EC AGRICULTURAL POLICY: IMPACT OF GERMAN UNIFICATION AND EAST EUROPEAN REFORMS

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 06296175
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• Original Classification: U
• Document Page Count: 20
• Document Creation Date: December 28, 2022
• Document Release Date: August 28, 2018
• Case Number: F-2017-01874
• Publication Date: August 1, 1990

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Directorate of
Intelligence
Confidential
(b)(3)
EC Agricultural Policy:
Impact of German Unification
and East European Reforms
An Intelligence Assessment
Cenfickh
EUR 90-10025
August 1990
(b)(3)
(b)(3)
(b)(3)
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Directorate ot
Intelligence � .�
EC Agricultural Policy:
Impact of German Unification
and East European Reforms
An Intelligence Assessment
This paper was prepared by
Office of European
Analysis. Comments and queries are welcome and
may be directed to the Chief, Issues and Applications
Division,
Reverse Blank
Confirlentini
ConfidentialEUR 90-10025
August 1990
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(b)(3)
Key Judgments
Information available
as of 9 August 1990
was used in this report.
EC Agricultural Policy:
Impact of German Unification
and East European Reforms
(b)(3)
German unification and the revitalization of East European agriculture
will gradually build pressures on the European Community to reform the
protectionist Common Agricultural Policy (CAP), which has been the focal
point of the sharpest US�West European trade disputes. The CAP�a
system of tariffs and subsidies to protect EC farmers from outside
competition�is already an expensive proposition for the EC. Although the
Community can sustain the system for several more years and will try to
avoid major concessions to the United States in the ongoing Uruguay
Round talks, the potential transformation of Eastern Europe into an
agricultural powerhouse by the mid-1990s is likely to force further
burdensome increases in EC subsidy payments. Under such circumstances,
budget constraints almost certainly would force the EC to contemplate
sweeping CAP reforms. We believe the EC would opt to couple such
measures with managed trade arrangements that would continue to limit
the access of competitive US farm products.
(b)(3)
In our view, the EC can deal with the immediate challenge of absorbing
East Germany into the Community without making fundamental changes
to the CAP. The concern of most Europeans to anchor Germany firmly in
the Community is likely to lead to generous EC decisions in expanding
dairy and grain quotas to include East German production. Even so, after
unification occurs, the former German Democratic Republic will be
unlikely to burden unduly CAP finances in the next year or so because in-
creased demand for food in eastern Germany is expected to outstrip any
rise in its agricultural output. Revenues from sales of surplus EC food
stocks to the east will probably be enough to offset the costs of buying any
excess eastern dairy and grain output. (b)(3)
With the CAP currently under little budgetary pressure, politics�particu-
larly in Germany�will govern the EC reaction to the US push to cut
agricultural subsidies, especially those on exports. The current political
climate, however, does not bode well for significant EC trade concessions in
the GATT Uruguay Round that is to be concluded by the end of 1990. The
Kohl government, for example, is facing a national election in December
and is loath to antagonize the crucial farm vote.
By the late 1990s, however, strong gains in East European agriculture may (b)(3)
well make CAP costs increasingly intolerable to the EC member states.
Some leading European agricultural experts anticipate a 20-percent in-
crease in the farm output of the eastern half of Germany over the next de-
cade. If this happens, CAP spending will have to rise to buy up mounting
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surpluses in such commodities as grain. Likely gains in agricultural
productivity from economic reforms elsewhere in Eastern Europe will turn
the region from a net importer of agricultural goods to a net exporter by
the end of the decade. This development probably will add to the CAP's
budget woes by pushing down global food prices and forcing the EC to in-
crease export subsidies�if permissible under GATT rules�in order to
maintain market share. These mounting costs, coupled with reduced
influence of the farm lobby as the number of West European farmers
declines, will probably make the EC more amenable to US arguments for a
reduction in agricultural subsidies.
Movement to reduce CAP subsidies later in the decade will not necessarily
make agricultural trade issues significantly less difficult for US-EC
relations. Member-state demands for some continued protection of agricul-
ture might lead the Community to contemplate other managed trade
policies troublesome to the United States. We believe the influential
Germans may push for market-sharing arrangements that could limit
access of US agricultural products to the Community. Soybeans and
nongrain feedstuffs are obvious targets, although we believe the EC�
fearing US retaliation�would not support measures directly limiting US
exports. Rather, the Community might cloak protection for its farmers by
claiming it is helping to reform East European countries and might
indirectly reduce US exports by granting East European products preferen-
tial access to the EC market.
