Wheat Letter - October 27, 2011
Published: October 27, 2011
U.S. Wheat Associates (USW) is the industry’s market development organization working in more than 100 countries. Its mission is to “develop, maintain, and expand international markets to enhance the profitability of U.S. wheat producers.” The activities of USW are made possible by producer checkoff dollars managed by 19 state wheat commissions and through cost-share funding provided by USDA’s Foreign Agricultural Service. For more information, visit www.uswheat.org or contact your state wheat commission. Original articles from Wheat Letter may be reprinted without permission; source attribution is requested.
In This Issue:
1. Dynamic Corn Market Attracts Wheat Industry Attention
2. Examining the Agricultural Productivity Challenge
3. A Good Month for Trade
4. Signed FTAs Benefit Sellers and Buyers
5. USW Brings Chinese Wheat Buyers to the United States
6. USW/NAWG Boards Meet Jointly
7. Wheat Industry News
Online Edition: Wheat Letter – October 27, 2011 (http://bit.ly/rHdimN)
PDF Edition:  Wheat Letter - October 27, 2011.pdf
1. Dynamic Corn Market Attracts Wheat Industry Attention
By Casey Chumrau, USW Market Analyst
The Chicago Board of Trade (CBOT) nearby corn contract is currently trading higher than the CBOT wheat contract. This reversal of a historical trend has only happened once before in 1983. As a result, wheat industry stakeholders and grain market analysts around the world are paying close attention to the price spread between wheat and corn. And for good reason: the behavior of the corn market in recent months helps them understand the current wheat market.
On Wednesday, Oct. 26, the CBOT December corn contract closed at $6.37/bu, 18 cents higher than CBOT soft red winter (SRW) wheat. Additionally, the spread between the CBOT corn contract and the Kansas City Board of Trade hard red winter (HRW) contract and the Minneapolis Grain Exchange spring wheat contract has narrowed significantly. This reversal in relationship sent ripples through the wheat market and supports higher wheat prices.
Prior to 2006, the average monthly settlement price for the nearby corn contract hit $4/bu only three times, all in 1996. Since 2006, the average monthly corn price has broken $4/bu 30 times, peaking in April 2010 at $7.53/bu. At its basic level, the rise in corn prices is a classic supply and demand story. Demand for corn has grown significantly and the supply has not increased at the same pace, resulting in higher prices. In its October World Agricultural Supply and Demand Estimate (WASDE), the U.S. Department of Agriculture (USDA) estimated world corn consumption for 2011/12 at 863 million metric tons (MMT), 19 percent greater than the 10-year average and more than 2 percent higher than last year.
Feed use is traditionally the single largest demand on the corn supply. Over a 50-year period, U.S. corn feed use averaged 78 percent, according to USDA. However, this figure has declined each of the past 10 years, corresponding closely with rising ethanol production. The percentage of total U.S. corn consumption dedicated to feed has dropped from 74 percent in 2001/02 to an estimated 42 percent in 2011/12. In that same time, the percentage of U.S. corn production used for ethanol increased from 8 percent to 43 percent, according to USDA’s Economic Research Service. This means tighter supplies of corn for traditional feed and food consumption with prices rising closer to wheat. As a result, many feed buyers are substituting wheat for corn.
According to Oklahoma State University Agricultural Economist Dr. Kim Anderson, higher corn prices and feed grain substitution has an impact on all wheat prices because it is removing wheat from world ending stocks. In the October WASDE, USDA estimated a 21 percent increase in U.S. feed wheat use in 2011/12 compared to last year and a 12 percent increase worldwide. China is selling government wheat stocks to meet its animal feed demand triggered by tighter corn supplies and higher prices. USDA’s current estimate shows a 31 percent increase in feed wheat use in China this year over last.
Higher corn prices also lead to greater competition for planted area. In the last 10 years, as demand for corn has increased 19 percent, planted corn area in the United States increased 11 percent and wheat acreage fell 8 percent. USDA estimated that producers planted 91.9 million acres (37.2 hectares) of corn this year, a 4 percent increase from last year. Planted wheat acreage this year is an estimated 54.4 million acres (22.0 hectares), 2 percent greater than last year, which saw the lowest planted wheat acreage since 1969. Demand for wheat continues to increase, but lower planted area limits production and, therefore, U.S. and world supplies. Tighter wheat stocks mean higher prices. Competition for planted area will likely continue to increase if corn remains as lucrative.
The competition is not limited to the United States, however, as farmers around the world see higher revenue potential in corn and an opportunity to fill gaps in exportable corn supplies opened by increased U.S. domestic use. Reuters reported Wednesday, Oct. 26, that harvested corn area in Ukraine and Argentina—both wheat exporters—has increased 111 percent and 48 percent respectively since 2005.
Although corn market dynamics are not the only factor driving wheat supply, demand and prices, they are playing a significant role in determining today’s price behavior. As long as the spread between corn and wheat prices remains tight, the wheat industry would do well to continue closely monitoring the global supply and demand picture for corn.
Spread between CBOT Corn and CBOT Wheat.
