EU accession and grain imports : the financial implications on major corporate grain users

Abstract

The objectives of the study were to analyse the main changes in the grain import system in Malta following EU accession, and evaluate the financial implications of these changes on the local major corporate grain users, namely the only flourmill run by Federated Mills pie. and the two major feedmills - K.P.H. and Andrews Feeds (Malta) Ltd. Apart from reviewing data on the subject, research included data collection from document analysis, an in-depth interview with a representative of Medigrain Ltd., structured interviews with senior management of the major corporate grain users and observations of global and EU grain markets and related local industries. Malta depends completely on hard and soft wheat imports for the production of flour by the only local flourmill and on barley and maize imports for the production of animal feeds by the feed-milling entities. After the 1980s, Medigrain Ltd. a state-controlled monopoly was entrusted with the task of importing all the grain and selling it at fixed prices, with the Price Stabilisation Fund absorbing fluctuations in the imported grain costs. Malta's accession in the EU on 1 st May 2004 necessitated the adoption of the Acquis Communitaire and in particular the Common Agricultural Policy (CAP) and the Common Organisation of the agricultural markets (COM) for grains. This brought a radical change in the grain import system with various implications on the major corporate grain users. Firstly, Malta had to liberalise its grain imports and thus Medigrain Ltd. ceased its operations. Private importers, particularly the major corporate grain users took over this role. Secondly, the Price Stabilisation System was phased out and grain users had to cope with the grain market fluctuations and variable imported grain costs. Thirdly, there was a shift from world market prices to EU internal market prices which are normally higher. EU export subsidies were lost, import duties for imports from non-EU countries were charged. In the case of the flour-milling company, EU accession had no influence on hard wheat imports with respect to specifications, source and cargo size, whereas world market prices remained applicable. As to soft wheat imports, EU accession had no impact on the specifications and cargo size, but the EU internal market mechanism contributed to shift to an EU source of supply and from world market prices to EU internal prices. The import costs of both hard and soft wheat increased significantly, mainly due to market conditions, which had to be faced by the flour-milling company following the removal of the PSF system. Moreover, EU accession brought drastic increases in the stock levels, cash operating cycle and additional financing and working capital requirements. The cost increases were reflected in increases in the selling price of the baker's flour. However, the company still had a competitive edge over foreign competitors since the locally manufactured flour is most suitable to make Maltese bread. The two major feed-milling entities formed a joint venture to import their barley and maize requirements jointly. In the case of both barley and maize, EU accession had no impact on the specifications, but the EU internal market mechanism contributed to shift to an EU source of supply and from world market prices to EU internal prices. This contributed to a significant increase in the cost of barley and maize imports. Moreover, EU accession also brought significant increases in the stock levels, cash operating cycle and additional financing and working capital requirements. However, the cost increases were cushioned by the temporary state-aid granted during the period under review. This enabled the feedmills to keep their selling prices of animal feeds unchanged so as to ensure stability to operators in the livestock sector who faced increased competition upon removal of levies for imported food products. On a concluding note, it must be emphasized that the study was related to the period immediately following Malta's EU accession, where the major implications emerged from changes in the structure, regulations and protectionism in the local grain import system. Hence further future changes will then be more a reflection of amendments in regulations and fluctuations in market prices. Therefore, the major corporate grain users need to adapt to the new situation and exploit the flexibility to take decisions and other opportunities regarding their grain imports in order to compete and meet the challenges brought about by Malta's accession into the EU