FOREIGN COUNTRIES' POLICIES AND PROGRAMS
European Union Intervention Stocks Have Export Policy Implications
For the first time since Common Agricultural Policy (CAP) reform in 1993/94, intervention (Government) grain stocks are building as prices weakened due to record production and exports were constrained by subsidy policies. Storage facilities already hold 6.5 million tons of grain as of mid-February 1998, which is nearly five times the average at mid-February during the previous four years.
Further intervention stock buildup is likely in the remaining months of 1997/98 as farmers seek to clear their storage facilities of old crop supplies in anticipation of the new crop. French producers could be major sellers as falling prices near intervention levels, while German producers, which normally account for about two-thirds of intervention stocks, have probably completed much of their sales for this marketing year.
One key difference from the stocks of the early 1990's is their composition. Prior to CAP reform half of the stocks buildup was wheat. But under CAP reform, the exclusion of feed-quality wheat from intervention enhanced its price advantage relative to other feed grains, especially barley and rye. Consequently, relatively more wheat is being fed and, in the absence of an aggressive export program for the displaced barley and rye, those grains are now being sold into intervention stocks.
This years rising stocks are coincidental with similar market dynamics to the period of rising stocks preceding 1993/94. Once again the gap is widening between internal grain production and consumption, a new round of agricultural trade negotiations beginning next year is similar to the setting for the Uruguay Round in the early 1990's, and concerns over the cost of EU expansion are raised again with the prospect of new entrants from Eastern Europe. Thus, while some stock rebuilding might well be expected in light of the sharp 4-year drawdown, growing intervention stocks also have the potential to influence the debate over further CAP reform.
But it is one thing to view rising intervention stocks as a long-term, market-policy tool, and quite another to consider the short-term implications for export programs. Higher intervention stocks and their associated costs could, indeed, help stimulate further CAP reform, but it could also precipitate a more aggressive, early-season export program for next year after three years of passive early-season programs.
For further information please contact Jay Mitchell at (202) 720-6722.
U.S. Grain Exports to Malaysia Suffer during Currency Crisis
U.S. grain exports are feeling the effects of the currency crisis in Malaysia, as the ringgit has lost nearly 30 percent of its value against the U.S. dollar since July 1997. The corn and wheat-based industries are largely dependent on imported raw materials, and are facing substantially higher input costs. Furthermore, the governments attempts to control inflation by fixing the retail prices of broilers and wheat flour are causing these industries to face a major cost/price squeeze. Strong grain supplies in competitor countries are also working against U.S. sales, as the U.S. is facing stiff competition from China, Australia, and South America. Despite these challenges, Malaysia continues to offer opportunities for U.S. grains, and exports should rebound with economic recovery.
Selected Economic Data (1996):
Area: 329,750 sq. km. (slightly larger than New Mexico)
Land use: arable land (3%), permanent crops (10%), forest and woodland (63%), other (24%)
Major agricultural products: natural rubber, timber, palm oil, rice
Total agricultural imports (million US$): 4,159.0
Major agricultural imports: corn, wheat, raw sugar, soybeans, milled rice
U.S. share of total agricultural imports (percent): 14.4
Major agricultural exports: palm/palm kernel oil, rubber
U.S. share of total agricultural exports (percent): 4.3
Agricultural trade balance with the U.S. (million US$): 27.4
Population (million): 21.1
Population growth rate (percent): 2.5
Urban population (million): 11
Real GDP (billion US$): 56.5
GDP growth rate (percent): 8.2
GDP per capita (US$): 4,521
Inflation (CPI, percent): 3.6
% of imports: 5.2
% of exports: 17
% of GDP: 13
% of workforce: 19
General Economic Conditions:
After three decades of economic growth averaging almost 7 percent per annum, Malaysia has been undergoing an economic downturn since the Asian currency crisis began in July 1997. The ringgit lost nearly 48 percent of its value against the U.S. dollar from July 1997 to January 1998. However, it rebounded to 70 percent of its previous value by the end of February 1998. The export-oriented manufacturing sector and agricultural exports should continue their strong performance, while other sectors may face substantial adjustments. Sectors dependent on imports are enduring the greatest hardships, as they are paying substantially higher costs for inputs.
The agricultural sector is the third largest contributor to the Malaysian economy, accounting for 13 percent of the GDP and 17 percent of export earnings in 1996. The sector grew by 2.4 percent in 1996, with palm oil/palm kernel oil, rubber, and wood products as its major agricultural export commodities. Agricultural imports grew 3.2 percent in 1996, with a buoyant economy encouraging greater imports of food-related products, cotton, and wood products. The value of U.S. agricultural exports to Malaysia almost tripled from 1991 to 1996. While the county's economic problems reduced sales during 1997 and on into 1998, Malaysia will continue to offer important opportunities for American agri-business.
