EU to free up set-aside land to ease cereal prices

Mariann Fischer Boel, Commissioner for Agriculture and Rural Development, recently announced her intention to submit to the Commission a proposal to set at 0 % the obligatory set-aside rate for autumn 2007 and spring 2008 sowings, in response to the increasingly tight situation on the cereals market.

In the EU-27, a lower than expected harvest in 2006 (265,5 million tons) has led to tightening supplies at the end of marketing year 2006/2007 and to current historically high prices. Intervention stocks have shrunk considerably, from 14 million tonnes at the beginning of 2006/2007 to 2.5 million tons now, mainly composed of maize held in Hungary. This year, initial results of the barley and wheat harvests are moderate, except in Spain, and the wet weather continues to disrupt or delay the harvests in western Member States.

The proposal should be seen as an answer to the present tight market situation covering autumn 2007 and spring 2008 sowings. Farmers can still continue to set-aside voluntarily a part of their arable area. This initiative should not be seen as an attempt to pre-empt the 2008 Health Check of the Common Agricultural Policy. In that context a review of the cereals policy will take place, including the issue of set-aside. - Mariann Fischer Boel, EU Commissioner for Agriculture and Rural Development

EU farmers currently set aside about 4 million hectares — or close to 8 percent of arable land — under a mandatory system set up in the early 1990s to eliminate a glut of E.U. grain supplies.

US corn ethanol snowball effect
At global level, closing stocks in 2007/2008 are expected to fall to their lowest level in 28 years, at 111 million tons, including only 31 million tons in the five major exporters. Exceptionally high prices are likely to persist due to a combination of bad harvests in important cereal producing countries as well as growing demand for cereals and in particular maize for the production of bio-ethanol. In particular the strong development of the ethanol industry in the United States is having a snowball effect on the price of other cereals.

According to Commission estimates, a 0 % set-aside rate could encourage European Union farmers to produce an additional quantity of about 10 to 17 million tons in 2008, which could contribute to easing market tension:
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The proposal will concern only autumn 2007 and spring 2008 sowings. A decision on a permanent basis would require a global grain policy review and an analysis on how and by which means we can address the positive environmental side effects of set aside, which will be conducted during the CAP health-check review.

Background
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 one ha of 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 and Cyprus). In the EU, the current area under obligatory set-aside amounts to 3.8 million hectares.

Setting the set-aside rate at zero does not oblige farmers to cultivate their lands. They can continue to set them aside on a voluntary basis and to apply environmental schemes. Cross-compliance applies on all arable lands.

Biofuels minor impact on EU food prices
According to Jean-Francois Loiseau of Passion Cereales, a French trade association, the establishment of biofuels will only mobilise five per cent of agricultural surfaces in Europe.

Increased cereal prices have in large part been a result of growing demand from Asian giants China and India, along with droughts in Australia and eastern Europe, two major cereal producing regions, says Loiseau.

But compared with countries such as Mexico, where the price of corn determines in large part the cost of staple foods like tortillas, in Europe cereal prices weigh little in the final cost of items such as French bread or Italian pasta.

According to Loek Boonekamp of the Organisation for Economic Co-operation and Development (OECD), an increase of 20 per cent in the price of basic agricultural products results only in a rise of 1.0 per cent on store shelves.


Reference:
European Commission: Cereals: Proposal to set at zero the set-aside rate for autumn 2007 and spring 2008 sowings - July 16, 2007.

Herald-Sun: EU to free up land for biofuel crops - July 29, 2007.