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Contents
Contents
Page (b)(3)
Key Judgments
Introduction
iii
1
German Unification: Limited Near-Term Impact on CAP Agriculture
1
The Medium-Term Impact: Competitive Challenge Likely
3
East European Farmers: Eyeing the EC Market
6
Agricultural Surpluses: Sowing the Seeds of CAP Reform
9
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How the CAP Works
The EC's Common Agricultural Policy was created
in the early 1960s, at a time when one worker in five
in the Community was a farmer. Reflecting the
political as well as economic significance of agricul-
ture, the EC's original members�France, West Ger-
many, Italy, the Netherlands, Belgium, and Luxem-
bourg�set the following ambitious and sometimes
contradictory goals for the CAP: to increase agricul-
tural productivity, stabilize markets, ensure a fair
standard of living for farmers, guarantee regular
supplies of food, and ensure reasonable prices for
consumers.
Of the three general principles governing the opera-
tion of the CAP, Community preference affects third
countries the most. Through the imposition of fixed
import duties on some farm goods and variable levies
on others such as wheat and corn, it protects Commu-
nity farmers from outside competition. The variable
levies come into play when world market prices fall
below the minimum import price, or threshold price,
set by the EC. Should EC prices go below the world
price, which rarely happens, the Community would
use an export levy to keep products inside the
Community.
Common pricing�which requires the price of an
agricultural commodity to be the same throughout
the Community�is the primary CAP internal sup-
port mechanism and is similar to the support price in
the United States. Every spring the Council of Minis-
ters of Agriculture from the member states sets prices
for all the commodities on the basis of proposals
from the EC Commission. According to the third
principle, common financing, the EC pays for the
CAP out of its own Community-wide revenues, which
come primarily from customs duties and a share of
member state value-added tax collections.
The EC's agricultural support program, as applied, is
one of the most generous in the world. A recent
OECD assessment estimated that CAP expenditures
in the early 1980s amounted to over 40 percent of the
value of production, more than 20 percentage points
above the US level. The generosity of the programs
has been necessitated in large part by the inefficiency
of the EC farm sector, a phenomenon caused primari-
ly by the small scale of production. The average size
of an EC farm in the mid-1980s was 9 hectares-14
hectares if Spain and Portugal are excluded�at a
time when the average US farm was 175 hectares.
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EC Agricultural Policy:
Impact of German Unification
and East European Reforms
Introduction
The EC's Common Agricultural Policy (CAP)�the
Community's most protectionist program�reflects
the political, economic, and social importance of
agriculture to the EC member states (see inset, oppo-
site). It was the first and, until the 1992 Single
Market Program, the only truly "common" policy
implemented by the member states. The CAP, which
claims roughly 55 percent of the EC budget or $30
billion, bolsters farm income with guaranteed support
prices and protects Community farmers from outside
competition through fixed import duties on some farm
goods and variable levies on others. Since the estab-
lishment of the CAP, the EC has changed from a net
food importer to a major agricultural exporter, cut-
ting dramatically the access of the United States and
other food exporters to the EC market. Ballooning EC
export subsidies have helped move mounting food
surpluses out of Community storage and into world
markets. This has heightened the competition US
farmers face in third-country markets.
We expect the East European countries" transitions
to market economies to pose two challenges to the
CAP:
� The immediate problem will be accommodating
East Germany's agriculture under Community pro-
duction quotas as German economic unity proceeds.
� Over the medium term, a surge in, agricultural
output from other East European countries�viewed
as likely by many experts�will increase pressure on
the EC to improve market access for East European
foodstuffs and may lower world agricultural prices
enough to push CAP subsidies up to prohibitive
levels.
' In this paper, we consider East Germany and the rest of Eastern
Europe separately.
1
(b)(3)
German Unification: Limited Near-Term Impact
on Agriculture
Over the next year or two, we expect German unifica-
tion to provide more opportunities than problems for
Western farmers. The demand in eastern Germany
for more varied and better quality food products
almost certainly will grow with economic recovery,
but the region has little capacity to respond quickly to
the expected increase in demand:
� East Germany's grain harvest will approach record
levels this year, but the region probably cannot
become self-sufficient ingrain, at least in the near
term.
