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Subsidy cuts, foreign markets threaten Washington state wheat growers

(Tuesday, Aug. 26, 2003 -- CropChoice news) -- Alwyn Scott, Seattle Times via The Agribusiness Examiner: When drought struck the Midwest last year, Chris Lyle thought he would finally make a decent profit growing wheat in Eastern Washington.

Less grain from states like Kansas and Oklahoma should have meant higher prices and more customers.

Instead, he got a wake-up call from the other side of the world: Farmers from Russia and Ukraine exported a bumper crop that pushed wheat prices down and stole customers away.

"They came in and took over some of our key export markets, such as Egypt and North African countries," said Lyle, who farms 4,000 acres in Adams County.

As Lyle drives his combine across his fields this month, he's heading toward one of the biggest threats to his livelihood since the farm crisis of the 1980s.

In Washington, where farming is the second-biggest industry after aerospace, the rise of Black Sea exports threatens a product worth a half-billion dollars a year --- about half as much as apples, the state's top crop. Millions of dollars more are in jobs that depend on farming.

"We expect them to become a bigger problem instead of less," Tom Mick, chief executive of the Washington Wheat Commission in Spokane, said of European producers. "We're scared to death of the potential damage they can do." Farm support at risk, too

"The Black Sea Boys," as Lyle calls them, are only part of the problem, however. Wheat farmers also are facing the potential loss of subsidies worth millions of dollars a year because the European Union and U.S. are moving ahead with efforts to cut or eliminate farm payments.

Such proposals have knocked around trade discussions for years. But they've gained new urgency now that the EU plans to admit ten Central and Eastern European countries next year. Enlargement is the biggest change in Europe since the EU was founded after World War II, and its effects are rippling across virtually every industry.

The EU passed a reform package in June that aims to curb farm spending. But it doesn't want to put EU farmers at a disadvantage. So EU officials are preparing to lobby hard for other nations to make cuts at a World Trade Organization meeting in September in the Mexican resort city of Cancun.

How hard is the EU working? "We won't take holidays in August," said Maeve Doran-Schiratti, deputy head of the agriculture cabinet for the European Commission, the EU's executive arm, in Brussels, Belgium.

Indeed, Wednesday the EU and U.S. announced a framework for cutting farm subsidies, greatly upping the odds of a deal in Cancun. While the agreement is thin on specifics, it probably would eliminate $66 million a year from farm incomes in Washington.

Some Americans would love to turn off the farm-handout spigot. They say the money mostly pours into the pockets of large operators or city slickers who lease their fields to farmers, rather than small farms that help keep rural areas populated.

The European Union is a group of 15 nations that have opened internal borders to ease the flow of people, goods and services, creating a common market of 350 million people. While countries retain sovereignty, they are governed by rules set by EU institutions in such areas as trade, labor, environment, agriculture, economics and security. Today's EU grew from the ashes of World War II, when Europeans envisioned greater integration as a path to peace and prosperity.

Key milestones:

* January 1, 1999, the EU launched a single currency, the euro, among 11 of its members, fusing their economic policies. Two years later, notes and coins entered circulation, relegating German marks and French francs to history. Several EU members remain outside the single currency, notably Great Britain.

* May 2004, the EU will admit ten new countries from Central and Eastern Europe. Its population will then top 450 million, making it the world's third-largest geographical market after China and India and bumping the U.S. to fourth. "It's hypocritical to suggest (subsidy) programs are about saving family farms," said Ken Cook, president of the Environmental Working Group, a Washington, D.C., nonprofit organization. "What the policies really do is lavish most of the benefits on the very largest operators without any concern for the survival of those at the bottom." In Washington state, he said, the top ten percent of farm-support recipients get 61% of the money.

But cutting subsidies while Europe's farming sector is taking off probably would bankrupt hundreds of family farms in Eastern Washington.

Consider Phil Isaak. The 10,000 acres he farms with two sons and two nephews near Coulee City received nearly $1.4 million in wheat subsidies over the past six years. That ranked him fourth among wheat-aid recipients in the state --- a large operator. "What now makes up our farm at one time was 53 farms," Isaak said. Though he said he doesn't like subsidies, he worries he and others wouldn't survive without it.

"The cash crop is break even," he said. "It's the government paying us that's keeping folks on the farm."

Of course, farmers always seem to be struggling. Foreclosed on by bankers, ruined by vermin, devastated by Dust Bowl droughts, or simply bled by falling prices. In the 1980s, thousands of family farms went bust as debts overwhelmed them. Farmers lost their land, or abandoned it. Many received help from "Farm Aid" concerts headlined by Willie Nelson. A handful killed their bankers.

