Wheat Letter - March 1, 2012
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. Freight Rates Help Carry U.S. Wheat Value Far
2. A Matter of Faith and Commitment
3. Perspectives on USDA Long-Term Wheat Projections
4. ISAAA Report Marks Record Acreage of Biotech Crops
5. Africa Board Team See Opportunities and Challenges
6. Wheat Industry News
Online Edition: Wheat Letter - March 1, 2012 (http://bit.ly/xX1IWd)
PDF Edition: Wheat Letter - March 1, 2012.pdf
1. Freight Rates Help Carry U.S. Wheat Value Far
By Casey Chumrau, USW Market Analyst
The relative value of U.S. wheat to world importers has been growing steadily. Over the course of marketing year 2011/12, U.S. wheat prices continued to decline. A similar trend down in freight rates is making U.S. wheat even more attractive around the world.
The ocean freight industry is still struggling to overcome the slow-down caused by the global recession in 2008 and 2009. There is still too much capacity and not enough freight demand to fill it. As a result, ocean rates have decreased significantly since September 2011, including a sharp decline starting at the beginning of 2012. For example, the rate from the Pacific Northwest to Egypt is down 30 percent from a peak of $47 per metric ton in mid-September, according to estimates provided by freight traders. The Baltic Dry Index (BDI), which measures the cost of shipping bulk commodities, is down 58 percent this year. The index closed on Feb. 27, 2012 at 730, compared with the pre-recession record high of 11,793 on May 20, 2008.
Jay O’Neil, senior agricultural economist at Kansas State University’s International Grains Program, believes freight rates have hit close to market bottom and will remain, with some fluctuation, near current values for most of 2012. In fact, he thinks it will be 2014 before vessel owners see any real relief.
During this same six month time period in which freight rates declined, the price of U.S. wheat grew more competitive due to higher prices of competing wheat and an easing of the demand that pressured U.S. prices. In late July, Russian wheat was nearly $40 per metric ton* cheaper than U.S. soft white (SW) wheat as part of an aggressive Russian marketing plan to regain market share lost in 2010/11 following the country’s self-imposed export ban. However, Russian wheat prices have increased and exports have slowed because of concerns that the Russian government may impose new export restrictions. In addition, Russian exporters have sold most of the readily available coastal wheat and must now go farther inland to fulfill orders, increasing the basis cost of Russian wheat. As of Feb. 17, 2012, Russian wheat was selling at $280 per metric ton, $16 more than U.S. soft red winter (SRW) and $8 more than U.S. SW wheat.
What does this mean for wheat importers? The combination of lower wheat prices and cheaper rates to move it means importers are getting a great value when buying high quality U.S. wheat.
*Free on Board (FOB) values
2. A Matter of Faith and Commitment
By Norman Uy, Senior Vice President, Republic Flour Mills, Manila, Philippines
[Editor’s Note: Following are excerpts of remarks by Mr. Uy on Feb. 10, at an event celebrating the 50-year partnership between USW and flour millers, bakers and noodle manufacturers in the Philippines.USW representatives, U.S. wheat farmers, U.S. diplomatic and agricultural officials and nearly 150 industry guests attended the celebration.]
“Welcome! I think USW invited me to speak tonight because Republic was the first flour mill in the Philippines, as well as in Southeast Asia. We are not the biggest, but we try to be as good as we can be. Thank you to USW for supporting us. Thank you also to the bakers who are represented here.
“Early last September, I joined three other flour millers representing the Philippines on a USW-sponsored trade team to the United States. While we were in North Dakota visiting farmers, we had some free time and I was able to reflect on our visit. I mentioned to one of the farmers that he and his neighbors had great faith. The reason is, to grow wheat they must rely on moisture from the earth or sky and they can do nothing about that unless it arrives. The rain arrives at a certain time. The heat arrives. The plants grow and the farmers can do nothing much except rely on time and faith and God’s work to make the plants grow. The farmer is hoping that the plants grow. And back in the Philippines, we are also hoping that the plants grow. How can you not have faith when you are relying on a natural product?
“We know 50 years as a golden anniversary. Here in the Philippines, those who are married 50 years will usually give their spouse a golden ring. Is it a coincidence that the ripe Washington state wheat fields Randy Suess showed us tonight are called fields of gold? Gold signifies wealth and for those who have been involved in this industry, I believe we have created wealth. Our challenge is to share that wealth by supporting the down-line industries to create more jobs and help feed our people – and by also supporting the farmers back in the United States who grow the wheat we need.
