000t of barley at a maximum of k5/t last week, effectively making EU wheat £3/t cheaper to Third country customers.

Many traders saw the move as retaliation for the recently passed US Farm Bill, which the European Commission condemned as a trade-distorting, hidden support payment. The bill will pay out $180bn (£124bn) to farmers over the next decade through various support measures.

US prices dipped sharply in reaction to the news from Brussels even though the commission denied the retaliation rumours. "This is a pure market management tool," agriculture spokesman Gregor Kreuzhuber told farmers weekly. "It is definitely not a response to the US Farm Bill. Our policy continues to be that we only grant refunds when they are necessary."

But although EU wheat prices have been cheaper than US values all season they continue to be undercut by Black Sea grain. The commission has been under considerable pressure to revamp the way it calculates import duties to take account of these cheap supplies, and it seems it is now changing its stance on export refunds too.

"There is a certain concern that our import protection mechanism does not work any more," said Mr Kreuzhuber. This, combined with an expected 15m tonne hike in EU wheat output this coming harvest, leaves the intervention system open to a massive influx of stocks. Export refunds might be necessary to prevent this, he suggested.

Gerald Mason, chief economist for the Home-Grown Cereals Authority, welcomed the move. "It is pleasing that the EU has shown an awareness of the competition, signalling a new attitude to the cereal market. But the reality is that the refunds go only a little way to bridging the gap between forward EU prices and low Ukraine prices."

UK wheat is worth about k106/t (£67/t) on a boat in November, compared with a Ukrainian value of just k78/t (£49/t). And, although French old crop wheat is trading at and below intervention levels (92,000t has now been offered into stores), new crop values are currently k4-10/t (£2.50-6.30/t) above that benchmark, making significant new season refunds unlikely, said Mr Mason.

Despite the news, UK old crop prices continue to weaken, sinking to new contract lows as the small surplus sees sellers outnumbering buyers. Values fell about £4/t over the week to about £60/t ex-farm, while new crop prices dropped £1/t in sympathy to £55/t ex-farm at harvest.

Wednesday saw DEFRA increase its end-of-season carryout by 325,000t, which, with a 2m tonne carryover in France and more selling by UK farmers, added to the negative tone. "This week has seen the first significant tonnages being sold on the forward markets for some time," said Glencore Grains Robert Kerr.

But Ukrainian and other Black Sea crops are reportedly suffering from dry weather. This could reduce their influence on global markets next season. Although there are no significant losses so far, yields can be very variable and crop development should be closely monitored, said Mr Mason. &#42

Grain export refunds have returned after a years absence. Despite the timing, Brussels denies the decision was triggered by the US Farm Bill.