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Farm commodity outlook will lead to cautious CAP and Farm Bill decisions

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Prospects for increased global production, reduced demand and lower prices on world agricultural commodity markets are likely to contribute to a cautious approach to new farm policy measures on both side of the Atlantic. 

Policy reviews are scheduled by both Brussels and Washington during the next three years. During this period prices for the major agricultural products are likely to slip well below the historically high levels of the last ten years.

The pressure will be on to limit spending on the support of markets and the payment of additional support subsidies. Production in major agricultural exporting countries – including the European Union and the United States – is unlikely to abate in the face of reduced demand from major importing countries.

The dairy industry in particular, is likely to suffer from cyclical overproduction and lower prices.

The latest predictions from the Organisation for Economic Cooperation and Development (OECD) indicate a much more ‘normal’ state of world markets than during the last ten years.

In its Agricultural Outlook for 2017-26 the Organisation says that there will have been “record production and abundant stocks of most commodities in 2016, keeping prices well below the peaks experienced in the last decade”. A trend likely to continue well into the projection period, it warns.

It points out that average prices of cereals, meats and dairy products are continuing to decline, with oilseeds and other proteins following the downward trend over the 2018-26 period. More importantly, demand growth can be expected to slow considerably. This is because major importers are likely to be reducing their activities in global markets.

“The primary sources of growth in the last decade were first the People’s Republic of China, says the OECD, “where rising meat and fish demand caused the consumption of feed to grow by almost 6% per year, and second the global biofuel sector, where the use of feedstock inputs grew by almost 8% per year”.

The tendency of governments and others, stimulated by fears of continuing shortages, to rebuild grains stocks also took an estimated 230 million tonnes out of the market over the last decade, raising demand to abnormal levels.

“These recent drivers are not anticipated to support markets in the same way over the medium term,” warns the OECD,” and no other sources to replace them are foreseen”.

Subsidy cut backs?

With production expected to continue along current levels in both the US and the EU, policy makers will therefore be eschewing any policies tending to further increase output and to limit state spending on market support measures.

Direct subsidisation deemed to maintain higher output levels are also likely to be cut back. In 2018, the US will be formulating its new Farm Bill for the following five years. In Europe the EU will be gearing up for further modification of its Common Agricultural Policy.

In both the US and the EU there will be greater pressure than in the past to curb spending on agriculture. President Donald Trump has already made it clear that he will oppose any measure in the Farm Bill which will increase expenditure. There is likely to be an attempt by the Trump administration to limit Food aid programmes, which form the major expenditure section of current agri-food legislation.

In the EU, the gradual withdrawal of major budget contributor the UK from EU financing, perhaps partically offset by increased member state contributions to the EU budget, will likely force a more stringent approach by legislators to the overhaul of the CAP, scheduled for the post-2018 period.

According to the USDA’s current Agricultural Projections to 2026, recent reductions in crop prices have led to higher direct government payments to farmers through the 2015 to 2017 period, mostly reflecting payments under the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) programmes of the 2014 Farm Act.

Payments under the CRP, ARC, and PLC programmes are likely to be the largest Government payments to the US agricultural sector over the projection period. Prices for most crops have fallen from the high levels of several years ago as US and global production responded to the high prices.

A stronger dollar is expected to depress agricultural exports over the projection period as it increases the relative price of US exports. The strong currency disadvantage will hit bulk commodities, principally grains, the hardest.

Lower corn (maize) prices and increasing production suggest that more corn will be used for feed and residual use, helping to fuel increasing meat production. Ethanol production is also expected to fall. The share of maize production expected to be used for ethanol production will fall over the projection period.

World maize prices and demand will be heavily influenced by Chinese Government decisions. The end of its support policy and the release of stocks onto the market will effectively divert corn supplies onto the world market in the immediate future.

EU exports

Potential growth in EU grain and dairy exports are also affected by exchange rates, which have a direct effect on competitiveness.

In the short term (up to 2020), it is generally expected that the exchange rate between the euro and the US dollar will remain between 1.10 and 1.20. The exchange rate with the currencies of the EU’s main competitors, such as the Brazilian real and the New Zealand dollar, is likely to depreciate in the short term, hampering the development of EU exports

At close to 300 million tonnes, total EU cereal production for 2017/2018 was 1.5% higher than the previous marketing year. Significantly, increases in yields in the north-western part of Europe compensated for the reduction in the dry south.

Common wheat prices are assumed by the European Commission in its medium term EU Agricultural Outlook report for 2017-2030 to remain above coarse grain prices over the outlook period.

However, from 2019 they are expected to be affected by an expected re-appreciation of the euro against the US dollar.

Common wheat and maize production are expected to further expand marginally at the expense of the other cereals. The main driver for soft wheat demand is its competitiveness on the world market. Corn yield is expected to continue stronger growth than other cereals, due to further yield increase, especially in the EU-N13, given the considerable gap with the EU-15. The barley area is projected to be relatively stable. Trade will however be influenced by the absence of Chinese demand.

China also remains the major influence on the demand for bulk dairy products, absorbing around an estimated 15% of world trade by 2026, according to the EU Commission. However, Chinese imports of Whole Milk Powder are not projected to reach again the exceptional 2014 level of 670 000 tonnes.

In contrast, China is expected to increase imports of Skimmed Milk Powder (SMP) for its domestic production of dairy products and whey, mainly for infant formula.

Imports of added value products such as cheese, butter, UHT milk and liquid cream are also expected to increase. China is the leading customer of the EU in volume and value when accounting for infant formula.

The current high level of the EU’s public SMP stock, which is around 370,000 tonnes, weighs on the market and may limit the price upturn in the immediate future, the Commission warns. Even though a large share of milk is channelled into cheese, the EU price is strongly correlated to changes in butter and SMP prices on the European and world markets.

Pressure to maintain support

Overall, the world markets for the major agricultural products remain in a highly volatile state.

It is therefore likely that governments on both sides of the Atlantic will be under pressure from their farm lobbies to maintain all available support and protective measures.

It is likely that the EU will, faced with a 12-15% cut in available funds resulting from Brexit, be looking for serious savings in its new policy for the 2020-25 Multi-Annual Financial Framework.

The 30% of the €50 billion a year CAP still spends on market support will be the major target for cuts. Likewise, in the United States the administration will be seeking limits on overall spending on the 2108 Farm Bill.

Given the Republican control in both Houses of Congress, however, the cuts are more likely to be made in the 70% spent on domestic Food Assistance than on farmer support.

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