“A 50-year relationship requires commitment backward and forward. Each one must bring something to the table. The commitment of the flour millers is to produce the best quality flour that we can, even if the wheat is sometimes not as good as what we want. Fortunately, the United States is known as the world’s reliable supplier for a reason. Their wheat supply is consistent and its farmers are committed to growing the best wheat possible. So, thank you USW for maintaining that strong relationship from the beginning.
“At night our suppliers from the United States call us. In the morning, our bakers and our customers and our dealers call us. Maybe that is why the people in the flour industry have no time to sleep.
“It must be a deliberative relationship that we pursue. If we are not deliberative, we can take things for granted, and that is when we can fall off and become cold. But, an industry that is small and committed to one another on a daily basis can overcome this risk.
“To close, we must also look after growth. Many people say that without growth, it is almost as sure as death. Living things grow and if you do not grow, it is only a matter of time. We don’t want our investments to go down the drain. No one wants this. And therefore, if our industries are to grow, we must all put our commitments on a table—from the supply side, from the flour miller’s side and from the baker’s side. I propose the millers and bakers commit together, with USW, to meet and try to find new ways to make this industry grow.
“Thank you again to U.S. wheat for being the world’s reliable supplier. We appreciate that and we know there will be more celebrations to come.”
3. Perspectives on USDA’s Ten-Year Wheat Projections
By Matthew Weaver, reprinted from Capital Press with permission
The USDA forecasts the U.S. slice of the wheat export market will shrink from 23 percent to 16 percent in the next decade and the Black Sea region will claim the largest market share.
Net U.S. wheat exports will decline from 22.8 million tons a year to 21 million tons by 2021 even as the export market grows, according to the USDA Agricultural Projections report.
Overall world wheat trade will increase 15 percent, from 137 million tons to 157 million tons, during that time, according to the report.
At the same time, the Black Sea region – Russia, Ukraine and Kazakhstan – will become the largest wheat exporter, accounting for about 30 percent of world wheat exports by 2021*.
"The U.S. does still have a large share of the global wheat market," David Stallings, projections coordinator for the Interagency Agricultural Projections Committee, which wrote the report. "It's just simply that we're facing a little more competition than we did in the past. Competition can be good, and it's going to be a challenge for us."
Australia and Canada, also major wheat-exporting countries, face a loss of market share, too, according to the report.
"The traditional five largest wheat exporters – the United States, Australia, the EU, Argentina and Canada – are projected to account for almost 62 percent of world trade in 2021, compared with 69 percent during the last decade," according to the report. "Argentina and the EU are the only traditional exporters whose market shares are projected to increase."
Alan Tracy, USW president, said the report tracks with the industry's projections for increased global wheat trade and consumption. His organization promotes U.S.-grown wheat in overseas markets.
However, Tracy questioned whether the increase in demand would be met by Black Sea growers. [USW] predicts the global demand for wheat will increase by 65 million to 70 million tons in the next 20 years.
"An increase of that magnitude is not going to be met by any one exporter," he said. "To expect (the Black Sea) to take all this demand, that's not likely to happen."
The countries, particularly Ukraine and Russia, underutilize land and resources compared to their potential due to interference from their governments, Tracy said.
"If I were a major importer, such as Egypt, I would be very reluctant to count on it," he said.
The U.S. cannot influence how much wheat the Black Sea region grows, Stallings said, but it can maintain its high quality and reliability as a supplier to remain competitive.
Tracy believes the U.S. is on a good course with its focus on quality and value, noting South Asian markets favor U.S. spring wheat over Canadian wheat and U.S. soft white wheat over Australian wheat.
Much also depends on the global demand for corn, soybeans and wheat, Tracy said. Corn supply and demand will drive prices. Current high corn prices cause farmers to switch from growing wheat to corn. This in turn drives wheat prices up.
The value of the U.S. dollar compared to foreign currencies is also a major factor in trade. As the dollar's value shrinks compared to a foreign currency, the price of U.S. commodities such as wheat goes down.
The one thing the U.S. lacks to better compete across the board is more hard white wheat, Tracy said. He hopes improved varieties will lead to more acreage and a better ability to compete with Australian wheat for noodle production.