2. Examining the Agricultural Productivity Challenge
The World Food Prize, established by the late Nobel Peace Prize winner Dr. Norman E. Borlaug, celebrated its 25th year with many events Oct. 11 to 14 in Des Moines, IA. The World Food Prize emphasizes the importance of a nutritious and sustainable food supply for all people.
World Food Prize laureates for 2011 are John Agyekum Kufuor, former president of Ghana, and Luiz Inácio Lula da Silva, former president of Brazil. The prize recognized their “personal commitment and visionary leadership in creating and implementing government policies to alleviate hunger and poverty in their countries.”
The organizers also brought together more than 1,000 international leaders in symposium to discuss solutions for providing food in the midst of challenges posed by political volatility, extreme weather, population growth and other factors. Among the many thought-provoking topics, Global Harvest Initiative (GHI) updated its Global Agricultural Productivity (GAP) Report first issued at World Food Prize events in 2010.
The new GAP Report finds progress in the current growth rate of agricultural productivity worldwide. Yet challenges lie ahead, especially in overcoming a wider productivity gap in Sub-Saharan Africa and Southeast Asia where the vast majority of global population growth will occur.
“We can be cautiously optimistic about the new evidence of faster productivity growth revealed this year but the long-term solutions to hunger and food security remain daunting,” said GHI Chairman of the Board Dr. William Lesher. “We must continue to pursue key policies with proven results in improving global agricultural productivity and development, such as investing in agricultural research, removing trade barriers, adopting new technologies and innovation and enhancing the role of the private sector.”
“Even greater challenges lie in our ability to facilitate the movement of food through international trade and to develop the necessary infrastructure to support more food production,” said Dr. Neil Conklin, President of the Farm Foundation, which provided funding for the GAP Report.
In the past year, USW made similar conclusions in analyzing world wheat trade and food security.
USW President Alan Tracy has presented USW studies showing that world wheat trade will likely have to double from about 125 million metric tons to 250 million metric tons by 2050. Trade growth must outpace productivity growth, Tracy noted, because regions where population is growing fastest cannot produce enough wheat to meet demand. World Grain magazine covered the report in its April 2011 issue.
Earlier this month, Tracy discussed food security strategies with participants at the International Association of Operative Millers Mideast & Africa District Conference in Jordan. Tracy challenged the perceived advantages of foreign farmland ownership and suggested that investment in logistics helps local farmers who produce exportable supplies, rather than competing with them for land. Tracy also said that because the world must produce more food with less inputs on less agricultural land, new technology—notably biotechnology—and a science-based approach to its development, regulation and implementation will continue to make agricultural production more efficient and sustainable.
Other worldwide organizations also focused on food in October:
· The Food and Agriculture Organization (FAO) of the United Nations celebrated World Food Day Oct. 16, “to strengthen international and national solidarity in the struggle against hunger, malnutrition and poverty and draw attention to achievements in food and agricultural development.”
· To promote “the delicious, nutritious and versatile role pasta plays in a healthy lifestyle,” the International Pasta Organisation (IPO) and Oldways sponsored the 17th annual World Pasta Day this past Tuesday, Oct. 25. USW is an original sponsor of the “Pasta for All” brochure now available on the Oldways website.
3. A Good Month for Trade
By Tyler Jameson, USW Assistant Director of Policy
October has been a good month for moving U.S. trade policy in the right direction. Congress received implementing bills for the three pending free trade agreements (FTA) early in the month and passed them by mid-October. On Oct. 21, U.S. wheat producers welcomed President Barack Obama’s signing of the implementing legislation for the three FTAs with Colombia, South Korea and Panama (see story below). These much-needed agreements will provide new trade opportunities and level the playing field for U.S. producers and companies.
In October, the United States also continued its efforts to further trade in new markets at the ninth round of Trans-Pacific Partnership (TPP) negotiations in Lima, Peru. This agreement would open opportunities for increased trade between U.S. farmers and companies and buyers in four countries that do not currently have bilateral agreements with the United States. U.S. wheat farmers support the nine-party talks and encourage other nations to enter this forward-looking trade agreement.
The U.S. government also implemented a long-haul trucking pilot program that allowed the first Mexican trucks to enter the United States under the program since 2009. With this development, Mexico eliminated all retaliatory tariffs on U.S. products, allowing our countries to realize full trade benefits under the North American Free Trade Agreement (NAFTA) without unnecessary tariff barriers.
Finally, Canada moved one step closer to an open wheat market with the introduction of legislation to remove the monopoly powers of the Canadian Wheat Board (CWB). We believe an open market will benefit wheat farmers in Canada, the United States and wheat buyers worldwide.
The U.S. wheat industry looks forward to advancing free and fair trade to help create more economic opportunity at home and for our trading partners.
4. Signed FTAs Benefit Sellers and Buyers
Leaders of the U.S. wheat industry applauded President Barack Obama’s signing on Oct. 21 of three long-pending free trade agreements (FTAs) with Colombia, Panama and South Korea.
