No.2  December 2006  
 Food Outlook
  Global Market Analysis

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OVERVIEW

MARKET SUMMARIES

WHEAT

COARSE GRAINS

RICE

OILSEEDS, OILS AND OILMEALS

SUGAR

MEAT AND MEAT PRODUCTS

MILK AND MILK PRODUCTS

FERTILIZERS

OCEAN FREIGHT RATES

Special features

Statistical appendix

Market indicators and food import bills

Announcement

Special features

BULGARIA AND ROMANIA EUROPEAN UNION ACCESSION

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* This special feature is courtesy of ALFRED C. TOEPFER INTERNATIONAL ( www.acti.de )
the views of which do not necessarily reflect those of FAO

The next round of European Union enlargements, the sixth since 1957, is fast approaching. Romania and Bulgariawill join the European Union on 1 January 2007 as the 26th and 27th members. Consequently, the European Union will border the logistically important Black Sea. The European Union will increase by the size of Germany and will then cover an area of 4.24 million km˛, representing 40 percent of the European continent. Following the accession, the number of inhabitants in the European Union will rise by around 30 million to a total of 490 million. At an average of 5.5 percent p.a. in Romania and 5 percent in Bulgaria in the last five years, economic growth in these two countries has been high. Responsible for this economic growth in both countries has been domestic demand due to high personal consumption, on the one hand, and to high demand for capital goods, on the other. In spite of growing consumption in the last few years, both countries are among the poorest in Europe. Per capita gross domestic product amounted to US$3 347 in Bulgaria in 2005 and to US$3 600 in Romania. In comparison, in the EU-25 it was US$30 473in 2005. This market review will focus on agriculture in Romania. and Bulgaria

Agricultural area in Romania amounts to 13.9 million ha according to EUROSTAT, of which 8.8 million ha are arable. The most fertile soil is in the western part of Romania in the province of Banat and in the areas of Wallachia in the south and the Republic of Moldavia in the east. Bulgaria has an agricultural area of 2.9 million ha, of which 2.7 million ha are arable. The fertile heavy black-earth soil is found in the north of Bulgaria, at the border to Romania. The region in the northeast of Bulgaria around Dobrich is considered to be the country’s granary.

In Romania and Bulgaria the farms are mainly small. In Romania a good 4.5 million operations were recorded in a survey conducted by EUROSTAT in 2002. For the most part the country has a subsistence economy with a farm size of less than one hectare. Forty (40) percent of the farms cultivate areas between one and five hectares. Around 30 percent of total agricultural area is farmed by these operations. The main reason for this structure favouring small farms is the land reform of 1991. Within the framework of this reform, land was returned to the owners who were registered as such prior to 1945. In addition, the employees of the previous collective farms received agricultural areas if they had worked for at least three years on a farm. Neither previous nor new owners were given more than 50 ha of land. Furthermore, the farms have the right to purchase only up to 200 ha of agricultural land. Thereafter, they are only allowed to expand by acquiring leasehold. Bulgaria has around 665 000 farms. The transformation of the structure of the farms is comparable with that seen in the new German states. Nowadays, 79 percent of total agricultural area is cultivated by farms that are more than 50 ha in size. The most important crops in both countries are wheat, maize and sunflowers. In Romania, soybeans are also planted on a larger scale.

Romanian grain production – this includes wheat, barley, maize, rye and oats, averaged 12.3 million tonnes in the last four years. The most important crop was maize, with an average production of 7.1 million tonnes, followed by wheat at 3.9 million tonnes and barley at 721 000 tonnes. Hectare yields have hardly increased in Romania since 1991. The maize yield has reached a mere 3 tonnes/ha on average in the last four years and was therefore even below the yield recorded in Ukraine and well below the EU-25 average of 7.7 tonnes/ha. The most important feedstuff is maize with average annual usage of approximately 5.6 million tonnes in the period from 2003/04 to 2005/06, followed by wheat at 850 000 tonnes. Exports averaged 1.1 million tonnes annually in the same period, including maize at 520 000 tonnes, wheat at 333 000 tonnes and barley at 216 000 tonnes.

In Bulgaria, the grain crop averaged 4.9 million tonnes in the last four years. The most important grain crop is wheat with average production of 2.8 million tonnes, followed by maize at 1.4 million tonnes and barley at 605 000 tonnes. Yields are currently higher than in Romania. Maize yields, for example, averaged 3.8 tonnes/ha in the last four years. In Bulgaria, too, maize is the most important feedstuff with annual usage amounting to 800 000 tonnes on average in the period from 2003/04 to 2005/06, followed by wheat at 610 000 tonnes. In the same period, an average of 750 000 tonnes of wheat was exported annually, as well as 349 000 tonnes of maize and 210 000 tonnes of barley.

Sunflowers are the dominant oilseed in both countries. The planting of sunflowers increased significantly following the fall of the iron curtain in 1991. Sunflower seed production reached 1.2 million tonnes in the last four years on average. In 1991, a mere 556 000 tonnes were produced. Rapeseed planting in Romania has also increased considerably in the last two years. The main rapeseed growing region is the area along the southern edge of the Carpathians. While rapeseed production amounted to 64 000 tonnes on average in the last four years, Romanian farmers produced in excess of 160 000 tonnes in 2005 and 2006. The increase in production is mainly a reflection of the growing usage of vegetable oils in the EU-25. Thus, Romania has become an important exporter to the EU-25. Sunflower seed exports averaged 345 000 tonnes in the period from 2003/04 to 2005/06. According to our estimates, rapeseed exports to the European Union close to doubled in this marketing year compared with two years ago. The export potential of rapeseed is, however, likely to decline in the next few years if the planned biodiesel plants are actually built. Production capacity is estimated at 290 000 tonnes of biodiesel.