*USDA notes the projections are a conditional scenario based on specific assumptions about the macroeconomy, agricultural and trade policies, the weather, and international developments. The report assumes there are no domestic or external shocks that would affect global agricultural markets. Normal weather with, in general, trend crop production yields is assumed.
4. ISAAA Report Marks Record Acreage of Biotech Crops
The rapid and growing adoption of commercial biotechnology crop production illustrates increasing confidence in the value and safety of this technology around the world.
The International Service for the Acquisition of Agri-Biotech Applications (ISAAA) recently reported that in 2011, the 16th year of commercial biotech crop cultivation, farmers worldwide planted a record 160 million hectares (mh) of biotech crops. That is up 8 percent (12 mh) from 2010 and represents a dramatic increase from the first year’s commercial plantings of 1.7 million hectares. In fact, ISAAA’s report asserts that biotech crops have been adopted faster than any other technology in the history of modern agriculture.
In 2011, farmers in 29 developed and developing countries planted 12 different biotech crops including corn, soybeans, cotton, canola, sugar beets, alfalfa, papaya, squash, tomato, sweet pepper, potato and poplar trees. It is important to note that two major world crops are missing from this list: rice and wheat. Soybeans remain the most popular biotech crop with 75.4 mh (47 percent) of global biotech planted area, followed by corn, cotton and canola. ISAAA reports that there are now more developing nations cultivating crops with biotech traits than developed nations, planting roughly half the total biotech crop area. ISAAA also notes that in addition to the 29 countries that cultivate biotech crops, 31 other countries have issued regulatory approvals for food and feed use as well as for release into the environment.
U.S. wheat producers support new technologies, including biotechnology, to develop new wheat varieties and traits that will benefit both wheat producers and the world’s consumers. In 2009, wheat producer organizations from Australia, Canada and the United States penned a statement supporting biotech wheat research, and significant investments have since been made that expand the promise of wheat breeding research to bring better wheat varieties to the market.
Commercial production of biotech wheat is still a number of years away, but U.S. wheat producers are encouraged by the trends in ISAAA’s report. The ISAAA report is available at http://bit.ly/AsMDek.
5. USW Africa Board Team Sees Opportunities and Challenges
By Jennifer Sydney, USW Manager of Funding Resources
The 2012 Africa Board Team hit the extremes. During the 14-day trip, Steve Halverson (SD), Jason Scott (MD), Gary Murphy (TX) and I experienced 90 degree temperatures in Lagos, Nigeria, and snow-covered mountains in Algeria. USW Board Teams like this one are intense, regional visits arranged per the organization’s bylaws to give Board members and state wheat commissioners the chance to review the work of overseas USW offices, learn about the local market environments for milling wheat and thank milling and baking customers for their business. We listened to concerns about policy issues, self-sufficiency and wheat quality. However, one constant through every location and meeting was the excellent reputation of USW’s overseas staff and U.S. wheat as a valued, high-quality commodity.
Our trip started in Lagos, Nigeria, where we were met by USW Marketing Consultant Muyiwa Talabi and Assistant Regional Director for Sub-Sahara Africa Gerald Theus. Nigeria is one of the most important markets for U.S. wheat.
“In Nigeria, the U.S. has a 90 percent market share in a country growing by 6,000 people per day,” Steve Halverson said. “It is very important to stay on top of this market because of the growth potential.”
In Lagos, we met with three of the most prominent flour millers: Dangote, Honeywell and Flour Mills of Nigeria. In Nigeria, the flour milling industry with support from USW has been able to build very successful, growing businesses in spite of unique challenges. The team learned about how the millers are working with U.S. wheat, bakers and wheat food manufacturers to expand their product lines.
The team then traveled to South Africa where we were met by Regional Vice President of Sub-Saharan Africa Ed Weise and Milling Consultant Jim McKenna. The mills in South Africa import primarily hard red winter (HRW) and some hard red spring (HRS). Millers there were keen to receive reports from the producers on planting and weather conditions in the United States. Ed gave very impressive world supply and demand presentations that really grabbed the attention of both the millers and the producers. Halverson summarized the market as being tough to crack, with price a high priority.