Outlook for U.S. Agricultural Exports:
The devaluation in the ringgit is having detrimental effects on U.S. agricultural exports to Malaysia. Furthermore, the ringgit's fall against competitors' currencies, particularly Australia and New Zealand, has not been as severe, giving them an additional margin to undercut U.S. products. Consequently, sales of many U.S. products are facing severe competition from Malaysian or other exporters' goods.
Current world market conditions for grains and soybeans are also working against U.S. sales, as the U.S. is facing strong competition from China, Australia, and South America. As a result, U.S. sales of feedstuffs are lagging well behind last year's levels. Since these products make up about 60 percent of total U.S. agricultural exports to Malaysia, this slow down will push the total export value significantly below the record set in 1996.
Despite these challenges, Malaysia offers continued opportunities for many U.S. products. Significant improvements in infrastructure will enhance the sales and distribution of imported agricultural commodities from the U.S. Although short term import demand may slacken for U.S. products, long term prospects remain solid given the basic market developed so far. The shift away from rice consumption to noodles, bread, and other wheat-based products also augurs well for increased exports of wheat. Growth in the tourism industry is expected to encourage greater imports of U.S. food for the hotel and restaurant industry, with high-quality U.S. meat and poultry products benefitting the most.
Production: There is no domestic wheat production. Malaysias wheat-based industry is dependent on imported raw materials.
Consumption: Domestic wheat consumption is expected to decline slightly in 1997/98. The Asian currency crisis has hurt Malaysias wheat-based industry, due to its dependence on imports. Even a significant drop in world wheat prices would offer little relief to importers and millers, as the Malaysian ringgit has lost nearly 30 percent of its value against the U.S. dollar. Millers are further injured by the cost/price squeeze resulting from the governments effort to stem inflation by fixing retail prices of flour and bread. Flour milling has also declined as a result of reduced demand overseas for wheat flour and noodles. Noodles account for nearly one-half of wheat use in Malaysia, while bread and biscuits account for 27 and 20 percent, respectively.
Domestic wheat prices are controlled by the Malaysian government under the Supplies Regulation Act (1974). The GOM has been faulted in the past for not adjusting domestic flour prices to reflect actual international wheat prices, causing at least temporary hardship for some of the less-integrated millers. Though the retail wheat flour price was increased in 1997, it was not enough to off-set the change in the exchange rate, thereby resulting in an effective reduction of flour prices in U.S. currency.
Trade: Total wheat imports are forecast at 1.1 million tons for 1997/98, representing a 3.5 percent drop from last year. In 1996/97, Australia captured nearly 70 percent of the Malaysian wheat market. Canada captured 16 percent of the market, while the U.S. only managed to supply 3 percent. The monopoly wheat boards in Australia and Canada can target specific markets and undercut prices of non-monopoly suppliers.
Though Australia remains the major supplier of soft wheat, the U.S. may be able to improve its market share in 1998/99, as Canada is expected to reduce its carry-over stocks this season. The U.S. wheat industrys efforts to develop wheat varieties suitable for noodles may also enable the U.S. to increase its market share in the future.
Production: Domestic corn production in Malaysia is insignificant, and is unlikely to expand in the foreseeable future.
Consumption: The corn sector has also been hard hit by the Asian currency crisis. Feed importers are extremely cautious in their purchase plans in order to avoid being caught in the volatile currency exchange fluctuations. The GOM recently allowed broiler prices for producers to increase, thereby bringing producers some relief.
Total domestic corn consumption grew by nearly 60% from 1990 to 1995. Though consumption growth has slowed since then, and will decline this year, it is likely to rebound with economic recovery.
With the need for technical assistance in the Malaysian feed and livestock sectors now diminished, the challenge to increase corn consumption lies more in the food, beverage, brewery and industrial sectors. The snack and breakfast cereal food industries had been growing quite rapidly, and this trend is expected to continue once the economy recovers. There is also some likelihood for expansion in the production of modified starches. Technical seminars to transfer technology in corn processing and corn food manufacturing would help to accelerate demand in those areas.
Trade: Corn imports are forecast at 2.2 million tons for 1997/98, which is eight percent lower than the previous year. China and Argentina are expected to capture two-thirds of the import market. U.S. market share has fallen since it reached its highest point in 1995/96, when the United States captured 65 percent of total imports.