In Bulgaria, sunflower seeds, with average annual production of 721 000 tonnes, have been by far the most important oilseed since 2003. Sunflower seeds are also an important export, with an annual volume of 418 000 tonnes on average from 2003/04 to 2005/06.

Grain and oilseed yields fluctuate widely in both countries due to the continental climate and severe winters, the danger of floods along the Danube and a greater danger of winterkill (in Romania it is 9-12 percent of winter grain on average) and pronounced summer dryness. In addition to this, with the farms being mainly small, they have neither the liquidity nor the necessary managerial skills to counterbalance the extremes in yields even to a small extent. However, both countries have a significant production potential. As in many former socialist countries, yields after 1991 have varied not only from region to region but also within any given region from farm to farm. While many former collective farms are operating at a low yield level, foreign investors have shown that higher yields are possible. Hectare yields of 6 tonnes for wheat or 7 tonnes for maize as well as 2 tonnes for sunflower seeds are by all means possible if the right input is used and the production processes are optimized (assuming normal weather conditions).

Romanian pork production has been increasing steadily in the last few years with growth rates of 5.3 percent on average since 2000 and is forecast by the USDA at 490 000 tonnes for 2006. This higher level of production is driven by strong domestic demand. Per capita pork consumption in Romania has been growing since 2001 by an annual 8.8 percent to an estimated 14.3 kg for 2006. In the EU-25, 43.5 kg are consumed per capita. All in all, the USDA expects pork demand to amount to 778 000 tonnes in 2006. Besides an increase in consumption, imports have risen nine-fold since 2000. The USDA has forecast pork imports at 288 000 tonnes, up from 263 000 tonnes in 2005 and 32 000 tonnes in 2000. Foreign investors believe Romania to have an interesting growth potential because of the low wages, rising demand for pork, lower raw material costs and low land prices. In spite of higher production, pig inventories have remained relatively stable in both of the last two years. At the end of 2005, 5.2 million head were counted, compared with 5.1 million in 2002. However, structural change is moving forward: fewer animals are being held by the previously collective farms while inventories at other kinds of farms are increasing.

In Bulgaria, pork production more than halved from 2000 to 2006. According to estimates released by the USDA, 81 000 tonnes of pork will be produced in 2006, compared with 224 000 tonnes in 2000. The decline is the result of lower pork consumption in the amount of an estimated 105 000 tonnes in 2006, down from 263 000 tonnes six years ago. Usage has, however, stabilized at this level in the last two years. The USDA expects per capita consumption to amount to 7.9 kg in 2006. As in Romania, the farms holding pigs are very small. The average farm holds only five animals. In comparison, in Germany an average of 322 animals were held per farm in May 2006. In total, 943 000 pigs were held as of the end of 2005, almost as many as in the German state of Saxony Anhalt.

Low hygiene standards are a problem in both countries. This is evidenced by, for example, the outbreak of classical swine fever, which has been rampant in Romania and Bulgaria for quite some time. In 2006 alone, more than 500 cases of swine fever have already been reported in Romania. Since the beginning of November, there has been an emergency vaccination of pigs on small farms and these measures will be expanded to large farms beginning on 1 January 2007. These countries are therefore currently not allowed to export living pigs, pork and certain pork products to the EU-25.

The poultry sector in Romania has had more momentum in the last few years. It is interesting that in Romania ten of the country’s farms contribute 50 percent to total domestic production. The quality and hygiene standards and production methods applied by these farms are based on those used in the west. Thus, these farms breed their animals themselves, give them feed produced by them, slaughter them on their farms and process these products to make food. Domestic production has consequently risen by 10.5 percent p.a. on average since 2000 and is estimated by the USDA at 220 000 tonnes for 2006. This boom is driven by the growth in per capita consumption, which has increased by 9.8 percent p.a. on average since 2001 and is forecast by the USDA at 8 kg per capita for 2006. In addition to higher production, imports are also increasing, in fact to an estimated 125 000 tonnes for 2006 from 25 000 tonnes in 2000. Meanwhile, egg production has been stagnating in the last few years at 6 million eggs. Overall, many market observers see significant growth potential in Romania in the poultry industry so that the country can be expected to change from a net importer of poultry meat to a net exporter.

The poultry sector in Bulgaria is, as in Romania, a growing market. The market concentration is increasing further. Thus, 17 percent of the farms already hold 60 percent of the broilers. Poultry density is highest in the northeast of the country. This region is the country’s granary, which makes the supply of feedstuffs possible. The USDA estimates the country’s poultry meat production at between 70 000 tonnes and 80 000 tonnes in 2005, up from 60 000 tonnes in the year before. A significant reason for the increase is the per capita consumption, which is at around 14 kg p.a. and is thus approaching the level in the European Union, where it is at 15.9 kg. Besides higher production, imports have also risen in the last few years. They amounted to 44 000 tonnes in 2005 (2004: 42 000 tonnes). Only because of the outbreak of AI at the end of 2005 and beginning of 2006 did demand decline for a short while. Since May 2006, however, this trend has been stopped. AI had one further effect, many slaughtering facilities could not meet the high hygiene standards and gave up, which affected 11 of the nationwide 59 registered poultry meat processing operations during the outbreak of AI in Bulgaria.

