Agricultural prospects following German unification

Agricultural prospects following German unification

Mary Lisa Madell

Agricultural Prospects Following German Unification

Abstract: The unification of East and West German has proceeded more quickly than anticipated. As a part of a united Germany, East Germany joined the Common Agricultural Policy of the European Community on October 3, 1990. East German agriculture is structurally very different from West German agriculture. Looking ahead, unification will have profound effects on the agricultural economies of both Germanys, and on the future of the CAP.

Keywords: Unification, Germany, EC, Common Agricultural Policy, socialist agriculture.

The unification of East and West Germany has proceeded more quickly than anticipated. Unification has added significant agricultural resources to former West Germany and the European Community (EC) (table 1). At the same time, the agricultural sectors of the two parts of Germany are vastly different from one another, and these differences will pose significant economic, social, and political problems, many of which have already surfaced. The most obvious concern the future of former East Germany’s agricultural lands and farmers as the structures, programs, and policies of socialism are dismantled. Also, the unified German Government assumes an added fiscal burden. And because of Germany’s importance in the EC and the world economy, many of these problems will have international repercussions for some time to come.

Table : Table 1 – Comparative agricultural sectors, East and West Germany, 1989

Item East Germany West Germany

Agricultural GNP ($ billion) 15.95 27.90

Agricultural GNP per rural

inhabitant ($) 11,200 13,520

Land (million hectares) 6.2 11.8

Labor (percent of work force) 10.8 4.2

Sources: Agricultural GNP: (14); land; (6); labor (6).

The Unification Process and Its

Consequences For East German

Agriculture

The first economic steps toward unification took place with monetary union between East and West Germany on July 1, 1990. Most German prices were liberalized and farm goods began to be traded in Deutschemarks (DM) and at EC prices, changing the prices and price relationships which East German producers faced. These prices had promoted national self-sufficiency and particularly favored production of meat and dairy products. A transitional intervention buying system was also set up alongside the subsidization which East German farms had received. One month later, all EC quotas and import levies on imports from East Germany were abolished.

On October 3, 1990, East Germany ceased to exist as a political entity. On the same day, its five federal states joined West Germany. When unification occurred, Community law became applicable in the territory of the former East Germany. The process of adopting EC laws and policies, including EC customs legislation and the Common Agricultural Policy (CAP), has begun in the five East German states.

To ease the transition, the five East German states have received temporary exemptions from some EC laws. They have been granted derogations for EC feedstuff regulations until the end of 1991. Full adoption of EC veterinary and plant health laws is scheduled for the end of 1992, and air and water standards in 1996. Almost all the Single Market legislation entered into force with unification, but the European Commission will allow substantial German national subsidies for agriculture in the east.

The Commission decided to maintain existing Maximum Guaranteed Quantities (MGQ’s), production ceilings beyond which automatic price cuts go into effect, for cereals and oilseeds for the 1990/91 marketing year, but East German production will not be included in the total. Nor will East German production be counted toward the MGQ’s for sheep or tobacco. East German producers, however, will face the same price cuts or increases in coresponsibility levies, or taxes, that result from exceeding the MGQ’s.

The former East Germany now has its own milk and sugar quotas. The milk quota has been set at 6.59 million tons, which represents 80 percent of current production and will require a significant reduction in dairy cow numbers (approximately 300,000 animals). The Commission wants to compensate East German dairies for this production cut with a one-off (one-time) payment to producers. For the first 3-percent reduction in output, the producer will receive a premium of 42 ECU/100 kg, and for the next 4.5 percent, the premium will be 21 ECU/100 kg. (1) In order to facilitate the rationalization of East German dairying, the quotas will be tradable within the five East German states through 1991. The sugar quota has been set at 847,000 tons, somewhat higher than current production levels.

(1) ECU = European Currency Unit. In January 1991, the rate of exchange stood at 1 ECU = $1.37.

For East German “less favored areas” (EC terminology for disadvantaged areas that are eligible to receive development funding), a maximum EC contribution of 280,000 ECU per holding has been established. The German Government is authorized to provide special national aids to farms in less favored areas through 1991. The set-aside program is expected to play an important role in removing marginal areas from agricultural production. At the end of October 1990, applications had been received to withdraw approximately 650,000 hectares (ha) (nearly 14 percent of East German land devoted to crops) from production. The Commission has adopted special measures to govern East German set-aside: holdings of 750 ha or more will have to set aside a minimum of 150 ha to quality for the program. In West Germany, set-aside payments have averaged about 500 DM per ha.

