EU Starch Market Regulation and its Tools

FEOGA

The fundamental objectives of the European Union (EU) agricultural settlement are to secure an adequate supply of food to the people and a decent income to the farmer and his family.

To achieve this, the Eurpean Commission decides a target price on some basic agricultural products - high enough to encourage the farmer - and they shield the market with an import duty filling the gap between the EU and the world market price.

In order to give the farmer a fair competition when he has to export any surplus food, he is offered export restitution matching the import duty.

The thoughts of the wise fathers about the regulations was that simple - until the officials in Brussels took over.

Update

The regulations are continuously updated and this site is not.The European subsidies to farmers are subject to significant changes. The financial support for agricultural production will be greened after 2013. More public funds are made available for sustainable agricultural production and 'green activities', such as nature conservation, while other subsidies to farmers are being reduced substantially. Of particular interest is the ending in 2012 of the potato starch regime. For many years potato starch factories were supported provided paying a minimum price for the starch potatoes. Decoupling this support and replacing it with a general hectare support may change the market. In Denmark potato growers seem to take advantage of this change.

Potatoes - An European Starch Crop

Only basic agricultural commodities are regulated directly - industrial products are not. Starch is therefore not supported as such - only the raw materials for starch like wheat and maize. Potatoes are an awkward product, not fitting into the EU system for the simple reason that potatoes can not be stored making it impossible for the Commission to purchase and put them in store, if other means to control the market mechanisms fail. On the other hand - potatoes are a fundamental European crop for starch and it is of great concern to keep the potato starch competitive with maize starch made from imported maize.

To overcome this controversy and find a modus vivendi, potato starch is associated to the regulation of maize and is in many ways treated and even named as maize starch. This fact adds confusion to many a detail in the administration of the FEOGA settlement and may confuse newcomers.

This paper contains a glossary, listing some of the price tools and terms used by the commission to administer the market regulations.

In order to understand the impact of the regulations on international trade we need an understanding of some of these tools.

The import duty is calculated as:

+ EU threshold price
- World market price
= Import duty

The world market price is an artificial price based on statistics obtained on a daily basis, whereas the threshold price is decided politically once a year.

In principle the export restitution should be equal to the import duty, but for several reasons the value is modified. The most important reason is to save money for the Commission and therefore the restitution has always come out at a lower level than the import duty.

The actual calculation is:

Export restitution of maize:
+ EU Import duty on maize
+ Threshold price regulations
+ Freight (From US to EU)
- EU preference
= Basic restitution
- Standard deduction (5%)
= Export restitution for maize

To translate the restitution of maize to starch, the restitution of maize is multiplied by 1.6 to convert it to the equivalent quantity of maize starch.

The Commission gives all figures in ECU. The corresponding national currency is calculated by means of the green exchange rate.

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The hen and the egg.

The influence of export restitution on the price level outside EU is obvious, but who is the mother of whom? The export restitution was introduced as a consequence of low prices outside EU, which again are influenced by the restitution.

The following example illustrates the effect the restitution may have on world market prices, which again have a feed back effect on EU export restitution.

Starch price example

DKK/kg

Ex works EU

3.20

Freight to non-EU

+ 0.60

Destination

3.80

Export restitution

- 1.27

Price in non-EU country

2.53

 

CAP & GATT

This effect is subject to criticism from members of other members of GATT (General Agreement on Trade and Tariffs).


CAP reform
(Source:March 1999, Berlin European Council: Agenda 2000, conclusions of the Presidency)

The content of the CAP reform aims to ensure that European agriculture is multifunctional, sustainable and competitive throughout Europe, including regions with specific problems. Agriculture must play its role in preserving the countryside and natural open spaces, and make a key contribution to the vitality of rural life. It must be capable of responding to consumer concerns as regards food quality and safety, environmental protection and the safeguarding of animal welfare.

The European Council considers that the implementation of the reform within the new financial framework will be more in keeping with actual levels of spending, and will stabilise agricultural expenditure over the period. It recognises the efforts which have been made to curb the budget within the framework of CAP reform, and underlines that this reform will constitute an essential element in defining the Commission's negotiating mandate for the forthcoming multilateral trade negotiations within the World Trade Organisation (WTO).

