Staying competitive in the global and European maize markets

This paper outlines the key factors affecting competitiveness in the global and European maize markets up to 2012.  It also explores the possible role and impact of using genetic modification (GM) technology in the maize sector to maintain/enhance Hungarian competitiveness.  (click here to view PDF copy)

Key market features

In 2004, the EU 25 produced and consumed 53.9 and 53.8 million tonnes of grain maize respectively.  In descending order, the leading producers were France, Italy, Hungary, Spain and Germany.  The main consumer was the animal feed sector (78% to total use).  The vast majority of maize used is derived from domestic EU production with imports amounting to only 5% of total consumption[1].  Imports are mainly into the animal feed sectors of Spain and Portugal, where price is the key factor influencing sources of supply. 

EU maize farm level prices have been about 20% higher than US and Argentine farm level equivalents in the last four years but broadly similar to world market levels[2].  Hungarian farm level prices have tended to be a little below the average in the leading EU producing country, France. 

The share of the EU maize market that requires supplies to be certified as being from non GM origin is within a range of 23% to 27% of total usage. 

Future market developments

Global demand for, and supply of, maize is forecast to increase by up to 10% between 2005 and 2011/2012.  World maize prices are also forecast to rise by about 10% to 15% over the same period. 

Within the EU 25, maize production in 2012 is forecast to be broadly similar to current levels and consumption is expected to rise slightly.  The EU market will, however probably become more ‘open’ and subject to the influences of world markets largely because of commitments likely to be agreed at the World Trade Organisation (WTO) relating to reduced levels of import protection and domestic agricultural support, and elimination of export subsidies.  

In relation to the GM versus non GM maize markets: 

Ø      The majority of EU maize production is likely to remain non GM in the next 1-3 years, although a slow expansion in the area planted to GM cultivars can be expected;

Ø      Those requiring certified non GM will have little difficulty in procuring supplies, with little or no price differentials between the two origins (at best a marginal differential of 1% to 2% in favour of non GM and this post farm gate rather than a farm level differential);

Ø      Beyond 2008, the levels of EU consumer opposition to GM technology will probably recede slowly as a result of greater levels of awareness and understanding of the technology (in particular recognition, from empirical studies of the environmental benefits, associated with reduced pesticide use and reduced greenhouse gas emissions).  In addition, crops containing GM quality traits are likely to become commercially available by 2010 – these latter innovations being ones that consumers can more readily associate with direct benefits;

Ø      Farmers choosing to plant GM cultivars will find plenty of buyers for their production, both currently and in the future (mainly in the feed sector which dominates consumption). 

Competitiveness issues

Maize is currently one of the most profitable arable crops grown in the EU 25.  It is also the most profitable crop in new member states like Hungary.  Average profitability levels in the new member states are, however significantly lower than in the leading maize producing countries of the EU 15.  This derives from a combination of lower levels of (current) support payments and lower levels of productivity (ie, lower average yields). 

Looking forward to 2012, this will be a period of implementation of the 2003 Common Agricultural Policy (CAP) reforms, transition to the full CAP in the new member states and implementation of the next WTO trade agreement.  The key points of relevance for profitability and competitiveness arising from these changes, coupled with the expected changes in global maize markets referred to above, are: 

Ø      Levels of support for agriculture will be lower than at present in the EU 15.  However, in the new member states these will be higher than prior to accession.  The receipt of direct aids will provide additional income and should lead to higher investment in agriculture, both in terms of fixed assets (eg, machinery, crop storage) and more efficient use of variable inputs (eg, new varieties and pesticides).  As a result, levels of technical performance should improve and an element of ‘closing the productivity gap’ with longer standing EU member states should occur over a number of years;

Ø      The EU market will be open to increasing levels of competition from world markets.  This will apply to all sectors;

Ø      The EU agricultural market will probably be subject to greater variability in prices (reduced role of policy support mechanisms and increased openness of markets);

Ø      Demand for crops in non food sectors (notably bio-fuels) can be expected to increase across the EU.  Agri-environmental schemes may become more attractive to some producers, especially if national governments choose to channel addition rural development funding from modulation into such schemes.  Nevertheless, the majority of agricultural policy support will continue to be delivered via market measures and direct payments;

Ø      In order to remain competitive in the EU marketplace, many producers will increasingly explore all forms of new technology that can assist them (eg, through yield enhancement and cost reduction[3]) or ways of reducing production and price risk.  Others may focus on higher value, niche product production, such as organics, where cost is less of a market driver or ‘care’ goods (eg, environmental set-aside, membership of agri-environmental schemes that target the delivery of environment and landscape goods for the wider public).  Lastly, some may choose to exit from the sector. 

Possible role of using GM cost reducing technology in maize in Hungary

In the next few years, some GM traits may become available to Hungarian maize growers.  Those most likely to become available first are herbicide tolerant (GM HT) and insect resistant (GM IR) maize.  Maize resistant to the European corn borer already has EU-wide approval for planting.   