� More important, the US Embassy reports the Ger-
man Democratic Republic cannot currently produce
adequate quantities of high-value products such as
fresh fruits and vegetables that East German con-
sumers desire.
(b)(3)
Even if the short-term measures designed to shield
GDR farmers from intense Western competition had
worked, the GDR's $1.2 billion deficit in agricultural
trade�already one of the highest in Eastern Eu-
rope�almost certainly would have widened (see inset,
page 2). Embassy reporting indicates that West Ger-
man agricultural exports to the GDR climbed 80 (b)(3)
percent in the first quarter of 1990 while GDR farm
exports increased only 7 percent.
The likelihood that East Germany will remain a net
agricultural importer in the near term should ease its
absorption into the CAP, especially in the important
dairy and grain sectors. These two sectors, along with
meat and oilseeds, account for the bulk of CAP
spending, according to Embassy reporting (see figure (b)(3)
1). To keep spending on surplus output in check, the
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(b)(3)
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East German Agriculture After German
Economic and Monetary Union
Bonn and East Berlin have agreed on a variety of
transitional support programs to protect the teetering
East German agricultural industry. East German
consumer demands are being met by West German
firms with the result that the marketing of East
German products has almost completely broken
down. Bitter farm protests have occurred across
eastern Germany prompting East Berlin to announce
an emergency aid package for its farm sector. The
primary support system is:
� Financial. East German authorities have imple-
mented a cash compensation program. This is
intended to assist East German farmers in adapting
to the introduction of the EC pricing system and
boost the liquidity of all East German farms. East
Berlin allocated $500 million for this aim in July.
As of 1 July, East Berlin is buying all agricultural
raw materials at EC intervention prices to cushion
the impact of rapid adjustment of producer prices;
East Berlin plans to buy up the entire grain harvest.
East Berlin will also provide subsidies to reduce
output�modeled on the West German acreage
reduction system.
� EC Access. Effective 1 August, East Germany
became a de facto CAP member, and East German
agricultural products are permitted to move freely,
without levies or border duties into all EC coun-
tries. Because these products must meet EC quality
and health requirements�few do�most exports
will be limited until food-processing plants are
upgraded. Instead, GDR farms will ship their prod-
ucts to West Germany for processing, and then
export.
Unification will also force German leaders to address
the thorny issue of land ownership. The East German
agricultural sector is dominated by roughly 4,000
farm collectives that were forcibly collectivized on
the Soviet model in the late 1950s. West German
agricultural interests favor reprivatization, in hopes
that dismantling the collectives would diminish the
competitive threat, but farm specialists in eastern
Germany want to avoid unnecessarily fragmenting
the GDR farm sector. Compensation payments to
West German citizens having title to large tracts of
GDR territory expropriated by the Communists will
almost certainly be part of the solution, although the
legal issues will not be fully settled for some time.
EC instituted dairy quotas and measures to stabilize
grain production in 1984 and 1988, respectively. The
Community must decide how much to raise the
existing production limits to take account of the
GDR's entry.
We expect the EC to be fairly generous in making
these decisions, in part to avoid antagonizing Bonn at
a time when most Europeans want to "anchor" Ger-
many firmly in the Community:
� With Western Europe's famous butter and cheese
mountains now virtually eliminated, the EC proba-
bly will decide that it can raise the milk quota to
accommodate most eastern German milk produc-
tion�an estimated 8 percent of present EC produc-
tion. Press reports indicate West German Agricul-
ture Minister Kiechle expects that perhaps 75
percent of existing East German milk production
could be included in the EC quota.
� Similarly, the EC probably will expand the grain
quota�which, if breached, automatically reduces
the following year's prices�by 4 to 6 percent
because the GDR at present is a large net grain
importer. Nonetheless, we believe the Community is
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Figure 1
European Community: 1989 CAP Budget,
by Product
Percent
Other 15.3
Fruits/
vegetables 4.3
Wine 5.1
Sugar 8.0
Cereal/rice 13.0
Daily 19.6
Oils/fats 17.1
Meat 17.6
Unclassified
32761.2 8-90
unlikely to agree to any German demands to sus-
pend rules mandating an automatic 3-percent cut in
price supports if the new production limits are
breached.
The EC probably will be able to offset the costs of
buying up eastern German dairy and grain output
through expanded sales to the region of Community
surplus products, such as fruit, vegetables, and wine;
Dutch vegetable sales have already soared.