Structural Changes

Over the years of Communist rule, East German agriculture evolved a far different structure than that of West Germany (see Box).

East German producers are already struggling to adapt to changed demand conditions and CAP limits on grain, oil-seed, and dairy production. Adopting the CAP will change traditional patterns of supply, use, and trade.

The restructuring of the East German agricultural sector will affect land and labor use in many ways. The job security and social welfare benefits farmers in the east enjoyed under the socialist system may be reduced or eliminated. As many as half of East German farmers, whose productivity does not equal that of West German farmers, could lose their jobs. Few have the experience and capital necessary to start their own farms. But before the large-scale agricultural production units in former East Germany can be restructed, the question of pending claims must be settled (see Box).

Effect of Unification on the

German Government

With unification, the German Government assumes the totality of a financial burden that was formerly divided between the two governments. This applies notably to the $21.2 billion external debt of the former East German Government. But other parts of the burden will consist of continuing expenditures, particularly for national programs of agricultural support. The German Government’s agricultural spending in 1990 was about 10 billion DM in the west and about 7 billion DM in the east.

The contribution to CAP Guarantee Section outlays from the German treasury will be large: $2.8 billion was set aside for the second half of 1990, and $4.8 billion for 1991 to provide direct aids to facilitate the adjustment of agriculture in the east.

The German Government will have to protect West German farmers from market disruptions caused by unification, while trying to help East German farmers adjust. In the immediate aftermath of unification, East German consumers’ rejection of locally produced food products resulted in cancellation of contracts with East German processors, which forced East German farms to sell their grains and livestock in the West. As East German productivity grows and as product quality improves, however, East German goods will compete for market share with West German products. Increased supplies on the market will put downward pressure on prices, and the presence of East German farm products on the market could affect West German consumer demand.

While East German yields are now lower than West German (table 3), this gap will likely be gradually closed. East German farms will not be handicapped, at least for the near term, by the inefficiencies of small size of operation, as are West German farms. Moreover, they stand to benefit not only from West German and EC structural investment, but also from improved input supply and infrastructure.

Table : Table 3 – Comparative average crop and livestock yields, 1983-88

Item East Germany West Germany

Grains (kg/ha) 4,400 5,230

Potatoes (kg/ha) 23,360 33,360

Sugar beets (kg/ha) 30,230 49,040

Winter oilseeds (kg/ha) 2,560 2,940

Milk (kg/cow) 3,821 4,713

Sources: (3 and 5).

The very large “industrial” farms of East Germany, however, are incompatible with West Germany’s agricultural policy goal of maintaining a viable agriculture based on small family farms (table 4). West Germany recently instituted a number of national policies designed to protect and promote traditional small farms while discouraging surplus production. West Germany encouraged participation in the EC’s land set-aside scheme, which was started in 1988, by providing a very high payment. The goals of the Act on the Promotion of Peasant Farming (1988) are to improve the competitive position of peasant farmers by orienting income supplements toward them and by excluding farms with herd sizes beyond a set limit from receiving certain national funds.

Table : Table 4 – Distribution of agricultural land, West Germany, 1987

Farm size in hectares Percent of

agricultural land

UAA 1/under 5 4.35

UAA between 5 and 15 15.48

UAA 15 – 30 27.15

UAA 30 – 50 24.72

UAA 50 – 100 20.43

UAA more than 100 7.88

1/UAA = Utilized agricultural area. Source: (8).

Beyond its large scale, farming in East Germany, like farming in most of the East Bloc, was not environmentally friendly. This fact raises strong feelings in West Germany, where the general public has been made very aware in recent years of the environmental damage that can result in certain circumstances from intensive use of fertilizers and herbicides. Measures to protect ground water are already in force (within the framework of an EC law, but administered by the West German states), and a Nature Protection Law is under debate. The West Germans’ belief is that large “industrial” farms are a greater threat to the environment than small farms. This perception stems from experiences of such farms in East Germany in which chemicals were applied at the wrong times or at inappropriate rates due to irregularities of supply, rather than from significant differences in application rates of chemicals between East and West Germany (table 5). Moreover, the manure disposal problem on East German specialized livestock farms revealed very real environmental damage potential.

Table : Table 5 – Comparative input use, 1988

Item East West

Germany Germany

Kg/ha Fertilizer:

Nitrogen 141.3 121.0

Phosphorus 56.4 56.8

Potassium 94.4 72.1

Total 292.1 249.9

Pesticides 4.9 2.3

Sources: (5).

Thus, in terms of both farm size and environmental impacts, the German Government faces additional challenges from integrating East German agriculture.

