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News : European Last Updated: Dec 19th, 2007 - 13:17:15


European Union scraps limits on grain production in response to wheat price crisis; EU biofuel target of 10% of energy use by 2020 seen as more threat than benefit
By Finfacts Team
Sep 14, 2007, 06:40

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The European Union reacted on Thursday to surging grain prices on world markets by scrapping limits on grain production imposed 15 years ago.

The European Commission said it would suspend for at least a year a rule requiring farmers to set aside 10 per cent of their land. Agriculture ministers from the 27-member bloc and the European parliament are expected to approve the move by the end of the month.

Intervention stocks have shrunk from 14 million tonnes at the beginning of 2006/2007 to around 1 million tonnes now in September, mainly composed of maize held in Hungary. Reducing the set-aside rate from 10% to 0% is expected to increase output by at least 10 million tonnes. The future of the set-aside system will form part of the debate to be kicked off by the Communication on the CAP 'Health Check' in November. This will also address the issue of how to retain the environmental benefits which set-aside has brought. Setting the rate at zero does not oblige farmers to cultivate all their land. They can continue with voluntary set-aside and apply environmental schemes.

Mariann Fischer Boel, Commissioner for Agriculture and Rural Development, said: "Cereals prices have hit historically high levels as the supply situation has grown increasingly tight. A poor 2008 harvest combined with 10% set-aside would expose the internal market to potentially serious risks. Setting the rate at zero should add at least 10 million tonnes to EU output and help to ease the market situation. Looking further ahead, in the 'Health Check', I want to take a good look at whether set-aside is still an appropriate tool. But I also want to ensure that we retain the environmental benefits it has brought."

The cereals market is currently characterised by historically high prices. The 2006 crop was lower than expected, at 266 million tons, due to adverse meteorological conditions. Intervention stocks have considerably tightened during the campaign 2006/2007, from 14 million tonnes to around 1 million tonnes. The estimate of private stocks varies, but all analysts agree they significantly decreased in 2006/2007.

The 2007 cereals crop is now estimated below last year's level because of dry and unusually hot weather in April followed by adverse summer weather in western Member States and drought and heat-waves in the Southeast of Europe.. This outlook is likely to lead to a further reduction in the EU of private cereal stocks by the end of the 2007/2008 marketing year. At global level, closing stocks in 2007/2008 are expected to fall to a historically low level, especially in the major exporting countries.

The current area under obligatory set-aside amounts to 3.8 million hectares in the EU. If the set-aside rate was set to 0 %, the effective return of land could be between 1.6 and 2.9 million hectares. Considering average trends, it is likely to bring around 10 million tonnes of grains onto the market. If farmers decide to use the maximum amount of land possible to produce cereals at the expense of other crops especially oilseeds, this quantity could reach 17 million tonnes.

Wheat prices have risen 78 per cent year-on-year in August and maize prices have risen 50 per cent, the Commission said. However, French milling wheat dropped on Thursday, with the benchmark November futures contract falling 3.1 per cent to €268 ($372, £183) a tonne.

The rising prices have become hot political topics in Italy over high pasta prices, and the French have complained at the cost of a baguette.

The Commission says that not all rises are justified. Wheat comprises only 4 per cent of the cost of a loaf of bread, it said.

World cereals output is forecast at 1.65bn tonnes in 2007, according to the International Grains Council.

Biofuels

Governments should end subsidies for biofuels, as the demand for grain for the alternative energy industry result in surging food prices and the potential destruction of natural habitats, including rain forests, the Organisation for Economic Co-operation and Development (OECD) warned last Tuesday.

Last week, the United Nations’ top agriculture official warned that developing countries risk serious social unrest triggered by rising food prices .

Jacques Diouf, Director-General of the UN’s Food and Agriculture Organisation, said that surging prices for basic food imports such as wheat, corn and milk has the “potential for social tension, leading to social reactions and eventually even political problems”.

“The current push to expand the use of biofuels is creating unsustainable tensions that will disrupt markets without generating significant environmental benefits,” say the authors of the study.

Food comprises 10-20 per cent of the household budget in the rich world compared with about 65 per cent in developing nations.

The OECD survey says biofuels would cut energy-related emissions by 3 per cent at most. This benefit would come at a huge cost, which would swiftly make them unpopular among taxpayers.

Brice Lalonde, the head of the Organisation for Economic Co-operation and Development’s round table on sustainable development, said on Wednesday that it may not be possible to hit the target using “sustainable” methods, as called for by European Union leaders in March.

Lalonde, a French former environment minister, said: “The message was to be careful and take a long hard look at the issues. Several people were very blunt in saying that you cannot ask nature to do everything. You cannot feed people and soak up carbon and protect biodiversity and fuel cars.”

“European transport ministers set the target ‘as long as it is sustainable’. That is a key sentence.”

Lalonde said that many lobbyists – not least farmers – were pushing for greater biofuel use and subsidies.

The FT reports that a spokesman for Andris Piebalgs, the EU energy commissioner, said he would publish a plan for hitting the target by the end of the year. “We are carrying out the mandate given to us by European leaders,” he said. “New technology will play a big role.”

That is a gamble, say some, as such technology is unproven. Most current biofuels use a lot of energy to break down plants. The OECD believes governments should scrap subsidies to those and fund research into second generation fuels, which use waste products such as cut grass.

Background to scrapping grain production limit

Set-aside was introduced to limit production of cereals in the EU and applied on a voluntary basis from 1988/89. After the 1992 reform, it became obligatory i.e. producers under the general scheme were required to set-aside a defined percentage of their declared areas in order to be eligible to direct payments. With the 2003 reform, they received set-aside entitlements, which give the right to a payment if they are accompanied by eligible land put into set-aside.

The rate of obligatory set-aside was initially decided every year but in 1999/2000 it was set permanently at 10 % for simplification purposes. In the new Member States that opted for the Single Area Payment Scheme (SAPS), farmers are exempted from the obligation of set-aside (Poland, Czech Republic, Slovak Republic, Hungary, Lithuania, Latvia, Estonia, Cyprus, Bulgaria and Romania).

Commissioner Fischer Boel announced on 16 July her intention to submit the present proposal. Since then the estimate for the EU cereals crop has been revised down and prices have kept rising.

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