Situation and Outlook for Tillage 2002/03

P.W. Kelly and F. Thorne

During the crop year 2001/02 factors at both international and domestic levels that had been developing for several years eventually came to a head. Internationally, developments in international trade affected the Irish cereal price. On the domestic front, area aid claims increased, resulting in area aid for forage maize being reduced.

The weather during the Autumn of 2001 provided good conditions for sowing of cereals. But 2002 had high rainfall in April, May, June and July. This provided poor conditions for crop development and led to disease problems on the growing crop, which increased costs and reduced yields.

International trade developments

There has been concern among Irish cereal producers during 2002 about the decline in grain prices since 2001. A focus of this concern has been the increased level of imports of feed grain in particular to the EU, which has in turn affected the Irish market. A brief explanation may clarify the reasons for these increased imports and their legitimacy or otherwise.

The increased imports of cereals, particularly feed wheat into the EU during the 2000/01 and 2001/02 seasons has been due to two reasons, neither of which are particularly connected. The first is the reduction of import duties on imported grain. The second is the increase in grain production in the countries of the Former Soviet Union.

Reduction of import duties on imported grain

The level of import duty on wheat of all types into the EU in October 2002, was zero. The explanation for this is given in Appendix 1. Features to note are that the reasons that the duty was zero were the fact that it is calculated based on US prices and consequently the level of duty depends on the price level in the USA and the strength of the US dollar relative to the Euro. In recent years, US wheat prices have been relatively high due to local supply conditions and the US dollar has been `strong' relative to the Euro. This decreased the level of duty dramatically.

At the same time as this was happening, the low cost (in dollar and Euro terms) wheat producing countries of the Former Soviet Union, (FSU) increased production to the extent that exporting became feasible. The EU was a relatively close market on which there were no duties and so trade took place. As the duty is calculated based on US markets, the price in the FSU has no bearing on it.

The levels of import duty in selected months of 2000, 2001 and 2002 are shown in Table 5.1.

Table 5.1: Duty on wheat imported into the EU, January, June and October each year 2000 to 2002 (€ per tonne)
	Quality
	`High'	`Medium'	`Low'
January 2000	24.23	68.89	81.70
June 2000	20.97	55.50	72.10
October 2000	0	0	28.01
January 2001	0	14.23	40.07
June 2001	0	13.2	49.03
October 2001	0	2.85	14.2
January 2002	0	1.34	0.27
June 2002	0	8.45	23.91
October 2002	0	0	0

Source: Cereals Association of Ireland, Market Intelligence Bulletin for relevant month.

Increase in grain production and exports in the Former Soviet Union

At the same time as the duty on wheat imports was reducing, the countries of the Former Soviet Union, particularly Russia and the Ukraine had, for a variety of reasons, been able to increase production and in particular increase the amount of wheat available for export. This is shown in Table 5.2.

Table 5.2. Wheat production and net exports (exports less imports) from the Russian Federation, the Ukraine and Kazakhstan combined, 1992 to 2002 (`000) tonnes
Year	Production	Net exports
1992	83963	-9278
1993	76990	1416
1994	55009	1846
1995	52863	272
1996	56150	1608
1997	71554	2794
1998	46637	6059
1999	55785	3445
2000	53747	2242
2001	80900	9685
2002¹	69800	n.a.

Note¹: Estimated
Source: FAO

It is expected, but not certain, that the arrangements for protecting the EU grain market from imports will be changed in 2003.

Domestic developments

National base area claim

The base area claims by crop, including set-aside are shown in Table 5.3

Table 5.3: National base area claim, by crop 1998 to 2002 (ha)
	1998	1999	2000	2001	2002¹
Cereals	290,864	276,700	284,498	284,297	293,814
Oilseeds	6,478	2,437	1,530	1,247	1,067
Proteins	4,445	2,781	1,583	2,987	2,239
Maize	5,058	8,079	12,615	17,591	17,096
Linseed	5,148	8,014	2,567	1,233	391
Total	311,993	298,011	302,793	307,355	314,607
Set-aside	20,044	32,563	29,693	36,626	34,160
Grand total	332,037	330,574	332,486	343,981	348,767

Source: DAF
¹Provisional

Table 5.3 shows that after increasing since 1998 the area claimed for maize payments declined slightly. However, the area claimed for cereals increased by 9,517 ha. Because of an arrangement made to `ring fence' the aid claim for maize, (which is only allowed 200ha of the National Base Area (NBA) of 345,500ha plus any shortfall arising from under utilisation of the NBA by other crops), all the area aid payment deduction, including set-aside, is applied to maize. This will reduce the maize payment from €365.40 per ha in 2001 to €157.56 per ha in 2002, a reduction of €207.84 or 56 per cent.