Due to the sharp fluctuations in currency exchange rates, importers are trying to keep their stocks to a minimum to reduce exposure to risk. Chinese corn has advantages in the current situation not only in terms of price, but also with shorter shipping times, lower freight costs, smaller vessels, and smaller capital outlays. The U.S. was able to penetrate the Malaysian corn market through the development of ports with Panamax capability. However, the U.S. will not be able to resume its "Panamax advantage" until the currency markets settle. Prospects for U.S. corn are expected to improve with economic recovery and the with completion of the Panamax facilities at Westport, which favor freight rates available from U.S. ports. However, U.S. market share depends largely on the supplies and aggressiveness of China and Argentina.
There are recent reports of corn imports from Indonesia in small vessels of two thousand tons or less. In addition, Malaysian feed compounders are reported to have purchased one lot of 20-30,000 tons in order to evaluate the quality of Indonesian corn. Smaller shipments may include re-exports of Chinese and Argentine corn which is too expensive for the shrinking Indonesian market. Locally produced corn from Indonesia is priced well below the competition, and is reportedly of low quality.
Production: Total domestic rice production is forecast at 1.28 million tons (milled basis) for 1998. The area devoted to rice cultivation has been on a downtrend, as dictated by the Seventh Malaysian Plan (1996-2000). The GOM expects paddy area to decline to 400,000 hectares by the year 2000, down from 660,000 hectares in 1995. Though high production costs make self-sufficiency unrealistic, the GOM still plans to satisfy at least 65% of consumption by the year 2010.
The government is shifting its focus to varietal and yield improvements, the restructuring of farm production systems including greater mechanization, improved farm management practices, and the reduction of post-harvest losses. A pilot rice project, using U.S. technology and expertise, has been launched in Sarawak. The project aims to increase yields from the national average of 3.0 to 3.5 tons per hectare to 8 tons per hectare. If the project succeeds, the downtrend in Malaysian rice production may be reversed.
Consumption: Domestic consumption is expected to increase by 6.4 percent to 1.838 million tons in 1998, as consumers shift from wheat-based to rice-based products during the economic downturn. While retail wheat flour prices have increased twice since 1996, retail rice prices have remain unchanged since 1993.
Trade: Malaysias rice imports increased to 628,000 tons in 1997. Thailand dominated imports, with over 70 percent of the market. Vietnam captured most of the remaining market share, while the U.S. was only able to export 1,227 tons of mostly specialty medium grain. Imports are likely to decrease in 1998 as Malaysia works down its stocks to meet domestic demand.
The U.S. exports primarily Calrose rice to Malaysia, which is consumed by Japanese and Korean expatriates. However, this market may slip in 1998, as some companies retrench and send their employees home. Asian rice exporters have an advantage, due to Malaysias desire to enhance regional relationships, cheaper freight and shorter shipping times. While the opportunities for sales of U.S. rice in Malaysia are still very limited, the removal of the price ceiling on high grade rice and the incorporation of LPN may help to create a small niche market for imports of branded, packaged rice from the United States.
Based on reports from the Agricultural Affairs Office, American Embassy, Kuala Lumpur. For further information, please contact Kim Svec at (202) 720-9523
The Philippines Acting to Ease Corn Imports
The financial crisis that has gripped much of Asia has also been felt in the Philippines. The local currency (peso) has depreciated sharply against the $US (50 percent from July to December, but rebounding somewhat since), and the economy has slowed. At the same time, the country is suffering from a serious drought, which is damaging grain production. Meanwhile, feed grain demand appears still to be growing, if not at a slower pace, in spite of the slackening economy, so substantial corn imports are needed to offset drought-reduced domestic supplies. To facilitate these imports, the Government of the Philippines (GOP) is easing up on restrictions that make prohibitive the cost of foreign corn.
Back in September, 1997 the GOP announced it would allow 300,000 tons of corn to be imported at a tariff rate of 35 percent. This amount was in addition to the 155,000 ton 35 percent tariff rate quota that the Philippines was committed to under the 1994 WTO accord. But as the peso depreciated, corn imports still were not feasible, even at this reduced tariff (the out-quota tariff is 80 percent). The GOP is now considering a new measure that would allow the 300,000 tons of corn to enter duty free, to be imported by July 1, before the local crop comes on the market. The measure still requires a final approval by the President of the Republic of the Philippines. Under the plan, the National Food Authority (NFA) would, if necessary, mark up the corn that they import, or charge a fee to private importers in order to protect local corn prices which are currently running at around 6,500 to 6,700 pesos per ton (about $162 to $167 at the present exchange rate). In the meantime, wheat is being imported at a tariff rate of 10 percent, helping fill some of the vacuum.