Agriculture (Arable crops): Measures adopted by the European Council

The European Councils amendments to the compromise on the proposals for the dairy and cereals sector reached at the Agriculture Council on 11 March 1999 reflect efforts to take account of the budgetary constraints.

  • Arable crops: For cereals, the principles of the proposed reform were endorsed. Only three parameters will be modified:
    • The intervention price will be reduced by 15% in two equal steps of 7.5% for the marketing years 2000/2001 and 2001/2002. However, market development as of the marketing year 2002/2003 will be analysed closely in order to establish whether further reductions are required.
    • Compensation of approximately 50% of the reduction of the intervention price is maintained. The increase of compensation payments per hectare (currently 54.34 euro multiplied by the reference yield), to be effected in two equal steps, will amount to 63 euro.
    • The base rate of compulsory set-aside will be fixed at 10% for the period 2000 - 2006.
    Monthly increments will be maintained at the current level.
    For
    oilseeds, progressive adjustments aligning aid per hectare to that of cereals is confirmed. An analysis of the production potential, accompanied by appropriate proposals, if necessary, will be issued at the end of the second phase.

In view of the specificity of agriculture in Portugal, the European Council recognised the need to improve the balance of the support granted to agriculture by means of rural development measures financed from the EAGGF Guarantee section. Moreover, the maximum guaranteed area for durum wheat will be increased from 59,000 ha to 118,000 ha.


Arable Crops : Prices and Payments

 

1999

2000

2001

2002

2003

2004

2005

2006

Cereals/maize
in euro/tonne
               
- intervention price

- compensation

 119.19

54.34

 110.25

58.6

 101.31

63

101.311

631

101.311

631

101.311

631

101.311

631

101.311

631

Protein crops
in euro/tonne

78.49

72.50

72.50

72.50

72.50

72.50

72.50

72.50

Oilseeds
in euro/tonne/cereals equivalent

94.242

81.74

72.37

633

633

633

633

633

Non-textile linseed4
in euro/tonne

105.10

88.26

75.63

631

631

631

631

631

Durum wheat5
Additional payment per hectare

 

 

 

 

 

 

 

 

- traditional areas

- other areas

344.5

138.9

344.5

138.9

344.5

138.9

344.5

138.9

344.5

138.9

344.5

138.9

344.5

138.9

344.5

138.9

Potato starch6
per tonne of starch

 

 

 

 

 

 

 

 

- minimum price

- compensation

209.78

86.94

194.05

98.74

178.31

110.54

178.311

110.54

178.311

110.54

178.311

110.54

178.311

110.54

178.311

110.54

Silage grass
in euro/tonne

none

58.6

6

631

631

631

631

631

Set-aside
in euro/tonne

68.83

58.67

63

631

631

631

631

631

NB: A special measure applies to cereals and oilseeds in Finland and Sweden: a fixed drying premium of 19 euro per yield tonne will be introduced from the year 2000.

  1. May change from the year 2002 if the intervention price is lowered, in which case aid will be increased.
  2. Subject to the reference price system.
  3. May change from 2002 in the event of a reduction of the intervention price and/or an overall revision of the sector. NB: Up to and including 2001, aid can be calculated on the basis of the oilseed yield expressed in cereal equivalent multiplied by a factor of 1.95. As from 2002, aid will be calculated on the basis of the cereal yield. The Blair House system will apply throughout the whole transitional period (aid reduced if the maximum guaranteed area (MGA) is exceeded).
  4. No changes for fibre flax.
  5. Subject to maximum guaranteed area per Member State; the MGA for Portugal was increased from 59,000 ha to 118,000 ha.
  6. Subject to Member State quotas; compensation was increased to 75 % to offset quota reductions.

Set aside: base rate has been cut from 17.5% to 10%; effective rate may be adapted according to market conditions. Payments (currently made between 16 October and 31 December) are made between 16 November and 31 January.

Small producers (less than 92 tonnes): exemption from compulsory set-aside is maintained. From 2000, specific payments for oilseeds, protein crops, linseed and maize will be available to these producers instead of the payments based on the average "all cereals" yields. These producers may also participate in the voluntary set-aside scheme.