Milk production in Romania amounted to just under 5.9 million tonnes in 2005, which corresponds approximately to the amount produced in Spain. Production has increased since 2000 by an average of 2.2 percent p.a. 97 percent of the milk is produced on small farms focused on self-sufficiency or direct selling. Two-thirds of the milk produced is either used on the farm itself or sold directly. The small milk quota of 3.1 million tonnes allocated by the European Union to Romania therefore also makes sense. The quota for deliveries to dairies is 1.1 million tonnes and for the direct sale 2.0 million tonnes. At the present time, the Ministry of Agriculture of Romania expects the milk quota to be divided among around 600 000 farmers. The main reason for the low level of milk deliveries is the small-structured agriculture. Ninety-five (95) percent of the 1.2 million Romanian dairy farmers has only one or two cows. For dairies, the expense associated with the collection, transportation and storage of milk is immense. The milk produced there frequently also has quality problems, which makes it impossible to process the milk further in the dairy. A higher quota for the delivery of milk to the dairies will only be possible if there is a change in the structure within Romanian agriculture. However, problems exist not only on the farms but also at the dairies. At the end of October, only 59 of the just under 600 registered dairies in Romania met the high European Union quality standards. An additional 188 are likely to meet the European Union requirements in the near future.

Romanian consumption of beef has increased annually by 0.8 percent since 2001 and is estimated by the USDA at 4.9 kg per capita for 2006. The production of beef grew in the same period to 208 000 tonnes from 200 000 tonnes and beef imports rose to 240 000 tonnes from 215 000 tonnes.

In Bulgaria the farmers produced a good 1.5 million tonnes of milk in 2005 according to the USDA. This corresponds approximately to the amount of milk produced in Saxony. Unlike in Romania, more milk is delivered to the dairies in Bulgaria, in fact two-thirds of the milk produced, with half of the remainder being consumed by the farms themselves and the other half sold directly. Bulgaria’s milk quota was set in the treaty of accession at 979 000 tonnes, of which 772 000 tonnes are for deliveries to the dairies. Bulgaria is plagued by the same structural obstacles as Romania, although the problems are not as pronounced. Two-thirds of the Bulgarian dairy farmers have one cow and only 10 percent of the dairy cows are held by large agricultural operations. Therefore, the problems encountered when the dairies collect the milk are similar to the ones in Romania.

Bulgarian beef consumption is forecast for 2006 by the USDA at 92 000 tonnes (2005: 104 000 tonnes). This demand has been covered less by domestic production, estimated at 35 000 (39 000) tonnes, than by imports in the amount of 53 000 (69 000) tonnes. Per capita consumption has been at 5 kg p.a. in the last few years.

Since 2000, cattle inventories in both countries have remained stable at 3.6 million head and thus represent only approximately 4 percent of cattle inventories in the EU-27. In the medium- to long-term, cattle inventories are expected to decline in both countries. This is due primarily to the expected increase in milk production per cow. As a result of a smaller number of cows, fewer calves will be born that would be available for placing on feed. A factor that should not be underestimated is additionally the improvement in feed conversion and thus the decline in the use of feedstuff per milk or meat unit produced.

However, other factors are also important for the further development of livestock production. Besides the improved infrastructure, which will lead to more favourably priced inputs, and the improved marketing of the milk produced and of livestock ready for slaughter, the improved hygiene standards also play an important role. These additional costs will be a big obstacle for many small farms and will accelerate the transition of the structure especially in livestock production. In light of the insufficient implementation of important hygiene standards, the European Union Commission’s monitoring report released in September 2006 was the opportunity to admonish both countries to carry out substantial improvements especially in the area of cadaver disposal systems in order to reduce the possibility of the incidence of BSE.

Compound feed production in Romania is estimated for 2006 at 1.90 (2005: 1.91) million tonnes. The largest share of compound feed is produced for poultry, at a good 1.10 (1.08) million tonnes, followed by compound feed for pigs at 740 000 (750 000) tonnes. In Bulgaria, compound feed production is forecast at 685 000 (669 000) tonnes for 2006, including 410 000 (397 000) tonnes for poultry and 220 000 (217 000) tonnes for pigs. These figures reflect the important role played by the poultry market in both countries. A big potential is seen in the future of compound feed production for cattle, which is currently playing an insignificant role in both countries.

Both countries will accept the so-called “acquis communautaire” when they join the European Union. This consists of the rights and obligations of the European Union, which are binding for all its Member States. By applying the Common Agricultural Policy, the European Union Commission expects the agricultural production structure to improve significantly as well as the living conditions of the rural population. Bulgaria and Romania have €5.4 million available for agriculture comprising €3.9 billion for Romania and €1.5 billion for Bulgaria. An important pillar is the direct payment to the farms, although a choice can be made between a single farm payment and a uniform area payment. The concept behind the calculation of the single farm payment is very complicated. Therefore it is probable, as in most of the countries in the EU-10, that the simpler concept of a uniform area payment is applied. All claims for direct payments as a part of the area payments and the livestock payments have been combined in a budget. The available funds will be paid out in accordance with the agricultural area of the country and the calculated amount will be paid out as an area payment per hectare of cultivated area. An exception exists for the acceptance of the common rights and obligations for the purchase of agricultural and forestry areas by other European Union citizens. They still have to abide by the national regulations for seven years. A different regulation applies only to farmers from the Member States who have leased land in Romania and Bulgaria prior to accession.

Romania and Bulgaria both have significant production potential, which is not only limited to grain production but also includes livestock production. Both countries already contribute around 6 percent to European Union grain production, 11 percent to oilseed, 3 percent to beef, a good one percent to pork and 3 percent to poultry meat production. This potential was not only recognized early on by many foreign investors who made investments there. The European Union also encourages this move by providing special support programmes, which include, for example, the support for up to 50 percent of the costs of investment. For this, the good production locations are to be found directly at logistically important locations close to the Danube, which make the exporting of goods possible as well as the procurement of resources. It can therefore be assumed that Romania and Bulgaria will develop into important agricultural locations within the European Union. However, this will not happen overnight but will need some time.