With German unity imposing limited near-term costs
on the CAP, the EC is unlikely to alter significantly
its position on agriculture in the GATT Uruguay
Round talks. EC Agriculture Commissioner Mac-
Sharry's recent proposal to cut farm support and
protection by 30 percent over 10 years is a minimalist
position that is far from meeting US demands on
agricultural reform. The Community believes it has
made a major concession by accepting partial "tariffi-
cation"�an idea advanced by Washington whereby
nontariff barriers such as import quotas are converted
into tariffs and then reduced�and apparently hopes
that a delay in serious talks until at least September
will prompt concessions from GATT members con-
cerned about meeting the December deadline for
3
concluding the Uruguay Round negotiations. More-
over, political considerations will constrain the EC's
scope to negotiate in the next few months. With an
all-German election set for early December, the Kohl
government is loath to antagonize the crucial farm
vote by making sweeping concessions, although we
believe he will be more flexible after the vote. Al-
though the EC is unlikely to accept US proposals for
rapid liberalization of agricultural trade and elimina-
tion of subsidies, we believe the Community still
places a high value on successful completion of the
GATT talks. Thus, when the Uruguay Round enters
the homestretch, EC leaders will, in our judgment,
give the talks the high-level attention necessary to
strike bargains on contentious issues.
(b)(3)
The Medium-Term Impact: Competitive
Challenge Likely
By the mid-1990s, agriculture in eastern Germany
could pose a major competitive challenge to farmers
in western Germany. West German agricultural spe-
cialists note that parts of the GDR were once consid-
ered the "granary of Germany" and that some of its
land is still potentially the most productive in Germa-
ny (see figure 2). Soil around Leipzig, for example,
scores close to 100 on a West German 100-point scale
that assesses soil on the basis of type, fertility, and
crop yields. The GDR region also enjoys better cli-
matic conditions. Even more important, the economies
of scale made possible by eastern Germany's large
farm cooperatives confer significant potential advan-
tages (see table 1). Many of the collectives' component
farms are likely to be reprivatized, but we expect
farms in eastern Germany to remain much larger
than those in the west�and become more efficient,
once the farm sector sheds up to half its current work
force. (b)(3)
Economic reforms and modernization accompanying
unification will allow farmers in the east to exploit
these advantages. Market-determined prices will
strengthen incentives for the production of goods that
eastern Germany produces most efficiently. Eastern
German farmers will be able to apply Western know-
how to improve yields on their superior land; at
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(b)(3)
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iulideuitia
Figure 2
Grain Yields in the Germanys, by Administrative Division
el`
i
Frankfurt-f1
Final borders of Germany have not been established.
East Germany has located the seat of its government
in the Eastern Sector of Benin. However. Greater
Berlin, including all four occupied sections, retains
its Four-Power juridical status.
Munich
Grain yields (100kWha) - 1987
1.1 57.0 and above
51.5 - 57.0
47.0 - 51.5
42.5 - 47.0
37.0- 42.5
IL=
190 Kilometers
100 Miles
Unclassified
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719134 (1301076) 7-90
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Table 1
West and East German Agricultural
Sectors: A Snapshot a
West
Germany
East
Germany
Size
Hectares (million)
12.0
6.0
Farms
685,000
4,000
Employment (million)
1.5
0.9
Average farm size (hectares)
17
1,500
Grain production (million tons)
Wheat
12.0
4.0
Barley
8.4
4.2
Rye
1.6
2.2
Yields (100 kilograms per hectare)
Grains
50.6
45.6
Winter wheat
60.0
54.2
Barley
49.9
47.1
Potatoes
332.0
272.7
Sugar beets
507.1
350.2
Producer prices
Wheat
36.6
(DM)
66.5
(OM)
Feed barley
33.15
60.3
Rapeseed
89.0
149.0
Potatoes
26.0
48.67
Milk
69.35
163.03
a Data is from 1987.
This table is Unclassified.
present, crop yields are roughly 20 percent below
West German levels. Moreover, investments in trans-
portation, storage, and distribution systems will re-
move bottlenecks that currently limit production and
raise costs in the GDR farm sector.
