US plans boost in grain production. Drought, US-EC subsidy wars spur desire for change in policy

When American farmers start planting next spring, the roar of their tractors may be heard as far away as Europe. That's because the United States is gearing up to boost grain production after several years of trying to limit output. The buildup is a natural response to this year's drought-shortened harvest. It is also a warning to Western Europe: free-trade agriculture or else.

Negotiators at last week's multilateral trade talks in Montreal could hardly miss the message - or its context. The US and the European Community (EC) strongly disagree over the direction of farm policy. And their smoldering dispute blocked implementation of other agreements reached in Montreal over liberalizing trade in areas such as services and tropical fruits.

Some commentators worry that this farm fight could jeopardize the whole round of current talks under the 96-nation trade compact called GATT (General Agreement on Tariffs and Trade). But several agricultural policy watchers remain convinced an agreement can be reached.

``What happened [in Montreal], I think, is unsurprising,'' says Rob Johnson, a spokesman for Cargill, the large US grain-trading company. ``One has to be more optimistic than two years ago. ... It's much too early to be writing the effort off.''

Secretary of State George Shultz and European Community Commission president Jacques Delors set a similar tone in Brussels on Friday, saying the talks were not a failure. The negotiations start up again in Geneva in April.

A major reason for optimism is the world's agricultural situation.

Two years ago, the EC and the US were fighting an angry trade war. Overburdened with surplus grain, they were using subsidies to sell their excess abroad. The drought changed that equation suddenly, raising prices and reducing the need for the subsidies. This financial easing has given both sides some political breathing room.

Grain reserves are so small, in fact, that prices have soared in recent months and US Agriculture Secretary Richard Lyng has scaled back several acreage-idling programs for next year's crops. Economists expect US farmers to respond with a one-time boost of perhaps 60 percent in corn and 40 percent in wheat over this year's harvests.

``From there on, increases would be fairly slow,'' says Bob Wisner, an Iowa State University economics professor. As long as normal weather prevails and the economy does not collapse, it will take several good harvests to get back to the surplus levels of two years ago, he says.

Furthermore, other major food-exporting nations are unlikely to match the US expansion in production next year, says Sara Schwartz, an economist with the US Department of Agriculture.

Some farmers, such as those in the EC, are so well insulated from world markets that they will feel little impact of higher world grain prices. Still others, such as Australian farmers, have already expanded into nongrain commodities and, thus, are unlikely to switch back to grain.

The breathing room will not last forever, nor does it guarantee a diplomatic solution to the US-EC impasse. On Tuesday, US Trade Representative Clayton Yeutter repeated the American demand that all trade-distorting farm subsidies be phased out gradually. The EC has agreed only to reduce, not eliminate, its complicated web of subsidies that prop up millions of small European farmers.

But it is one more indication that several forces are at work beyond the current negative rhetoric.

In August, when a US economic analysis group projected the world agricultural situation up to 1995, it found what is now obvious to everyone: Changes in weather, technology, and the economic health of nations are at least as important as farm policy in determining the well-being of world agriculture.