IMPACT OF ANIMAL DISEASE OUTBREAKS ON LIVESTOCK MARKETS: AN FAO ANALYSIS

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While it is recognized that animal disease may have a significant local impact, the growing interdependence of livestock markets
is creating awareness of the broader costs on livestock industries around the globe. Certainly, escalating outbreaks of animal diseases have increased market instabilities, most recently with a recurrence of FMD in South America, the identification of BSE in various major exporting countries and, most specifically, the ever widening and troublesome spread of AI, especially its H5N1 variety, around the world. These outbreaks have tested the resilience of global livestock markets that have recently exhibited the slowest growth in trade over the past decade. The notification of trade bans for meat has never been higher and, increasingly, consumers’ concerns about meat safety are leading them to shift consumption to other animal proteins. As governments express rising concern about the socio-economic impact of animal disease prevention and control, the zoonotic nature of H5N1 is raising the costs of prevention and disease control, prompted by the possibility of a disease pandemic affecting the human population

In the context of considerable policy challenges posed by animal disease to livestock producers, meat processing industries and policy-makers around the globe, this analysis reviews the status of the major animal diseases currently affecting markets and assesses some preliminary scenario results of three broad animal disease scenarios involving AI, FMD and BSE outbreaks 6. The examination of alternative model simulations helps identify and assess critical aspects of the impacts of animal diseases on markets. In particular, it provides general benchmark estimates on the market and trade costs of these diseases under different scenarios, while providing a framework to assess some of the factors and policies that can influence the market impact of different types of animal diseases.

Animal Disease Outbreaks: An Update

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Recent market developments in meat markets are set against a backdrop of animal disease-induced market instability in recent years characterized by consumption shocks, variability of export supplies, and price volatility. The onset of AI in Asia (AI outbreaks in late 2003 and early 2004) coincided with the discovery of BSE in North America, a region which supplies nearly one-quarter of global meat exports. Exacerbating market instability were the FMD outbreaks in Argentina and Brazil in late 2005.

Avian Influenza

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New AI detections in the major consumption areas of nearly 40 poultry importing nations in Western Europe, the Near East, and Africa in late 2005/early 2006 led to major consumption shocks and translated into shifting trade flows, dramatic price declines, and supply responses in both infected and non-infected countries. While more than 220  million birds are estimated to have been culled since the onset of the disease, this accounts for less than one percent of the 52 billion birds slaughtered annually. Most of the market and trade impact of AI are closely linked to consumption and the imposition of trade restrictions. However, the culling and high mortality of birds certainly has had an impact on the livelihoods of poultry-dependent households in many of the least developed countries. In addition, the unproductive “downtime” forced on affected poultry farms has had a negative effect on industry profitability and market stability while there have been broader ripple effects through global markets as consumption and trade shocks have affected prices for meats and industry inputs around the globe.

In the European region, AI outbreaks were confirmed in 25 countries, with trade bans put in place for those nine countries where AI was identified in domestic poultry operations. Approximately 69 countries put bans on poultry products from the various affected Member States within the EU-25. Eleven of those did not adopt a regional approach and imposed bans on all European Union products. In addition to bans related to H5N1, trade restrictions were also put in place on products from the Netherlands which in August identified a low pathogenic avian influenza strain on one farm. With short-term consumption shocks in the EU-25 ranging between 70 percent in Italy, 40 percent in France, and 0-10 percent in other member countries, European Union aggregate chicken prices declined by 15 percent in late 2005.

Foot-and-Mouth Disease in South America

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Brazil: In October 2005, FMD outbreaks in the cattle sector were reported in two Brazilian States, Mato Grosso do Sul and Parana. These two States previously accounted for 50 percent of Brazilian’s beef exports. Bans were imposed by over 50 countries, but the overall export impact was mitigated by the regional nature of the bans imposed by the European Union and the Russian Federation, recipients of nearly half of Brazil’s beef exports, which targeted only the two affected states. The Government expects to send soon documentation to the World Organisation for Animal health (OIE) requesting the reinstatement of sanitary status as an area free of FMD with vaccination. The end of September sees the conclusion of the six-month period required after the last animals were culled on the properties affected. The regionalization of export bans allowed the beef sector to maintain export volumes at almost the previous years’ level, because slaughterhouses substituted beef from the affected states with that produced in states completely free of FMD such as Goias, Mato Grosso and Minas Gerais. This process of substitution was facilitated by Brazil’s diversified export markets covering over 150 countries.

The pork sector in Brazil has been more disadvantaged by the FMD outbreak than the beef sector, which actually experienced the outbreak. This is despite the fact that the share of exports to production, at 21 percent, is similar to that of beef. The pork sector has a heavy dependence on the Russian Federation market, the destination of 65 percent of Brazil’s total pork exports. This, combined with a decision by the Government of the Russian Federation to extend the ban to Santa Catarina (the only State in Brazil which has the status of being completely free of FMD without vaccination) and Rio Grande do Sul, has led to serious damage to the industry with prices declining on the Brazilian domestic market by 30 percent, well below the costs of production. Approximately 60 countries have imposed import restrictions on pork from Brazil. While exports were reported down more than 25 percent in the first half of the year, a resumption of trade to the Russian Federation from Rio Grande do Sol in mid-year implies some export recovery. There have been attempts in 2006 to diversify markets to FMD areas, in particular Singapore, Hong Kong and other smaller markets in Africa and Asia.