Analysis by Agra Europe, a leading European journal
on agricultural issues, projects increases in current
GDR production of 20 to 30 percent within a few
years as a result of such reforms, with the greatest
gains in grain, meat, and milk output. Embassy
reporting, however, indicates that some East German
officials are less optimistic; they believe that the
5
emphasis being placed on the environment may limit
yield increases-or take land out of production-and
dampen eastern German agriculture's competitive-
ness.
The Kohl government is committed to aiding farmers
in eastern Germany even though enhanced competi-
tion for agriculture in the west may result, according
to Embassy reporting.' West German Agricultural
Minister Kiechle is focusing on rationalization of
agricultural production and conversion to environ-
mentally sound practices. For example, the Agricul-
tural Ministry in Bonn is likely to urge the GDR to
pursue "extensification"-substituting less potent
natural fertilizers for the chemical fertilizers used
under the Honecker regime's intensive agricultural
strategy. In addition, Bonn agreed initially to channel
DM 4 billion ($2.4 billion) in 1990 and DM 7 billion
($4.2 billion) in 1991 to the east for structural im-
provements and environmental upgrading, and has
since upped its financial commitment. Bonn also
dropped all restrictions and quotas on GDR farm
products, according to Embassy reporting, so that raw
materials can be shipped to West Germany for fur-
ther processing. The bulk of this production will be
exported-mainly to the USSR and Eastern Europe
with EC export subsidies.
If, as we expect, Bonn's help permits eastern Ger-
many's agricultural output eventually to outstrip its
demand for food, a surge in CAP spending by the
mid-to-late 1990s is probable. Surpluses in commod-
ities such as grain would accumulate, forcing the EC
to spend vast sums to subsidize exports-if still
permitted under post-Uruguay Round GATT rules-
or to store the excess.' The size of the increase in CAP
outlays will depend on world agricultural prices and
the health of EC economies. A decline in world food
'Regional farm associations in West Germany are pitching in as
well. The Bavarian Farmers' Association is organizing seminars
and providing information to GDR farmers, including assistance to
the newly organized Saxon farmers' association.
' The USDA estimates that merely bringing East German yields
up, and feed use levels down, to West German levels would make
approximately 3-4 million tons of wheat and barley available for
export each year. We estimate this would result in a $300-450
million increase in CAP spending. (u)
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prices boosts subsidies the EC must provide to make
its exports competitive and makes the high EC sup-
port prices more untenable in the face of rising
production surpluses. European economic health in-
fluences CAP spending because under a February
1988 agreement increases in outlays are restricted to
74 percent of the Community's GNP growth rate.
East European Farmers: Eyeing the EC Market
A similar, if less rapid, transformation of other East
European countries into substantial agricultural ex-
porters would add to the pressure on the CAP, even if
the EC does not open its doors to Eastern agricultural
produce (see inset, page 7). The region has the poten-
tial to become an agricultural powerhouse. Poland
and Czechoslovakia have abundant pastureland and
meadowland that is ideal for animal husbandry, espe-
cially dairying, and orchard production, according to
the USDA. Hungary, Romania, Yugoslavia, and Bul-
garia already are relatively important food exporters
and have broad, fertile land conducive to grain and
oilseed crops. These, in turn, can support intensive hog
and poultry feeding complexes.
But such a transformation is not certain. While it is
relatively easy to project consumption levels, produc-
tion levels depend heavily on policy choices that have
not yet been made and require financing that has not
yet been secured. We have devised three scenarios to
portray the range of possible outcomes. In all cases,
we have assumed that no country in the region
becomes a member of the EC by the late 1990s:
� The status quo scenario. We assume yields will
remain at their 1989 levels and that each country's
acreage under cultivation will be in line with the
trend established over the last decade. In Poland, for
example, the land devoted to agriculture climbed by
7 percent during the 1980s; in Czechoslovakia,
Hungary, and Romania, however, the percentage
declined as marginal land was taken out of
production.
� The enhanced productivity scenario, which we con-
sider the most likely case. This scenario takes
account of the impact that land reforms,' better
access to agrochemicals and machinery, and up-
graded distribution systems are likely to have on
yields. In it, we assume that the East Europeans are
able to cut the existing gap between their yields and
those of EC members in half, with land under
cultivation increasing at the trend rate from the
1980-89 period. The biggest gains would come in
Bulgaria, Poland, and Romania.
