TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

International Soft Wheat Markets Under Policy Intervention
Both the changes in the CAP and those implied by the URAA implementation
are likely to have deeply affected international price transmission for soft wheat.
Summing up, it is fairly clear that in the past thirty years the EU price has
somehow been “isolated” from world markets, bounded from below by the
intervention price (export subsidies 46 are meant to cover the difference between
domestic prices and the world ones) and from above by a variable levy and,
afterwards, by the “155% rule” established during the URAA. The most relevant
EU trade policies for cereals are then export refunds and variable levies, with the
objective of ensuring the maintenance of high prices on domestic markets.
In addition to the CAP reforms and the URAA, to the analysis that will follow,
at least another event is worth of mention. Rather awkwardly, in 2002, unusual
circumstances on world markets caused the EU price to be quite low despite the
peak in US prices. This can be explained by the way EU import duties are
calculated (Binfield 2002; Morgan 2003). In a nutshell, the shortages of milling
quality wheat, due to poor harvests in US, Canada and Australia, had resulted in
an increase of the US price for wheat. Since this price is used as the reference
price to calculate EU import duties, the duties had fallen to zero. At the same
time, large crops in Russia and the Ukraine increased the supply of feed quality
wheat, that could enter the EU duty free. In practice, due to the lack of an import
duty, and thanks to their proximity, Russian and Ukrainian wheat exports could
enter into the EU at prices lower than domestic EU wheat prices, depressing them.
The EU reckoned the situation as serious enough to change the EU protection
system for cereals: on January 1, 2003, a Tariff Rate Quota (TRQ) of less than 3.0
Mt 47 was introduced for medium and low quality grains that are not traditionally
imported in the EU from the US or Canada (the EU’s major grain trading partners
that are part of the WTO). The situation is then unlikely to occur again.
In the very last years, commodity world markets have been characterized by
soaring food prices because of both transitory (like adverse meteorological
conditions) and structural factors (like the increasing food demand from emerging
economies; the growing energy costs; the biofuels demand which creates a
pressure on crops production; the reduction in stocks due to policy reforms in
developed countries; FAO 2008).
Even if their treatment goes beyond the scope of this work, it must be noticed
that high food prices stimulated a renewed debate on the appropriateness of
market intervention policies, already going on in the so-called CAP “Health
Check” discussion in the EU (European Commission COM(207) 722, and
COM(2008) 306/4), which should be concluded by the end of 2008 and will set
the new rules to regulate the agricultural sector up to 2013. Substantial cutbacks
46 For short periods of time, usually no more than a few months, when world prices were substantially higher
than internal prices, export taxes have also been used.
47 The in-quota tariff was set at euro 12/t; the after quota tariff was set at euro 95/t.
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