Other data not shown in Table 5.3 shows that the area of maize grown in the country increased even though the area for which arable area aid was claimed declined. As it is a forage crop, maize can be entered as forage area for the beef special premia, suckler premia and ewe premia. It does not count for extensification claims. These claims for forage area are set against the National Base Area as are claims for other cereals used for forage.

Crop area

Estimates of crop area estimated from seed sales, show that the areas of Winter wheat and Winter barley increased, probably as a result of the good planting conditions in Autumn 2001. The areas of Spring wheat and Spring oats correspondingly declined. The area of Winter barley, (a minor crop) was unchanged. The estimated area of Winter wheat in 2002 was estimated as 90,000 ha, (+ 41,000 ha from 2001). The areas of the other cereals were Spring wheat 20,000ha, (-15,000 ha), Winter barley, 20,000ha, (no change), Spring barley, 150,000ha, (-12,000ha), Winter oats, 12,000ha, (+6,000ha) and Spring oats, 6,000ha, (-6,000ha). All the other crops occupied 25,000 ha or less.

Yields and quality

A comparison of estimates of yields for the harvests of 2000, 2001 and 2002 is shown in Table 5.4.

Table 5.4: Estimated cereal yields, 2000, 2001 and 2002. (Tonnes per ha)
	2000	2001	2002
Winter barley	8.3	8.0	6.5
Winter oats	8.4	8.0	8.1
Winter wheat	10.0	9.8	8.4
Spring barley	7.0	6.8	5.2
Spring oats	7.0	6.7	6.2
Spring wheat	8.6	8.1	7.5

Source: Teagasc Harvest Reports.

Yields for 2002 reflected the difficult growing season, particularly the very wet weather in April, May and June 2002. Yields of all cereals except Winter oats declined by between 1.6 (Spring barley) and 0.5 (Spring oats) tonnes per ha.

Overall cereal quality in 2002 was `satisfactory' but not as good as in 2002. The good conditions at harvest contributed to this. Barley qualities were assessed as "moderate", (Winter) and "good" (Spring). Both Winter and Spring wheat were assessed as "acceptable". Winter oat quality was "acceptable" and Spring oats were "very good" (Teagasc 2002).

Although the yield and quality of grain were generally worse in 2002 than in 2001, straw yields and quality were better. The level of demand for barley straw remained at 2001 levels but the demand for wheat straw declined somewhat. This kept the price of barley straw at about its 2001 level but the price of wheat straw, for mushroom compost, declined.

Cereal production

Production of cereals has been estimated by combining data for yield and area harvested.

Table 5.5: Estimated cereal production in 2001 and 2002, (000 tonnes)
	2001	2002	Change (%)
Wheat	763	906	+19
Barley	1,260	910	-28
Oats	127	134	+6
Total	2,149	1,950	-9

Table 5.5 shows that overall cereal production declined in 2002 from its 2001 level. This was due to reduced yields due to poor weather conditions during the growing period of the crop. The increase in area of high yielding winter wheat was not sufficient to offset the effects of the poor Spring and Summer weather.

Prices

Cereal prices in 2002 were below those prevailing in 2001. This was due largely to the increased level of imports as already explained and the generally good yields elsewhere in Europe, especially France, which drives the EU cereal market. In Autumn 2002, feed barley at about 20 per cent moisture was fetching about €90 per tonne, compared with €97 per tonne in 2001. The largest price decline was for feed wheat; the price of both Winter and Spring varieties fell by about 17 per cent or about €20 per tonne. The price of oats also declined significantly, by about €18 per tonne or 16 per cent.

Area aid payments

Area Aid and Set-Aside Payments remain unchanged in the 2001-02 cereals marketing year and will continue at their present rate until the `Agenda 2000' changes finishes in 2006. This is unless the radical changes outlined in the `Mid-Term Review' of the CAP and the `Agenda 2000' are implemented. At the time of writing, (November 2002), the outcome of the `Mid-Term Review' is not decided.

Gross margins

Trends in gross margins for the main tillage crops between 2001 and 2003 are shown in Table 5.6.

Table 5.6: Trends in gross margins for the main tillage crops 2001 to 2003 (€ per ha)
	2001	2002¹	2003²
Winter wheat	951	718	798
Winter barley	746	529	620
Winter oats	667	630	589
Spring wheat	904	652	694
Malting barley	712	562	671
Spring feeding barley	623	456	548
Spring oats	717	713	616
Sugar beet	1137	670	1011
Potatoes	3366	5888	4038

¹Estimated, ²Forecast

The estimated gross margins of all major crops, except potatoes, declined in 2002. A combination of reduced yields, reduced prices and increased costs over 2001 brought this about. The gross margins forecast for 2003 for all the cereal crops, except winter and spring oats, show an increase on 2002. The relatively high yields experienced in 2002 for oats are not forecast for 2003.