� Increased productivity and land use scenario. This
final scenario posits that both productivity and land
under cultivation rise. We have assumed that each
country's agricultural acreage in the year 2000
equals its past high or the trend value, if that turns
out to be larger. Admittedly, development priorities
of East European regimes may argue against an
expansion in agricultural land use. Indeed, marginal
land cultivated during the first decades of Commu-
nist rule, when many regimes strove for self-suffi-
ciency, probably would not be returned to farming
in an efficiency-oriented market economy. More-
over, environmental damage sustained in once-fer-
tile farm regions may limit various countries' abili-
ties to boost agricultural production (see inset, page
8).
The differential impact on trade of these three scenar-
ios is most evident in the grain sector. Whereas
Eastern Europe remains a substantial net importer in
the status quo scenario, the region becomes a signifi-
cant exporter in the other two (see figure 3). At the
end of the decade, enhanced productivity alone would
turn the region into a net exporter of nearly 14 million
metric tons of grain, with Romania exporting the bulk
of the total. With enhanced productivity and more
land under cultivation, the region would be a net
� Land reforms are already occurring in some countries: Romania
has distributed about 27 percent of its agricultural area to the
peasantry, and Sofia has promised 30 hectares to any Bulgarian
who will cultivate the land. (u)
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East European Food Exports:
Knocking on the EC's Door
East European countries view agriculture as an im-
portant sector of their economies and will emphasize
it in their reform programs. It accounts for about 20
percent of the region's GNP and employs nearly 22
percent of the labor force. This compares with 2.3
percent of GDP and 8 percent of the labor force for
the EC. Moreover, exports of food and raw agricul-
tural products have been both a major earner of hard
currency on Western markets and important in barter
trade with the USSR to acquire energy and raw
materials.
The East Europeans are pressing for increased access
to the EC market�particularly in the meat, dairy,
and grain sectors�in order to earn badly needed
hard currency to modernize their economies. A Hun-
garian economic official, for example, has expressed
concerns over EC protectionist tendencies, arguing
that the EC needs to open its agricultural markets
and abandon its agricultural subsidies if it is serious
about aiding the East. The EC has always been a key
market for East European agricultural goods, taking
about a third of the region's agricultural exports. In
fact, Eastern Europe is a net exporter of foodstuffs to
the Community despite protectionist EC policies,
such as quotas on East European beef that were
imposed in 1974.
(b)(3)
The EC probably realizes that it will have to make
concessions to the region in agriculture or face the
anomaly of supporting liberalizing economic reforms
in the East European countries while still protecting
the EC's own highly managed agricultural system. In
our view, the EC is likely to grant the East Europe- (b)(3)
ans "controlled access" to its agriculture market�
potential East European food exports are in sensitive
EC sectors�working out new voluntary-restraint-
type agreements with the individual East European
countries or expanding old ones. These would most
likely be in the meat and dairy sectors, along with
some grains. It already has increased the beef quotas
granted to Hungary, Romania, Poland, and Yugosla-
via, and suspended import levies for sheep and goat
meat for all the East European countries except
Romania.
exporter of over 27 million metric tons of grain.
Romania would again be the biggest producer by far,
followed by Hungary and Poland.
The scenarios have a less wide-ranging impact on
other agricultural sectors:
� Output of livestock products, such as meat, milk,
and eggs, is likely to increase 14 percent if the
productivity gap with Western Europe is halved,
according to our analysis. The rise could reach 24
percent if farmers increase their herds in response to
profits under a market system. Bulgaria, Poland,
and Romania will share the largest increases in
output.
7
(b)(3)
� The region's output of oilseeds is likely to increase
10 percent over the next decade under the enhanced
productivity scenario. Import needs will decline (b)(3)
although Eastern Europe will remain a net importer
of this product.
� Vegetable and fruit production is likely to expand
only modestly over the medium term. The produc-
tivity-enhancing measures we assume for grain cul-
tivation�more use of agrochemicals and machin-
ery�are less appropriate for these crops. Produc-
tion in this sector is highly labor intensive, and most
agricultural experts do not foresee significant in-
creases in this type of effort by the large cooperative
farms expected to dominate Eastern Europe's agri-
culture.
�Canfidentitel---
(b)(3)
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Environmental Degradation in Eastern Europe
Pollution of agricultural lands and water may limit
the ability of Eastern Europe to increase food pro-
duction. Even if it does not, US and EC concerns
about health risks and food quality probably will
constrain export opportunities:
� According to Czechoslovak press reports, dairy and
livestock products as well as sugar and vegetables
contain high concentrations of nitrates because of
inappropriate use of fertilizer.
