Drought may bring relief from subsidy war. Drop in world grain glut opens markets for US and European farmers

The North American drought is causing the beginnings of a stir in international circles. The United States and Canada won't have as much to export. Foreign competitors are planting a little more. And food-importing nations face a hard choice: spend more for the grain that is available (and more expensive now) or don't buy as much.

But the biggest impact of the North American drought is likely to be political, not economic. With a smaller stash of surplus grain, the agricultural trade war between the US and the European Community (EC) is likely to subside, trade analysts and economists say.

``The budget pressures are off the EC,'' says Dale Hathaway, an agricultural consultant based in Washington, D.C. ``And the real question is: Will their minds stay focused?''

Since 1986, the US has used aggressive export subsidies to force the EC to change its farm programs and stop subsidizing its grain exports. The EC has started to reform farm policy but not to the extent that the Americans want. Each side has dumped large quantities of surplus grain onto the world market below cost.

But this summer's drought has brought a temporary respite. With less surplus grain and world prices rising, each side is finding it easier to sell abroad with fewer subsidies. Both will save considerable sums in agricultural subsidies that no longer have to be paid.

``If the two sides would look at this as an opportunity to act ... it could be a very positive thing,'' says Ed Rossmiller, director of the food and farm policy center at Resources for the Future, a Washington research group.

With less economic pressure on them, the two entities might be able to reach a compromise on farm trade in the current round of negotiations under the General Agreement on Tariffs and Trade, he adds. Agricultural policies have become a major focus of this round of the GATT.

But so far, the two sides remain far apart. ``There haven't been any major breakthroughs with the EC to date,'' says Gary Holmes, a spokesman for the US trade representative.

And many agricultural analysts, including Mr. Rossmiller, are dubious that the two will come to agreement. The US is pushing nations to give up all farm subsidies. The EC says that that position is impractical for the time being.

``We are still waiting for the US to make a step in the short-term negotiations,'' says Jacques Vonthron, agricultural attach'e for the EC delegation in Washington.

In contrast, another set of international negotiations is not likely to be affected by the drought at all. Currently, the US and the Soviet Union are discussing a deal by which the Soviets would buy a set amount of US grain - a renewal of the present agreement that expires Sept. 30. But a one-year disruption in US production isn't likely to affect these talks, says Alan F. Holmer, head of the US negotiating delegation. ``We are talking about a five-year, long-term agreement.''

So far, the extreme dryness has cut the combined wheat harvest in US and Canada by 15 percent and of coarse grains by 26 percent, according to estimates by the US Department of Agriculture (USDA). Since that estimate, drought has probably further damaged coarse grains (which include corn as well as sorghum, barley, and other grains), analysts agree.

But for a variety of reasons, other large food-exporting nations have not radically increased their own plantings. One of the main reasons is timing. Most of these countries were already planting by the time the drought transpired, says Sara Schwartz, agricultural economist with the USDA.

One of the exceptions is Argentina, which has a later planting season. Although its farmers have been delayed in their wheat planting because of dry conditions, US analysts expect them to boost corn and soybean acreage when the planting season starts in a couple of months.

Another factor is that most of these nations have farm programs that partly insulate farmers from up-and-down price movements, Ms. Schwartz says.

Finally, few nations want to invest heavily in agricultural expansion when, in all likelihood, worldwide production will return to normal next year. The estimated ratio of grain stocks to consumption remains near historic highs, according to the USDA.

``It really takes more than a one-year blip [in production] to get people here or anywhere else to break out new acreage,'' says Richard Pottorff, agriculture economist at WEFA Group, an econometric company near Philadelphia.

So far, US analysts see the drought as a temporary setback rather than a long-term blow to North American grain exports. Even foreign observers don't see much long-term advantage for their nations' farm trade.

``We will be very prudent in our assessment of the drought,'' says Mr. Vonthron of the EC. The idea is not to let farmers inundate the community with surplus grain so soon after it began to pull itself out from under its heavy surpluses.

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