Argentina: In early February 2006, FMD was detected in the province of Corrientes. Since the outbreak, Argentina has lost its
FMD-free with vaccination status, a suspension which could last 6-8 months as the country responded to the outbreak through the stamping out of around 5 000 head
(mainly cattle).The trade impact has been minimal because, with the exception of Chile, most major markets only banned imports from Corriente, a province which accounts for only
2 percent of Argentine beef exports.

Bovine Spongiform Encephalopathy in North America

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In 2003 BSE infected cows were discovered in North America, a region which supplies nearly one-quarter of global beef exports (valued at US$4 billion). Since then, net export availabilities of beef from the region have been significantly reduced by about one million tonnes. It was only some 30 months after BSE was found in Canada (May 2003) and the United States (December 2003) that major high value Asian beef markets started to re-open the access to Canadian and United States beef cuts. The economic impact of the prolonged ban on North American beef products extended beyond the immediate effects on the two affected markets (see below) as reduced exportable supplies prompted a nearly 20 percent increase in Pacific market beef prices (supported also by rising chicken prices in the context of AI).

The BSE-related market losses in Canada and the United States have differed depending on the two countries’ export dependency and net trade position. For example, the Canadian cattle industry exported 12 percent of its live animals and nearly 50 percent of total beef production prior to the identification of a BSE-infected animal in May 2003. After more than two years, at a total estimated cost of over US$4 billion, exports of meat are gradually recovering. Exports of live animals are languishing as exports of cows are still banned; however, exports of young cattle are rebounding. In 2003 alone, the value of Canadian beef and cattle exports declined by over US$1billion (US$400 million for beef, US$700 million for live cattle). In the case of the United States, the country is a net beef and live cattle importer and, although one of the world’s largest beef exporters, its exports account for only 10 percent of production . The value of United States beef exports, following the detection of two BSE-cows dropped by US$2.6 billion in 2004, while the absence of United States beef in global markets contributed to raising international prices. However, domestic prices remained relatively high as imports adjusted. This contrasts with the domestic impact in Canada where a more dramatic dependence on international export market, as indicated above, immediately translated into cattle prices dropping by approximately 50  percent and reduction of cattle and calf receipts for 2003 by 33 percent from previous year’s level (Statistics Canada, 2004).

Animal Disease Scenarios: Some Model Results

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There is no established conceptual framework for analysing the global cost of animal diseases; however, estimates of producer market losses that arise from various disease outbreak scenarios can be estimated by model simulation. The results could prove useful for governments and international organizations when evaluating policy interventions that seek to mitigate aggregate costs.

OIE Rules on Disease Freedom

    Foot-And-Mouth Disease:

    To be recognized as an FMD-free country without vaccination, a country should show that there has been no outbreak of FMD and that no vaccination against FMD has been carried out during the last 12 months. When FMD outbreak occurs in a FMD free zone where vaccination is not practiced, the following waiting period is required: 

    •3 months after last case of stamping out

    •3 months after slaughter of all vaccinated animals where a stamping out policy is imposed

    •6 months after the last case or the last vaccination where stamping out policy was
    not applied.

    When FMD outbreak occurs in an FMD free zone where vaccination is practised, one of following is required:

    •6 months after last case where stamping out is applied

    •18 months after the last case where a stamping out policy is not applied.

     

    Avian Influenza:

    For an AI-free country, zone or compartment, no infection for the past 12 months. If an infection occurs in a previously free zone, disease-free status can be regained three months after a stamping-out policy is applied. Low pathogenic poultry can be kept for slaughter or stamping out, disease free status can be regained three months after disinfection of all affected establishments.

    Bovine Spongiform Encephalopathy:

    Determining the BSE risk status of the cattle population of a country, zone or compartment is done by conducting a risk assessment, which is reviewed annually, that identifies all potential factors for BSE occurrence and their historical perspective. These factors include a number of factors such as feeding regimes, live animal movement and importation of beef products. In the case of a positive BSE finding, full documentation must be provided to demonstrate related cattle have been completely destroyed. A claim of negligible or controlled risk must be substantiated.

    Zoning, Regionalization and Compartmentalization :

    Regionalization (or zoning) and compartmentalization are procedures implemented by
    a country to preserve the distinct health status of a specific geographic area or subpopulation (in the case of compartmentalization) for the purpose of international trade. The exporting country defines this zone/compartment in respect to the specific disease and the measures recommended by the OIE with the importing country recognizing this status.

    This section provides some preliminary estimates of the impact on production, consumption, trade and prices from disease outbreaks, of AI in Europe, Brazil and the United States, FMD in Brazil, and BSE in North America. The discussion focuses on:
    1) the role that market characteristics play in determining individual country market losses; 2) the impact that regionalization policies have on disease costs;
    3) the nature of consumer responses in influencing market losses; and
    4) the differential market impacts of various animal diseases.

    The heterogeneous nature of meat products and markets complicates modelling of the sector and this needs to be taken into consideration in understanding the results. For example, the world beef and pigmeat markets are considered to be divided into at least three market segments. These markets, the Pacific Market (PM), the Atlantic Market (AM), and the FMD endemic market (FMDM) have been established over time, largely on the basis of the FMD status of the various countries, but also by trading patterns and trade agreements 7/8

Avian Influenza Scenarios

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Various scenarios on the market and trade impact of AI were analysed:

    Global AI consumption shift/shock of 10 percent away from poultry to other meats 9

    AI outbreak in the European Union: two scenarios with loss in exports for six
    months 10 Annual average equivalent of a complete ban on exports for six months., first, with no consumption shock, second, with a 10 percent consumption shock in the European Union.