The heavy borrowing that doomed farms in the 1980s is less prevalent today. But there are other troubling similarities. Farming costs continue to rise, wheat prices keep falling and cheaper producers are taking a larger slice of the market.

Last year, Europe and the Black Sea area exported more wheat than the U.S. for the first time in nearly a century. While last year's crop won't be repeated this year due to a drought, it showed the vast potential of farms there. By 2008, the big surge in exports that swamped Lyle's profits last year will be the annual average export from the Black Sea area and Europe, according to U.S. Department of Agriculture forecasts.

And it will keep growing.

Over the next ten years, European and Black Sea exports will continue to exceed U.S. exports, and the lead will widen, further shrinking the U.S. share of the world wheat market, the USDA says.

Russia and Ukraine have been huge grain producers historically, he said, "but they've never really exported before."

Rich soil, abundant fertilizer and cheap labor and land give Central and Eastern Europe a big edge over the U.S. Last year, Black Sea wheat cost $1.37 a bushel, less than half the $3.20 cost of U.S. wheat, according to Mick at the Washington Wheat Commission.

The Black Sea producers still face big obstacles. Roads are poor. Trucks break down. Grain gets lost or rots on the way to market. Ports lack silos. But an infusion of post-Soviet capital is helping rebuild the farm industry. For countries in Central and Eastern Europe, joining the EU will bring investors attracted by lower risk.

Black Sea farmers don't produce the high-quality wheat grown in Eastern Washington, but hungry countries often buy the cheaper product.

The USDA forecast assumes hiccups on the road to reform of collective farms. Progress in the 1990s, for example, was largely wiped out by the 1998 financial crisis in Russia.

But Europe and the Black Sea Boys are "a bit like Japanese car makers in the 1960s," said John Bensted-Smith, an official in the EU Commission's directorate-general for agriculture. "They're here to stay as players."

If the forecast is borne out, Washington farmers would be hit especially hard. They sell 85% of the wheat they grow overseas, compared with 50% nationally.

It was during the winter of 2001-02 that Louis White made the decision to sell.

White, who is 70, was recovering from surgery and had time to consider what would happen if he died. "I wanted to carry on," he said. "But I knew I was going to leave my wife and family in a mess if something happened to me right quick."

White's grandfather homesteaded the Palouse farm near St. John in the late 1800s. But White realized he couldn't give it to either of his daughters. "It would be an injustice to them," he said. "I'd have to give them everything to get them started, and would have to take some of their income to live on for the wife and me."

So last July he and his wife, LaRena, put the place up for sale, ending three generations of ownership. LaRena could see it coming. "I do all the bookwork," she said.

If they get their asking price of $1.3 million for the 1,100 acres, they might be able to keep $350,000 to retire on after paying taxes, Realtor's fees and debt --- and with all the farm equipment thrown into the sale, White said. He owns his house in town outright, and figures the nest egg would be enough.

But after a year on the market, the Whites are still waiting for an offer. And the Internet is littered with ads like theirs, some with a whiff of desperation: "Price reduced. Sale must be all cash at closing."

A few growers in Eastern Washington don't see disaster ahead. The Black Sea Boys "are very definitely a force that we have to deal with," said Mark Schoesler, a state representative who owns a large farm near Ritzville, Adams County. "I don't know if we can ever compete with Third World conditions" such as low labor costs and weak environmental regulation.

But research and technology can keep Washington wheat in the market, he said. "If they're going to be the lowest-cost producer, we have to offer something they don't. We have to export quality."

He also thinks the EU is bluffing on cutting farm subsidies. "I'm not sure the EU really wants to have a level playing field as bad as they talk," he said. If the U.S. proposed eliminating everything cold turkey, "you could really watch those boys squirm. I think we're in a stronger position because I think they have more to lose."

Maybe that's because the erosion of farm subsidies and falling crop prices already have chipped away at farm incomes. A thousand acres of wheat used to support a family of four. Now, a family needs 2,000 acres or more to ride out downturns. Since the 1970s, the state has lost more than 3,600 wheat farms --- nearly half the number that existed 30 years ago.

"When I was growing up on the farm, a lot of the moms didn't have jobs in town," said Rusty McGuire, a lawyer in St. John who handles farm sales. "Now, a lot of guys my age, in their 30s and 40s, are basically living off what their wives make."

With farms in such weak condition, it doesn't take much to tip one into bankruptcy.

"All it takes is somebody that has geared their operation up with machinery and labor," said Jay Wernz, who has loaned money to farmers for 25 years as president of the Bank of Fairfield, south of Spokane. "If by chance they might lose some land, say that they leased from another operator, that would do it."

If Washington's wheat growers lose subsidies or more exports to competitors, "you're going to see fewer farmers," Wernz said. "I hate to say it, but that's what's going to happen."