USW Chairman Randy Suess, a wheat farmer from Colfax, WA, and National Association of Wheat Growers (NAWG) President Wayne Hurst, a wheat farmer from Burley, ID, attended a ceremony Friday at the White House Rose Garden, held to mark the occasion.
“We are very pleased to see these FTAs signed into law and we have already started the push to win back the wheat export business we lost without them,” Suess said.
Suess, Hurst and the Boards of both organizations are now urging the Obama Administration to work closely with our trading partners to be sure the agreements enter into force as quickly as possible.
The delay in Congressional consideration of the agreements signed in 2006 and 2007 has hurt U.S. wheat export competitiveness, especially in the Colombian market, where duties on U.S. wheat directly affect flour millers. Like other import-dependent wheat buyers, Colombian millers want multiple suppliers and a variety of wheat classes with the characteristics they need. The agreement signed Friday gives that opportunity back to Colombia’s millers and puts U.S. wheat farmers back on equal footing (at least in terms of tariff advantages) with the CWB and Colombia’s MERCOSUR trading partner Argentina.
The FTAs with Panama and South Korea also eliminate duties on U.S. wheat. While current tariffs do not significantly affect wheat exports to those countries, research commissioned by USW in 2010 showed that lowering barriers to trade increases the value and volume of all commodity exports.
Read more at www.uswheat.org/newsReleases. To see photos of Suess and Hurst at The White House, please visit http://www.facebook.com/uswheat.
5. USW Brings Chinese Wheat Buyers to the United States
A team of executives from Guangzhou Huaren Grain Trading Co., Ltd., in the People’s Republic of China is visiting the United States Oct. 19 to 28 to gain an understanding of the U.S. wheat handling and export system. The team—sponsored by USW—is meeting with the Oregon Wheat Commission, the Wheat Marketing Center, the Washington Grain Commission, the Nebraska Wheat Board, the Chicago Board of Trade and U.S. grain trading companies during its visit.
“This organization holds import/export rights for cereal and feed grains,” said USW People's Republic of China/Hong Kong Regional Vice President Matt Weimar, who is leading the team. “It is a purchasing agent for several Chinese flour millers that currently need imported, high-quality wheat to blend with domestic wheat to help meet increasing demand for more premium wheat food products.”
Weimar said that USW will continue positioning U.S. wheat as the most valuable choice to meet that need and the team’s visit will help demonstrate U.S. wheat crop quality and the benefits of the U.S. wheat supply and certification system.
In China, as in all of the countries it serves, USW offers personalized consultation for flour millers and wheat food processors. For example, Dr. Gary Hou, technical director and Asian foods specialist with the Wheat Marketing Center, travelled to China last April as a USW whole grain products consultant. Hou presented technical aspects of using whole wheat flour versus refined flour to nearly 200 participants at the first ever Whole Grain Foods Development International Forum.
Following the conference, Hou and Beijing-based USW Country Director Andy Zhao visited flour mills to discuss the benefits of using U.S. wheat in whole grain products. For example, they noted how soft white wheat could help maintain the bright white color preferred by Chinese consumers. Additionally, they showed how the stronger gluten in HRW or hard red spring (HRS) wheat could address technical challenges associated with including the bran and germ in flour.
Weimar said the team is also investigating opportunities to import U.S. wheat in containers, a delivery method preferred over bulk vessel shipments in many parts of China. Australia is currently meeting Chinese container load demand of as much as 18 million bushels (391,896 metric tons) per year.
6. USW/NAWG Boards Meet Jointly
USW and NAWG will hold a joint 2011 Fall Wheat Conference Oct. 30 to Nov. 2, in Scottsdale, AZ. The conference features committee meetings, a joint USW/NAWG board session and board meetings for both organizations. USW and NAWG leaders meet together twice each year.
Guest speakers at the joint board meeting include Arizona Department of Agriculture Director Don Butler; Senior Research Fellow Grady Gammage, Jr., with the Morrison Institute for Public Policy of Arizona State University; and CoBank Senior Vice President Candace Roper. The USW Board of Directors, comprised of wheat farmers representing the 19 state wheat commission members of USW, will also hear a review of wheat promotion activities in Mexico, Central America and the Caribbean from USW Regional Vice President Mitch Skalicky.
USW and NAWG wish to thank supporting sponsors Monsanto, BASF Crop Protection, John Deere and the Arizona Grain Research and Promotion Council, the conference host organization.
7. Wheat Industry News
· USW Biotech Presentation. USW Director of Policy Shannon Schlecht spoke at the HGCA Grain Market Outlook Conference Oct. 7 in London, United Kingdom. You can view his presentation, “Developments in Biotech Wheat: A U.S. Perspective,” at http://www.youtube.com/uswheatassociates.
· Senate Confirms Trade Representatives. Last week, the U.S. Senate confirmed the appointments of Michael Punke as Deputy U.S. Trade Representative and Ambassador to the World Trade Organization, and Isi Siddiqui as U.S. Chief Agricultural Negotiator. For more information, visit http://bit.ly/vBCZUY.
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