    AI outbreak in Brazil: loss in exports for six months, no consumption shock.

    AI outbreak in the United States: loss in exports for six months, no consumption shock.

Results are examined relative to the baseline projection for 2006, and are shown in
Tables 1-4.

Global consumption shock due to AI

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The impact on global markets and trade of shifting consumer preferences in all countries against poultry meat is demonstrated in Scenario 1, which simulates the effect of a global 10 percent shift away from poultry towards the other meats in 2006 (see Table 1). In the first year, trade in poultry products falls by 13 percent and international prices by almost 7 percent. World production and consumption of poultry meat decline by nearly 6 percent. Given the lag in supply response of other meats, prices increase considerably, with beef and pigmeat prices up from 10 to 20 percent in the Atlantic and Pacific markets. Feed prices fall as poultry production contracts and other meat production remains largely unchanged in the first year. However, the model, when carried into future years, illustrates the global markets’ ability to respond to market shocks, with feed demand recovering in subsequent years as production of other meats rises. Clearly, sharp meat consumption shifts, as currently witnessed in global poultry markets, have large ripple effects throughout the broader agricultural economy.

Table 1. Scenario 1: Worldwide 10 percent preference shift
away from poultry consumption

  World Developed Least Developed Other developing
POULTRY    
Production-5.8-4.7-5.5-6.7
Consumption-5.8-5.5-6.2-6.0
Imports -16.2-8.0-12.3
Exports-13.3-7.7n.a.-18.9
     
INTERNATIONAL PRICES:    
Poultry-6.7   
Atlantic pigmeat14.9   
Pacific pigmeat18.8   
Atlantic beef15.8   
Pacific beef10.7   
Maize-3.2    
Oilmeal-3.3   

Notes: In this scenario, the consumption preference shift away from poultry is re-allocated to other meats on a proportion basis using world consumption shares of 2004-05. An n.a. value for LDCs results from the fact that exports from these countries are minima .

AI outbreak in the European Union

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In Scenario 2a, a simulated reduction in European Union poultry exports, channelled into the domestic market in the short term, reduces European Union chicken prices by almost 4 percent. In response to a 7 percent decline in production, a shortage of white poultry meat results in increased imports. As competitors move to fill the global supply shortages, international poultry prices increase by almost 2 percent, while substitution effects increase the prices of beef and pigmeat. Scenario 2b is identical to 2a, except that a 10 percentEuropean Union consumption shock (i.e. a shift left in the demand schedule), which is allocated proportionally to other meats, has been assumed. In this scenario, chicken prices decline by over 6 percent, poultry output by almost 12 percent and consumption by almost 7 percent. The consumption shift affects the domestic pigmeat sector and, given the biological lag that limits the supply response for the first year, prices rise by almost 12 percent. Pigmeat prices in the Pacific market, which is the highest value destination for European Union pigmeat, rise only one percent, as European Union supplies to that market are reduced. In the beef sector, increased beef consumption attracts imports from the Atlantic market, causing beef prices in that market to rise 3.5 percent. The price and trade impacts of a significant shift in European meat consumption patterns stimulates higher Brazil and United States poultry exports. Finally, while under the first scenario producer market revenues (as measured by the sum of the price and output changes) fall by about 11 percent (or about €1.2 billion), they fall almost 18 percent (or about €2.1 billion) under a consumption preference shift away from poultry meat.

Table 2. Market and trade impacts of AI outbreaks
in the European Union

Scenario 2a: AI outbreaks in the European Union : No consumption preference shift

  World EU Brazil United States Developed Least Developed Other developing
% Change
POULTRY       
Production-0.2-7.02.10.4-2.01.01.3
Consumption-0.20.8-1.30.00.3-0.8-0.6
Imports 37.10.00.09.3-3.9-8.6
Exports-0.6-5010.22.5-12.2n.a.10.9
        
PRICE:       
Poultry1.6-3.82.10.3   
Pigmeat0.0-1.20.40.0   
Beef0.0-0.60.00.1   

Notes: Applied to 2006 base projection. Assumes trade bans last six months. Results for annual data. For the European Union, the world reference prices used are the Pacific pigmeat prices and Atlantic beef prices

Scenario 2b: AI outbreaks in the European Union : 10  percent preference shift away
from poultry

  World EU Brazil United States Developed Least Developed Other developing
% change
POULTRY       
Production-1.0-11.91.50.6-3.40.91.0
Consumption-1.0-6.6-0.30.2-1.7-0.9-0.4
Imports -0.40.00.03.0-4.5-8.5
Exports-3.2-505.83.0-12.3n.a.5.8
        
PRICE:       
Poultry1.2-6.21.50.5   
Pigmeat1.511.8-0.11.5   
Beef3.64.73.60.6   

Notes: Applied to 2006 base projection. Assumes trade bans last six months. Results for annual data. For the European Union, the world reference prices used are the Pacific pigmeat prices and Atlantic beef prices

AI hypothetical outbreaks in Brazil and the United States

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Scenarios 3 and 4 evaluate hypothetical AI breakouts in Brazil and the United States (see Tables 3 and 4). Not surprisingly, given their large share of world trade, these scenarios hold broader implications for international poultry markets than that of the European Union, which only accounts for 10 percent of global trade. These two examples show how market shocks differ for countries depending on their relative linkages to international markets. A 50 percent export shock in Brazil, which exports about 30 percent of its production, leads to a 10 percent reduction in domestic poultry prices. Meanwhile, given the lower export dependence of the industry in the United States, where exports (almost exclusively lower priced dark meat) account for only 15 percent of domestic output, the same proportionate loss of export markets is estimated to reduce production and prices by some 7 percent. The obvious lesson demonstrated by these scenarios is that greater involvement in international markets exposes a country to proportional greater “market access risk”; e.g. the price/sales risk that is associated with higher export dependence. In these two scenarios, market revenue losses, as exports are banned for the duration of six months, are 20 percent in Brazil compared with about 14 percent in the United States. Effects on international markets obviously depend on relative market shares, the importance of trade to the overall industry, and the destination of trade flows.