EU Starch Glossary:

Target price.

Once a year a target for EU market price is negotiated. This is only an indicative price, but the threshold and the intervention price are derivatives of the target price.

Threshold price

The threshold price is in essence a minimum import price. The level is fixed for one production year at a time beginning 1st. of July.

Threshold adjustment

During the production year the threshold prices are adjusted monthly to compensate for storage costs etc. Potato starch gets 7 monthly adjustments beginning 1st. of November.

Import duty

The import duty is calculated daily as the difference between the threshold price and the calculated world market price on certain agricultural produce.

01.10.92 the derived import duty for starch is:

Potato starch     2.17 DKK/kg
Maize starch      2.17 DKK/kg
Wheat starch     3.07 DKK/kg

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Intervention price

The intervention price of maize is established once a year. If the market price falls below the intervention price, there is an obligation for the Commission to purchase in order to support the market price. There is no intervention price for potatoes.

EU market price

The EU market price is fixed daily based on statistics.

The market price fluctuates widely. It may reach the threshold price or even go above, but often the market price is rather close to the purchase price.

The purchase price

When the market price of maize falls below the intervention price, the Commission is obliged to buy and pay 94% of the intervention price. This lower price is named the purchase price. There is no purchase price for potatoes (they cannot be kept in stock).

World market price

No such price exists. It thus has to be established. Through enquiries all over the world the Commission gets daily the basis of statistics on which the import duty is calculated. The world market price itself - as well as its sources - is kept confidential by the Commission, but anyone interested may calculate the figure by subtracting the import duty from the EU threshold price.

The calculated world market price - and thus the import duty - is very sensitive to changes in the value of the US$.

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Production restitution

Production restitution is obtained by preparation of native potato starch for certain manufactured goods if they are sold on EU markets, and it is paid in order to guarantee the competitive power of the manufactured goods containing starch, when necessary. A list of manufactured goods entitled to production restitution is given.

The production restitution is per November 1992: 1.36 ECU = 1.22 DKK/kg of potato starch.

The calculation is based on the purchase/intervention price for maize and an average world market price is deducted.

Maize November 1992 ECU/t

Purchase price    155.18
World market price, CIF Rotterdam, (25 days average) -68.28
Basic restitution 86.90
Translated into potato starch (86.90x1.60) = 139.04 ECU/t
Converted into DKK Rate 8.97989 124.856 DKK/t

If the market price is equal to or higher than the intervention price, the production restitution is calculated as the difference between the intervention price and world market price.

The rate is normally fixed at the end of each month - and is valid for the following month.

The regulation is adjusted by extensive and complicated rules and requires extremely careful use due to the possibilities for fraud.

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Export restitution

 

Export restitution is obtained by export of starch products to non-EU-countries, provided that the article complies with different quality requirements etc. - and it is paid in order to guarantee competitive power on the world market.

The actual calculation system is rather complicated, but in short terms the calculation is based on variable import duties for maize (US rate), the institutional prices and market conditions of various grain products at the time of calculation.

If the EU market price varies more than +/- 5% proportional to the purchase price, the market price is applied in place of the purchase price in the calculations.

Normally the rate for export restitution is fixed at the end of each month (as for production restitution) with effect for the following month.

If the Commission finds that the market conditions require intervention/regulation, it has the authority to carry out different political efforts (suspension of pre-fixation, change of rate of restitution etc.)

Intervention from the Commission normally takes place in order to prevent speculation in restitution decreases.

November 1992

ECU/t

Import duty for maize(Average of 25 days

in October)

137.49

Adjustment of the

threshold price

+1.50

 

138.99

Freight allowance

(USA - Europe)

+ 8.00

Adjusted import duty

146.99

Threshold price for maize (October)

205.87

Purchase price for maize (October)

-153.68

Community preference

52.19

Adjusted import duty

146.99

Community preference

-52.19

Basic export restitution

94.80

Standard deduction 5%

-4.74

Export restitution

90.06

Translated into potato starch (90.06 x 1.60)=

144.10