Strong Dollar Keeps Lid On Eu Grain Subsidies

The dazzling performance of the dollar is creating a honeymoon for European Union (EU) taxpayers and farmers by helping the 15-nation bloc export grain with fewer subsidies this year.

Only last month, the EU faced a choice between hiking the subsidies needed to match lower world prices in dollars and risking a subsidy quarrel with the United States or seeing its grain surpluses pile up in storage at even greater cost.

But the dollars unexpected surge has given Brussels a chance to keep grain flowing at the ports without handing out ever greater sums to exporters, traders and analysts said. It puts Brussels at ease, a European exporter said last week of the dollars startling rally since early January. The EU has been under pressure to curb subsidies, both from home where the $50-billion farm budget is groaning under the cost of mad cow disease and from abroad, where the United

 

States is threatening to retaliate with its own subsidies if Brussels encourages its farmers too generously.

Reducing subsidies would normally make EU grain harder to sell. But the strong dollar means the EU has to subsidise less in local currencies to achieve the same effect on world markets. In practice the EU pays out the subsidies in European currency units (ECUs), but it is the sharp rise in the value of the dollar against the French franc which fuels most savings.

France is Europes largest grain supplier and exporter and its prices are the benchmark for EU competition with the US. The dollar has risen nearly 10 per cent from 5.19 francs at the turn of the year to just under 5.69 francs on Friday last. The reward for the EU is seen at several million dollars a week.

For example, to close the gap between French wheat prices and lower prices on the world market, Brussels is currently spending up to 18 ECUs ($21) for each tonne exported.

At todays grain prices, turning the currency clock back to the end of December would force Brussels to hand out 29 ECUs per tonne to remain competitive. The difference gives EU taxpayers a saving of $1.5 million for last weeks wheat exports alone. The picture is the same for other key crops like barley. Certainly, in the short-term it does help the (European)

Commission, said Steve Thornhill, head of marketing and economics at Britains semi-public Home-Grown Cereals Authority. It is a rare piece of luck for EU accountants in the midst of Europes $1-billion beef crisis but analysts warn it may not last. One reason is it seems caused by a temporary phenomenon in grains. Another is that the same dollar rally could accentuate lower grain prices and force the EU to push up subsidies again.