Table 3. Scenario 3: Hypothetical AI outbreak in Brazil:
No consumption shock

  World EU Brazil United States Developed Least Developed Other developing
% Change
POULTRY       
Production-0.1-1.8-9.80.20.61.4-0.6
Consumption-0.1-0.65.7-0.1-0.2-0.90.0
Imports 25.00.00.0-2.5-3.3-9.7
Exports-6.38-501.53.9n.a.16.7
        
PRICE:       
Poultry3.42.7-9.70.4   
Atlantic pigmeat-3.00.8-3.00.0   
Beef-1.70.4-1.70.1   

Notes: Applied to 2006 base projection. Assumes trade bans last six months. Results for annual data

Scenario 4: Hypothetical AI Outbreak in the United States : N o consumption shock

  World EU Brazil United States Developed Least Developed Other developing
% change
POULTRY       
Production0.03.53.2-6.6-2.22.21.7
Consumption0.1-0.4-1.71.30.4-2.3-0.1
Imports -20.20.00.0-3.3-11.6-5.6
Exports-6.22315.0-50-25.3n.a.12.8
        
PRICE:       
Poultry2.31.83.0-6.8   
Pigmeat0.70.50.7-1.4   
Beef0.90.30.9-2.1   

Notes: Applied to 2006 base projection. Assumes trade bans last six months. Results for annual data

FMD Scenarios: The Impact of Regionalization

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The market and trade impact of an outbreak of FMD in Brazil is assessed for the two year period, 2006-2007. Scenarios 5a and 5b illustrate the differential impact that may be anticipated under an OIE recognized regionalization approach, under which importing countries ban beef only from the disease-stricken regions, versus a scenario that does not recognize regionalization, which results in a total ban of imports from the country, rather than the region in the country (Table 5). In the case of Brazil, the world’s largest beef exporter, the assumed difference in export levels due to regionalization, as evidenced in 2006, is significant; for beef, under a regionalized market, exports of beef and pork fall by about 9 and 60 percent respectively, compared with a 100  percent reduction for both product exports, under a no-regionalization assumption.

Under the regionalization11 scenario (see results in Table 5), the decline in beef exports in 2006 of about 10 percent is accompanied by a drop in market prices of 16 percent in the first year. Domestic production falls less than one percent in the first year, as the product moves onto the domestic market; however, the total market revenue loss is estimated at 16-17 percent of market receipts in the first year. Lower production in the second year causes domestic prices to rebound to previously projected levels, with market revenue losses of only 2.5  percent. Beef prices in the Atlantic markets, as measured by the Argentinean export price, rise by nearly 7 percent, reflecting the lower export supplies to that market in the first year, but by only 2 percent in the second year. The market impacts gradually erode subsequently as market access is regained as bans are lifted. For the pigmeat sector, a reduction of exports of almost 60 percent pushes down domestic prices by 26 percent in the first year. Producers respond to the lower prices of the previous year through an output cut of 9.5 percent in the second year, 2007. Given the significant market share of Brazil in the Atlantic pigmeat market, Atlantic pigmeat prices rise by over 60 percent in the first year, before moderating in the second year.

Under an assumption of no-regionalization, the impact of an outbreak of FMD in Brazil is estimated to be very severe. A simulated total ban of exports in 2006 pushes down domestic prices of both beef and pigmeat by more than 50 percent, as all exports are disposed of in the domestic market. Market revenues for beef fall by almost 60 percent in the first year, and by 22 percent in the second year, compared with the baseline projection. For pigmeat, the results are more severe with market revenue losses estimated at 56 and 28 percent in the first and second year, respectively. Prices in both the Atlantic beef and pigmeat meat markets respond drastically to significantly lower supplies and prices increase by about 80 percent in each of these markets . The closing of price differentials between market segments cause major changes in international trading patterns, with participants of the premium Pacific markets also shipping to the Atlantic markets as the prices in the later market rise. This scenario highlights the very important role played by regionalization policies, not only in stabilizing the domestic market of a major trading country, but in limiting price volatility in international markets. Clearly, the benefits arising from the application by partner countries of the regionalization principle are greater the larger the export dependency and international market share of the disease-affected country.