Effect of Unification on the

European Community

East German agriculture will require significant investment in order to bring it up to the level of production and efficiency found in West Germany. The cost of rural restructuring will be borne by the German Government and by the EC budget. The Commission has estimated that for the period 1991 to 1993, 3 billion ECU, or over $4 billion (not including the costs of the set-aside), will be required of the EC Social Fund, Regional Development Fund, and Guidance Section of the CAP budget.

Some EC countries have expressed concern that West Germany’s attention may be distracted from the process of European integration. The EC hopes to establish a European Monetary Union, and, as the member state with the strongest currency, Germany will have to take the lead. Some foresee that West German investment money will begin to flow to the east rather than to other EC countries. This latter fear is especially acute among the EC’s poorer countries, namely Spain, Ireland, Portugal, and Greece.

Impact on the Common

Agricultural Policy

As was the case in previous enlargements of the Community, the agricultural sector will pose special problems as the former East Germany adopts the CAP. The CAP is an essential part of the Community, and it relies upon a delicate balance of the member states’ interests. The fundamental changes wrought by unification may alter Germany’s role in the CAP.

While unification did not necessitate any changes in the programs or policies of the CAP, some adjustments will have to be made to accommodate East German agriculture. For example, the MGQ for grains and oilseeds will eventually have to be adjusted to include East German production. The operation of the stabilizers, and of the set-aside program, is to be reviewed by the Commission over the next 2 years. EC intervention ceilings for beef, butter, and skim milk powder have been increased to 235,000 tons (from 220,000 tons) for beef and 275,000 tons (from 250,000 tons) and 106,000 tons (from 100,000 tons) for butter and skim milk powder, respectively. In terms of budget outlays also, the impact of German unification will be felt. The EC estimates that the former East Germany will add close to a billion ECU ($1.3 billion) a year to CAP Guarantee Section outlays. It is anticipated that part of this projected increased expense will be offset by payments from the former East Germany. The EC budget for 1991 has increased the ceiling for structural spending by 750 million ECU in 1991 and 1 billion ECU in 1992 and reserved these additional funds for structural programs in the five East German states. A further 65 million ECU for other policies in the east was also approved.

With the East German states in the CAP, total EC agricultural production will expand, and the budget will have to expand correspondingly in order to pay for increased intervention purchases, export refunds, and income payments. East Germany was at, or very near, self-sufficiency in milk, meat, and repeseed. For wheat and barley, East Germany was 80 and 70 percent self-sufficient. These production levels were attained under central planning. Under the CAP, output of most commodities can be expected to increase as inputs and services to agriculture are improved.

The West German Government tried to limit the disruptive effects of East German supplies on its markets, and on its EC partners’ markets, by exporting surplus quantities of East German meat and livestock, mainly to the USSR. The EC is now responsible for financing these subsidized exports, which will add to its budget outlays for agriculture and will risk increased tensions in international agricultural trade. The EC is engaged in the agriculture negotiations under the General Agreement on Tariffs and Trade (GATT), and is under pressure from other negotiating parties to reduce its export subsidies.

Conclusion

Unification will have many significant impacts on Germany and the rest of the world. Unification will require adjustments in the vastly different social structures and economies of its western and eastern states. The other members of the EC will have to adjust to the addition of

over 16 million East Germans and to the changed priorities of the German Government. Outside Germany, unification will have impacts on international security policy, international trade, and monetary policy.

In agricultural markets, unification will put greater pressure on West German farmers as East German farmers become competitors in the German and EC markets. The pressure on prices will likely increase calls by West German grain farmers to scrap the stabilizer system, limit imports of competing feedstuffs, and institute national or regional production quotas. For their part, East German farmers are already suffering as the sector begins what looks like a long and painful adjustment to market orientation.

German unification adds a new element to the forces for change already acting upon agriculture in the EC. Increased supplies of many major commodities from the former East Germany have already begun to put downward pressure on EC prices. The added budgetary burden of intervention purchases, export subsidies, and structural payments could provide an added incentive to speed the pace of agricultural policy reform. Also, attempts to shift increased supplies of major commodities already in surplus onto the world market are bound to increase tensions between the EC and its competitors in world agricultural trade.

As the Uruguay Round of GATT negotiations, the Europe 1992 project, and the ongoing process of CAP reform force continued adjustment on EC farmers, German unification has created new pressures. These pressures are manifesting themselves on the German Government, on agriculture under the CAP, and on West German farmers, whose enterprises rely heavily on high CAP prices and generous national payments to survive.

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