� East German journalists allege that overproduction
of liquid manure at one state enterprise has re-
leased large concentrations of ammonia and nitrate
gasses into the atmosphere and ground water, poi-
soning wells, rivers, and farmland within a 10-mile
radius. An entire forest was destroyed and the area
now resembles "Afghanistan," according to locals.
� Military reporting indicates ground water in Roma-
nia remains relatively uncontaminated in the Banat
region. Surface water is highly contaminated, how-
ever, with bacteria, agricultural chemicals, and
heavy metals.
� Bulgarians have frequently voiced concerns about
the concentration of radioactive materials in the
food supply, especially in the aftermath of the
Chernobyl' disaster.
The magnitude of Eastern Europe's competitive chal-
lenge to West European agriculture also will depend
on the development of East European trade with the
USSR. For the foreseeable future, the region will
continue to obtain most of its energy and raw material
imports from the Soviet Union, partially in exchange
for food and agricultural products. Many East Euro-
pean officials fear that, at least for the next several
years, the region's terms of trade with the USSR may
well deteriorate, as more and more of their trade is
put on a hard currency basis at world prices, accord-
ing to Embassy reporting. If these concerns prove
Figure 3
East Europe: Agricultural Trade Balance a
Thousand metric tons
30
25
20
15
-10
1980
85
90
95
Yields and area
cultivated rise
/
Yields rise
2000
a Data for 1980-89 are based on historical data, those for
1990-2000 are baseline and scenarios.
327613 8-90
true, the volume of Eastern Europe's exportable sur-
plus in agriculture going to the USSR almost certain-
ly will not diminish and may well increase. This, in
turn, may well limit the increase in East European
food exports to the world market.
Quantifying the effects of expanded East European
production on CAP spending is extremely difficult.
Should our most optimistic projections prove correct,
the region's net exports would surpass present EC net
exports and equal approximately 5 percent of current
world grain production. Such a large increase in food
exports almost certainly would put downward pres-
sure on world prices, but the price decline could be
8
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-Confidential-
Table 2
Eastern Europe: Supply and Demand
of Wheat and Coarse Grains
Area Har-
vested
(million
hectares)
Yield
(metric
tons per
hectare)
Produc-
tion
(million
metric
tons)
Net Imports
(million
metric tons)
1979/80
29.0
3.14
91.1
14.7
1980/81
29.0
3.35
97.2
11.5
1981/82
28.8
3.31
95.3
8.2
1982/83
28.8
3.70
106.6
3.9
1983/84
28.9
3.54
102.3
2.4
1984/85
29.0
3.96
114.8
-0.6
1985/86
28.7
3.56
102.2
4.6
1986/87
29.1
3.86
112.3
2.4
1987/88
28.5
3.61
102.9
4.3
1988/89
29.1
3.59
104.5
3.0
1989/90
29.2
3.73
108.9
4.7
This table is Unclassified.
either mitigated or deepened by weather-related pro-
duction changes elsewhere, such as a drought-induced
shortfall in grains. In any case, EC CAP costs would
rise in response to falling world prices. USDA esti-
mates, for exampleouggest that-in the reverse
case-a 1 Ecu ($1.20) increase in the US export price
of wheat results in a nearly $120 million decline in EC
export subsidies.
Agricultural Surpluses: Sowing the Seeds of
CAP Reform
The concerns of the German Government, which is
among the most determined defenders of the CAP,
are likely to guide the EC's handling of growing
European agricultural surpluses. Bonn's traditional
protectionist stance on agriculture has been influ-
enced by a mix of political, social, historical, and
economic factors, including the homage paid to small
family farms as an integral part of West German
rural society. At least half of West German payments
to farmers are social security payments designed to
limit pressures on them to leave farming, even if they
are no longer competitive, according to Embassy
9
reporting. These policies have been followed by Ger-
man governments through the years; indeed, German
agricultural trade has been tightly controlled since
Bismarck's chancellorship over a century ago
We expect Bonn to respond more constructively to the(b)(3)
pressures for CAP reform likely to emerge during the
latter half of the 1990s.5 The impact of unification on
Germany's complicated balance of regional power,
even more than economic forces, is likely to be
decisive in changing Bonn's hardline agricultural poli-
cy. At present, West German agricultural policy is
shaped by the politically influential south-Bavarians
have held the Agriculture Ministry for over 20
years-rather than the more efficient north, accord-
ing to Embassy reporting. The development of more
efficient farmers in eastern Germany will eventually
dilute Bavaria's influence on agricultural policy and
probably tip the balance in favor of greater market
liberalization. Assuming that northern Germany
shares in the economic boom unification is expected to
bring, northern farmers are likely to find common
cause with their eastern counterparts and be more
supportive of a more market-oriented agriculture re-
gime.