Along with the anticipated 300,000 ton duty-free quota, the 155,000 ton WTO tariff-rate quota will also be available at the original 35 percent duty. Further strengthening of the peso, which has shown some recovery recently, could allow this quota to come into play.
Philippine corn production for 1997/98 is forecast at 4.2 million tons, down for a second consecutive year. The reduced production is partly due to drought conditions and partly to reduced area, compared with historical levels. Area planted to corn has been declining sharply since 1990. A return to higher corn area is considered unlikely because of the attractive prices prevailing for alternative crops. Inadequate storage, processing, transportation, and marketing infrastructures further constrain increased corn production.
Given the 80 percent tariff on corn imports that are outside the approved import quotas, and the weak position of the peso, the level of corn imports in 1997/98 will be governed by the GOPs administrative decisions. They have two vocal factions to contend with: there are the corn producers, who want protection for the relatively high-priced local market; then there are the corn processors and users (e.g. poultry and hog breeders) who want corn prices that are affordable. Furthermore, stocks are at very low levels.
The United States has been the major supplier of corn to the Philippines, with a two-thirds share of the market during the past three years.
Based on reports from the Office of Agricultural Affairs, American Embassy, Manilla. For further information, please contact Linda Wheeler at (202) 720-5387.
Uncertainties Plague Southern Africa Maize Situation
The status of maize in southern Africa differs from that of the rest of the world. While maize is considered primarily a feed grain in most parts of the world, it is a dietary staple in southern Africa. Yellow maize accounts for the bulk of the maize produced globally, but white maize makes up the majority of the maize produced in southern Africa. White maizes vitally important role in the daily lives of southern Africans makes its supply and demand situation a highly political issue.
Two factors are driving the maize situation and outlook in southern Africa: extreme weather conditions and market liberalization. While the weather patterns this year will only have a short-term impact, market liberalization in southern Africa shapes the future. Kenya, South Africa, Tanzania, and Zimbabwe are facing the consequences of these combined factors.
Kenya: The situation in Kenya is affected not only by weather and market structure but to a large extent by political instability. The domestic front is characterized by corruption, tribal violence, a lack of confidence in the financial sector and poor infrastructure. The Government of Kenyas (GOK) efforts to liberalize the agricultural economy have so far met with negative consequences. Producers were reportedly frozen by uncertainty in the newly liberalized market and responded by reducing acreage. Weather was also a major factor disrupting production in 1997/98. Kenya faced a drought in early 1997 only to be hit with flooding later that year and into early 1998. All indications are that Kenya will face a maize supply deficit between 0.7 and 1.0 mmt.
Due to the maize deficit, the GOK recently announced a temporary suspension (April 1 to June 30) of its 25 percent ad valorem maize import duty. With white maize reportedly selling at a $65/ton premium to yellow corn, suspension of the tariff would go far in helping ease imports and ensure their affordability, but there has been little indication as to what action the GOK will take. Private importers must contend with that uncertainty and others as well. For example, the National Cereals and Produce Board (NCPB), the GOKs grain parastatal, has been targeted for commercialization. However, little progress has been made toward that end and some private importers fear that it will be given sole importer status once again, if only temporarily.
South Africa: Producers were inundated with reports early in 1997 that the El Nino weather pattern would cause dramatic reductions in rainfall during the 1997/98 production year, convincing many to reduce maize plantings. At the same time, producers were no longer under the protective wing of the Maize Marketing Board which guaranteed them a buyer and a good price. Together, these forces compelled many producers to adjust their planting decisions. Yellow maize area dropped off sharply while white maize area declined only slightly.
Since a larger than normal portion of the maize crop was planted late due to the early-season dryness, it will mature later and may be threatened by frost. However, El Nino hasnt had as strong an impact on maize production as feared. February and early-March rainfall and temperatures have been near-normal. Changes in planted area have also affected output significantly. The maize crop harvest will begin in May, and is forecast at 7.5 mmt, down 2.0 mmt from the 5-year average. More significantly, yellow maize production is projected to drop more than white maize.
The production pattern of the maize crop soon to be harvested is a sign of things to come. We are likely witnessing a marked shift away from yellow maize production in South Africa and toward white maize. While yellow maize area dropped dramatically this marketing year, white maize area fell by less than one percent. This trend is in line with South Africas comparative advantage in white maize production due in large part to the cost of inland transport. While white maize is highly competitive -- in fact, leads the world -- in trade, yellow maize must confront import and export parity prices that hinder its profitability. Import parity for yellow maize, shipped via the Gulf to South Africa and subsequently to the interior, is around $136/ton. Thus, imports cannot compete with local production in the interior. Likewise, the yellow maize export parity is $106/ton due to the inland shipping costs which render exports uncompetitive. As a result, we find yellow maize imports the most cost effective at the coast and domestic production most cost effective inland. So, we expect yellow maize production to fall off so that it meets the needs of the interior and yellow maize imports to increase and supply coastal feedmill demand.