Table 5. FMD Outbreak: Trade impacts of regionalization
– the case of Brazil

  Scenario 5a: Scenario 5b:
  Regionalization No regionalization
  World Brazil World Brazil
  2006 2007 2006 2007 2006 2007 2006 2007
Impact on the beef sector
Production 0.0 -0.2 -0.8 -2.7 0.2 -0.4 -4.0 -13.4
Consumption 0.0 -0.2 1.8 -0.7 0.2 -0.4 24.9 12.6
Imports     0.0 0.0     0.0 0.0
Exports -1.3 -0.9 -9.6 -9.0 -8.7 -6.6 -100 -100
                 
Impact on the pigmeat sector
Production 0.0 0.2 0.0 -9.5 0.0 0.3 0.0 -20.2
Consumption 0.0 0.1 14.3 2.2 0.0 0.2 23.9 -1.6
Imports     0.0 0.0     0.0 0.0
Exports 0.4 -2.8 059.7 -59.6 -0.1 0.7 -100 -100
                 
Prices
Pigmeat 62.8 2.6 -26.4 -3.8 83.0 61.1 -50.1 -8.6
Poultry -0.5 0.1 -0.6 0.1 -1.8 -0.5 -2.3 -0.7
Beef 6.5 2.1 -15.6 0.3 76.1 50.0 -56.0 -27.5
Feed 0.0 0.8 0.0 0.3 -0.1 1.4 0.0 0.5

Scenario 2a: Total ban on Brazilian beef: 100 percent reduction in exports
of beef and pigmeat

Scenario 2b: Regional bans on three states: 200 000 tonnes reduction in beef exports, 60 percent reduction in pigmeat exports

BSE in North America: Transitioning Back into International Markets

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The effects of BSE in Canada and the United States have been assessed in several studies. The key impact of this disease has been to reduce exportable supplies from these countries
to the Pacific Market by about one million tonnes of beef annually. Severe domestic price depression created by excess domestic supply, particularly in Canada, but also in the United States, has led to a contraction of the industry. As trade bans have been lifted, first between these two countries where intratrade is significant, then by importers in Pacific markets, the North American beef sectors are gradually returning to a pre-BSE situation.
Of clear concern is the long-term impact of prolonged trade bans, the ability of the sectors to recover and to regain their international market shares, as well as the broader incentives related to long-term investment in the industry.

To evaluate the implications of re-establishing market shares, the baseline projections, which assumed a lifting of trade bans, is contrasted with a simulation which extends trade bans into the indefinite future. The difference between these scenarios provides an impact assessment of BSE in North America on international beef markets and a measure of the length of time that markets take to adjust to the lifting of the trade bans.

Figure 1 illustrates the response of both the Canadian and United States and Canadian industry over the projection period to 2015 after trade bans are removed, compared with a situation where trade bans are retained. This scenario shows the responsiveness of North American beef output to the higher domestic prices associated with the relaxation of the ban. In fact, the adjustment time is very slow, with production continuing to adjust over the ten year period. Output is only 6 percent higher than if trade bans were to have remained in place. The industry recovery allows it to supply to the Pacific market the one million tonnes that had been precluded by the trade bans. This boosts North American (United States) domestic prices by 5 to 10 percent higher over the period, while Pacific market prices decrease 15 to 20 percent, compared with a situation where trade bans continue.

Food Outlook

Notes: The charts show the percentage difference from a base where trade bans continue against North America, and a projection where bans are lifted.

Conclusions

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This article has reviewed the status of the three major animal diseases, namely AI, FMD, and BSE, which have been major causes of instability in meat markets and trade over the past three years. Through the use of a newly developed modelling framework, it also presents the results of three broad animal disease scenarios and draws some lessons on several factors that critically influence market losses from animal diseases and their international market impacts.

Some of the preliminary conclusions of the study are that:

    international market responses to animal disease outbreaks depend critically on the type of disease, the
    nature of consumer responses, the size of the market affected and trade linkages.
    Obviously, the impact of animal disease outbreaks, in the form of market losses, is highest for countries where the
    outbreak occurs and is in proportion to the country’s export dependence. The prevalence of disease-related market
    segmentation, such as those existing for beef and pigmeat, create higher international impacts for those market segments;


    consumer reactions play an important role in determining the size of market losses associated with animal diseases,
    with non-disease infected exporters significantly and adversely affected. Government policies that seek to sustain consumer
    confidence could mitigate market losses, thus minimizing market impacts, both in-country and globally;

    regionalization is
    a very effective instrument to limit market losses to countries that are experiencing an animal disease outbreak and to stabilize
    international markets. This has proved to be the case for Argentina and Brazil, where the potential market impacts of FMD outbreaks
    could have been extremely severe in the absence of importer recognition of in-country zones;

    a return to market equilibrium
    following a significant disease outbreak varies by disease and meat product. Poultry markets rebound very quickly, given the rapid supply
    responses of the industry, in contrast to beef markets which may take a decade to return to equilibrium.



6.  As a part of its Cosimo Project, a collaborative modelling effort with the Organization for Economic Cooperation and Development (OECD), FAO has enhanced the coverage of the world meat market, including the Pacific and Atlantic beef and pigmeat (including FMD and FMD-free) markets, and the global poultry meat sector. The model includes important domestic and trade policies that condition global market responses and supports cross-commodity analysis through linkages to the major markets for grains, oilseeds and oilseed products and milk and dairy product markets

7.  In 2004-05, the Pacific Markets accounted for some 46 percent of world beef exports and 68 percent of world pork exports. Atlantic markets accounted for 51 percent of world beef exports and 29 percent of world pork exports. The remaining FMD markets account for the remainder and are small.

8.  In general, the Pacific Market for beef includes North and Central America, Oceania, Japan, South Korea, Thailand and a portion of the Chinese and Indonesian markets; it is similar for pigmeat but includes the Philippines and high quality cuts from the European Union The Atlantic Market for beef includes South America, Malaysia, Viet Nam, various countries in North Africa and the Middle East, Eastern Europe and the remaining portion of the Chinese and Indonesian markets; for pigmeat, lower quality cuts from European Union are also included. The FMDM is the residual market

9.  The “shift” is interpreted to mean a shift in the demand schedule such that for the same prices and incomes, consumers consume 10 percent less poultry meat.

10.  Annual average equivalent of a complete ban on exports for six months.

11.  Exports not allowed from the two disease-affected states.

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