(b)(3)
Other Community members are also likely to view
more favorably fundamental reforms of the CAP-
tougher production quotas and virtual elimination of
subsidized export prices-by the end of the decade.
Paris, a frequent hardline supporter of subsidies,
already is indicating that it believes French grains are (b)(3)
competitive in a free market and occasionally es-
pouses making the CAP more market oriented, ac-
cording to Embassy reporting. Other factors will
probably work to weaken political support for subsidi-
zation of agriculture in Europe:
� Concerns over the environmental damage from agri-
cultural overproduction are likely to grow in coming
years, pushing the EC to implement reforms that
would reduce its agricultural surpluses.
German policymakers will probably also feel pressure for CAP
reform from consumers in eastern Germany. While polls consistent-
ly show that West Germans are prepared to pay high prices for
agricultural products, the reaction of East Germans to the sharply
higher food prices that accompanied German economic union
clearly shows that they are not. Since income levels in eastern
Germany probably will lag those in the west for some time, German
leaders will almost certainly encounter pressure to accept reforms
that lower food prices in order to ease the burden in the east.
-Confidential-
(b)(3)
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� Demographic trends�especially the expected re-
tirement during the next decade of the majority of
farmers in both Germany and France�will reduce
the farm lobby's political influence.
� Over time, the EC-92 program of deregulation is
likely to help liberalize the agricultural sector.
Stronger competition and investment in the Euro-
pean food industry may well build demand for more
specialized agricultural products and divert re-
sources away from traditional agricultural goods
that currently are in surplus. Cheaper East Europe-
an products in these traditional areas might, in turn,
find a larger EC market.
Nonetheless, the EC will remain committed to some
residual protection for agriculture. Over the next
several years, as the scope of Eastern Europe's chal-
lenge to CAP and world agricultural trade becomes
clearer, we expect to see discussion of options ranging
from retargeting subsidy policies to market-sharing
arrangements. Some aspects of this debate may move
Community agricultural policy closer to US
preferences:
� Some agricultural lobbyists have advocated "great-
er regionalization" of the CAP. This idea, which is
opposed by many Europeans as a step away from a
"common agricultural policy," would grant national
governments more latitude in providing aid. Even
though Bonn is likely to stop short of embracing
regionalization as a concept, we believe it will boost
direct subsidies�perhaps in the form of regional
aid�to German farmers.
� Alternatively, the Commission and member states
might opt to substitute direct income supports to
farmers for price supports. This would bring Euro-
pean agricultural policy more in line with US farm
policy, but the EC has staunchly resisted this ap-
proach because it believes that income supports
would create production distortions of their own in
the agricultural market and weaken countries' abili-
ties to correct the imbalances.
At least one option that may appeal to the highly
influential Germans could pose a major obstacle to
US exports to Western Europe, however. More specif-
ically, Bonn may be increasingly attracted to the idea
of a global market-sharing arrangement in which the
European market would be closed to non-European
farmers in exchange for ending the dumping of
surplus EC food on the world market. This policy has
been primarily advocated by farmers in southern
Germany. Conservative leaders in the north have
begun to back it, too. Proposals to limit the access of
US agricultural products to the Community�partic-
ularly soybeans and nongrain feedstuffs�could re-
ceive increasingly serious attention.
Although we believe the EC would be reluctant to
push openly for direct limits on US agricultural
products out of fear of retaliation, the Community is
likely indirectly to limit US access to its agriculture
market by granting greater access to East European
producers of lower priced products. Some Europeans
are beginning to believe that, if the EC market must
be opened, they would rather have the East Europeans
the beneficiaries than US farmers, according to Em-
bassy reports. Association agreements that are likely
to be negotiated between the EC and East European
countries in the next year probably will be the vehicles
for setting up such a market-sharing regime.
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