Drawing on a review of literature (see references) and recent analysis[4] of the potential impact in Hungary, Table 1 summarises the likely impact of using GM HT and GM IR maize in Hungary.  The analysis assumes that the GM technology is brought through for regulatory approval, the approvals are received, seed companies make the technology available in leading varieties adapted to Hungarian agronomic conditions and Hungarian farmers are able to make choices about whether to plant GM crops according to technical and agronomic performance criteria and market requirements.  As such, this assumes that practical, proportionate and science-based co-existence conditions for the planting of GM crops in Hungary are in place.   

The key points to note are as follows (see section 5): 

Ø      yield gains are likely from using GM IR technology where currently farmers experience economic losses from the European corn borer and corn rootworm pests;

Ø      The impact on the costs of production varies by trait used.  Users of GM HT maize are likely to experience reduced levels of costs even after paying for the technology.  With regard to GM IR technology, some users may find that average variable costs decrease whilst for others costs increase (this will depend upon whether insecticides or seed treatments have traditionally been used to combat pest attacks or not);

Ø      An increase in average gross margin profitability of between +€13/ha to +€52/ha is likely to arise for users;

Ø      At the national level the positive farm income impact is likely to be between 33.16 and 35.11 million euros;

Ø      The technology offers additional intangible benefits such as increased management flexibility and simplicity;  

Overall, important benefits are likely to be derived from using the technology, if it is made available in leading varieties adapted to Hungarian agronomic conditions.  Against a background of an increasingly open and competitive marketplace, both domestically and in export markets, application of this technology has the potential to make an important contribution to maintaining and enhancing Hungarian competitiveness. 

It is, however important to note that as weed and pest infestation levels and farm performance vary by farm and year, so will the impact of using GM technology.  Some farmers may not derive benefits from using the technology, in some years.  The analysis of impact on farm performance does, however suggest that most farmers stand to benefit financially from using the traits examined.   

Table  SEQ Table \* ARABIC 1: Potential commercial farm level impact of using GM technology (per hectare) on grain maize crops in Hungary (2012 and beyond)

Sources: Based on data used in Demont et al (2005), Brookes (2002 & 2005b), NCFAP (2003), Bonis et al (2005), Szell et al (2005) and drawing on conventional farm income data in Brookes (2005), which itself draws on data from the Hungarian Institute of Agricultural Economics (AKII)

Notes:

1. GM maize traits: GM HT (to glyphosate) and GM IR to the European Corn Borer and Corn Rootworm  
2. Yield gains for GM IR crops based on Brookes (2002), Bonis et al (2005) and Szell et al (2005)
3. Cost of the technology (charged as a seed premium) based on Demont et al (2005) and/or cost currently charged in Spain (for GM IR maize targeting the ECB: original source: Brookes 2002).  For further details see Appendix 3
4. Impact on costs of insecticides and herbicides, based on Demont et al (2005), Brookes (2002), Monsanto Hungary (2005: personal communication), NCFAP (2003) and Rice (2004): see Appendix 3
5. Adoption levels based on Demont et al (2005)

Implication of not using GM maize technology: servicing the non GM maize market

A constraint to using GM technology in the EU often cited relates to whether a sufficiently large market exists for GM maize and what might be foregone in terms of possible loss of sales into markets that require certified non GM maize?.  Whilst there is a current market segment that requires certified non GM maize, it is important to recognise the following points: 

Ø      finding outlets for GM derived maize crops is likely to be fairly straightforward, especially in the feed sector.  This sector accounts for 78% of total grain maize usage in the EU 25, and 85%-90% of this usage has no requirement for non GM maize.  The EU feed sector also currently makes widespread use of other GM derived ingredients, notably soymeal and the majority of animal feed sold in the EU is positively labelled as containing GM derived ingredients;

Ø      whilst markets currently exist in which there are non GM requirements, these account for a minority of uses and are found mostly in the human food sector.  In these markets, quality is an important criteria influencing sources of supply and usually requires supplies to be fully traceable.  Servicing this market therefore requires investment in quality assurance and traceability systems, which is an aspect of competition that the Hungarian maize sector probably lags behind most of its EU counterparts;

Ø      over the next few years, the distinct market for non GM maize and derivatives is expected to decrease in size;

Ø      the non GM maize market should be approached in the same way as looking to supply any market segment.  To be successful, suppliers need to be competitive.  Currently Hungarian maize struggles to compete in the EU 25 maize market regardless of whether its maize is GM or not.  The most important export markets in Europe are within the feed sector in countries such as Germany, Greece, Slovenia, Austria and Spain, where price is the most important factor influencing buying decisions and where GM derived ingredients are widely used.  In the Spanish market, Hungarian maize has to compete on price with both EU origin maize and imports, including GM maize from Argentina.  This highlights the importance of price competitiveness with both non GM and GM derived maize;

Ø      there have been no price differentials between GM and non GM ‘equivalent’ crops at the farm level in most GM growing countries (including Spain, the main EU country where GM crops have been planted since 1998).  Consequently, farmers are unlikely to realise any price premia for producing non GM maize. 

AgBioForum Volume 9 // Number 3 // 2007

Global impact of biotech crops: socio-economic and environmental effects in the first ten years of commercial use. 

Executive Summary and Conclusions