The typical maize trade pattern is: import yellow maize to the coast, export surplus white maize. That scenario holds true for 1997/98. The common perception is that South Africas neighbors are its major customers. While southern Africa may rely to a large extent upon white maize imports from South Africa, South Africa does not necessarily rely on these exports markets. The data shows that South Africa exports roughly one-third of its maize (primarily white) to Japan and nearly one-fourth to Iran. Most of South Africas imports are yellow maize, two-thirds of which are U.S. origin.
Maize imports are somewhat restricted by a variable tariff and by phytosanitary regulations. South Africa maintains a minimum import price tariff on maize which becomes effective once the price of U.S. #3 maize (FOB Gulf) falls below $110/ton. For the first $10 decrease in price, a tariff of $5/ton applies. For the second $10 decrease in price the tariff increases to $10/ton . A phytosanitary restriction on maize imports from areas where Stuarts Wilt is known to occur requires special permits and procedures.
Tanzania: Tanzania is also attempting to liberalize its economy, but its progress so far has been limited. There are still many marketing boards and parastatals playing a large role in the agricultural sector. The Government of Tanzania (GOT) is making a slow move toward freer market capitalism which, in the long run, should bring production in line with demand and there is indeed enthusiasm among producers about the opportunities that a free market will offer. But in the short to medium run, Tanzanias agricultural sector is struggling to adapt and with the past years unfavorable weather the agricultural sector has been hard hit.
Tanzanian maize production is expected to fall by 30 percent, to 1.85 mmt in 1997/98. As a result, imports are projected to increase five-fold to 50,000 mt. Supply is still likely to be insufficient to meet demand, so consumption is expected to fall by 650,000 mt. Imports will be most important during January to August when the domestic crop is unavailable. In the long run, a free market blessed with favorable weather could make Tanzania a minor white maize exporter in the region.
With respect to trade, the GOT still strictly controls maize imports and exports. The GOT monitors production, supply and prices and then decides whether to authorize imports or exports. A license to import maize is required. Due to the severe import needs in 1997/98, Tanzania lifted its maize tariff. The moratorium was in effect through December 1997 but no notification of an extension has been received. In conjunction with the tariff change, the GOT banned exports and offered importers storage facilities.
Zimbabwe: Government policy has played a significant role in the maize sector during the past year, particularly with respect to the price of maize meal. Merchants were reportedly marking up prices in order to be able to service their debts when faced with high interest rates. Riots erupted in Zimbabwe in mid-January 1998 when the Government of Zimbabwe (GOZ) announced a 21 percent increase in the price of maize-meal. This price increase came on the heels of three price increases in four months. The GOZ abandoned the price change immediately and the Grain Marketing Board (GMB) released reserves of maize to temper prices. The GMB is slated to be "commercialized", allowing the market to fully dictate price, supply and demand. However, no deadline for commercialization has been set and in the meantime the GMB controls the strategic grain reserve though which it directly manipulates prices and has the sole right to import and export maize. Since 1994, the domestic maize market has been opened up, maize producers are able to sell directly to users.
Some officials have linked the recent social unrest to white landowners who, officials claim, are upset with the GOZs land reform policy. While there is no evidence to support this claim, it brings to the fore an interesting dilemma. The GOZ has espoused a land redistribution plan whereby some large land holdings (primarily white-owned, commercial farming operations) will be divided amongst the population (primarily to black, communal farmers). Zimbabwes maize production will most certainly decline if land is redistributed to small, communal and less-efficient producers.
While the governments influence clearly distorts the maize market, producers are doing their best to adapt to a more open market. In fact, Zimbabwe continues to produce ample maize to meet domestic needs and has had an exportable surplus in six out of the past ten years. The production and import situation in 1997/98 is unique due to weather factors that compound the political-economic factors outlined above. Late rains in December delayed plantings and area is estimated to have fallen roughly 15 percent. Since then, Zimbabwe has experienced drier than normal conditions. As a result, the USDA estimates that production in 1997/98 will fall by around 100,000 mt. from last season.
Based on reports from the Offices of Agricultural Affairs in Pretoria, South Africa and Nairobi, Kenya. For further information, please contact Deanna Johnson at (202) 720-4204.
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