The assumptions for the 2003 forecasts are that five year rolling average yields are achieved and cereal prices rise slightly, by about five per cent due to reduced market supplies in Europe and the longer term rise in world prices. The effect of any revision of the tariff regime used to protect the EU cereal market remains to be seen. Fertiliser prices are projected to remain unchanged, seed costs are projected to fall roughly in line with cereal prices and all other cost items were projected to rise at the projected rate of retail price inflation of about four per cent.

Sugar beet gross margin in 2002 was less than in 2001 as a result of a yield decrease of about 18 per cent. Yields in 2002 were about 38 tonnes per ha (derived from National Farm Survey Results for 2001) and sugar content was about 17 per cent. Sugar beet growers should be warned at this stage that major changes in the EU sugar regime are likely in the next two to three years as a result of new international trading arrangements for sugar.

The gross margin for potatoes is included in this analysis but is always subject to great uncertainty when expressed on a calendar year basis, as the potato harvest is spread from Autumn in one year to early Spring in the next. For 2003 the gross margin is forecast to fall from its very high level of 2002.

References

Cereals Association of Ireland. Market Intelligence Bulletin for relevant month.

DAF. (2002). Personal communication.

FAO. (2002) www.fao.org

Teagasc. (2002) Harvest Report No 1 of 05/09/02 and others. Available at http://www.tnet.teagasc.ie/ and also www.client.teagasc.ie

Appendix I

Method of calculation of EU import duties on cereals

The method of calculating import duties on cereals into the EU was agreed as part of the Uruguay Round of WTO negotiations. At the time the system was formulated, the main source of grain imports into the EU was the USA. The system of calculation of the tariff was based on this fact. The tariff rate is based on the difference between the price of imported grain at the port of entry into the EU, (usually Rotterdam) and the "Minimum Import Price", (MIP). The MIP is measured in Euro and is calculated by multiplying the prevailing (ie taking account of monthly increments) Intervention Price by 1.55.

For the purposes of the tariff calculation, the price of imported grain at the point of entry to the EU is based on three categories of grain: `high', (14% protein); `medium'; (11.5% protein) and `low', (a catch-all grade with no lower limit on protein).

The US price that is used in the calculation is not based directly on the price at the US port but on the futures market price on an exchange such as the Chicago Board of Trade. In the case of feed wheat this is for US No 2 Soft Red Winter (SRW) wheat, which is the type of wheat that most closely resembles EU produced feed wheat. The futures price is then adjusted by a `fob premium' which is the difference between the `near month' futures price and the prevailing US Gulf price. It represents the balance of farm supplies, (which affects the futures price) and export demand, (which affects the Gulf price).

To arrive at a delivered (cif) EU price the process is:

EU cif price = US futures price (quoted in US dollars) + fob premium (also in US dollars)+ freight charge (quoted in US dollars). So the EU cif price is initially based on prices measured in US dollars. The EU cif price has to be converted into Euro at the prevailing rate of exchange and the duty is estimated by taking the difference between a `two week average EU cif price', (to remove short term fluctuations) and the MIP. In practice a `franchise' of plus or minus five Euro is applied to the duty figure that is found and the duty only changes in steps, (again to minimise short term fluctuations). Two important points arise from this process. The first is that it is based solely on US quotations. The second is that since the price quotations and transport charges are based on dollars and the MIP is based on Euro, the exchange rate of the dollar to the Euro has an important bearing on the level of duty. A `strong' dollar versus the Euro, will, all other things being equal, lower the duty payable on grain imports.

In 1995 when the system was introduced, a 10 Euro per tonne `premium', or extra charge was levied on grain imports from Black Sea and Mediterranean ports, to take account of the fact that freight charges to the EU from these countries would be less than from the USA. In November 2001 because of increased freight charges from Black Sea countries largely due to extra insurance premiums, this extra duty was removed. Removal of this premium would have no effect when the cif landed EU price of imports from the USA was more than ten dollars below the MIP and be worth less than 10 Euro if the difference was between one and ten dollars. Since 2000, the difference has often been of the order of 15 Euro or more.

Over the period since 2000, the US dollar has tended to increase in value, (`strengthen') against the Euro. The US export price of grain has also tended to increase, even when measured in dollars. The EU intervention price has also decreased as a result of the application of the Agenda 2000 reforms. These three items alone would decrease the duty paid on imported grain.