The team then travelled to Algeria, greeted by Assistant Regional Director for Middle East, East and North Africa Ian Flagg and USW Regional Technical Director Peter Lloyd. We toured the Port of Algiers and met with the Office of Cereals (OAIC), the government body that imports most of the durum, wheat and barley for the country. The OAIC officials explained the complicated government system for subsidizing baguette bread. We learned that despite the high prices OAIC pays for locally grown wheat, not enough Algerians want to farm the land, making the goal of self-sufficient wheat production a challenging endeavor.
“One of the main challenges in Algeria is that we do not have a single class of wheat that compares to French wheat,” Scott said, “which is typically their first choice for the type of bread they make. Our HRW wheat protein is too high and our SRW is too low. However, a fifty-fifty blend of these wheats would be very comparable to flour made from French wheat. The OAIC, as well as the millers we met with, seemed receptive to blended wheat if it meant that they could save money and continue to produce a similar product. The challenge is a limited capability to blend the wheat or flour in Algeria. USW continues to work within the existing systems to find ways to meet Algerian preferences.
After a day in Algiers, the team traveled to the small town of Blida to tour the SIM flour milling company and the Moula pasta and cous cous production plant. The team then flew to Annaba and met with the largest food manufacturer in Algeria, Groupe Benamor. Benamor is a diversified business and is currently the only private miller importing U.S. durum for cous cous and pasta production.
After touring several sites within the massive Benamor compound, Steve, Jason and Gary had the chance to meet with local Algerian wheat farmers who had more questions than the team had time to answer. They asked how U.S. farms are organized and whether they choose their own varieties or must use varieties specified by the government. They wanted to know how wheat prices are set and how much U.S. farmers invest in equipment and employees. It was an interesting exchange of knowledge for both sides of the table.
“This trip was very interesting and I think it was a huge success,” Scott said. “We were able to be on the ground, visit with our customers and answer their questions. That will go a long way when they make their next wheat purchases.”
6. Wheat Industry News
- Date Set For U.S.-Korea FTA Implementation. The United States and South Korean governments this week announced that the U.S.-Korea Free Trade Agreement (FTA) will enter into force on March 15. The U.S. FTAs with Colombia and Panama still await implementation.
- Toward an Open Border. After meetings with U.S. grain industry officials in Washington, DC, last week, Canadian Agriculture Minister Gerry Ritz told reporters that Canada and the United States are "working on initiatives that will see the grading systems more in parallel." Ritz said concerns about too much Canadian wheat moving into the United States were not raised in the meetings. "The Americans understand that the border works two ways, that this will facilitate trade both southward and northward. They look at this as strengthening our integrated approach," he said. In related news, The Canadian Wheat Board announced it will shorten its name to simply "CWB" as it starts to compete in an open market.
- Texas AgriLife and Bayer Sign Wheat Agreement. Texas AgriLife Research and Bayer Crop Science have signed a multi-year agreement to share germplasm in exchange for a concentrated effort to work on drought tolerance and tortillas and flat breads. For more information, please visit http://bit.ly/y3aws8.
- Wheat Productivity Research. DuPont and the Australian Centre for Plant Functional Genomics (ACPFG) have expanded their long-standing research collaboration to increase research scale on improving the overall productivity of wheat, as well as other crops. The expanded program brings a new focus on advanced cereal breeding through molecular markers, discovery research for agronomic traits and hybrid seed production in wheat. In addition, the collaboration will continue working toward agronomic traits to increase drought tolerance and decrease the need for soil-applied nitrogen fertilizer in leading production crops, including corn, soybeans, canola, rice and sorghum. For more information, visit http://bit.ly/xVl0wY.
- “Bake and Take” Day. The fourth Saturday in March (March 24) is “Bake and Take Day” in the United States and creates an opportunity for folks to show kindness to friends and neighbors by sharing homemade baked treats. This event, sponsored by stakeholders in the U.S. wheat, flour and baking industries, began in 1970 as a community service project of the “Kansas Wheathearts,” an auxiliary organization of the Kansas Association of Wheat Growers. They set out to share baked goods with family members, friends, neighbors and those in need, generating goodwill in the community. The idea of a community member sharing a favorite recipe with someone special became so successful the Kansas Wheathearts created national Bake and Take Day in 1973.
- Registration open for NCI Pasta Short Course. North Dakota State University’s Pasta Production and Technology Short Course will be April 10 to 12 in Fargo, ND. The course will focus on the fundamental and applied aspects of manufacturing extruded and sheeted pasta products. For more information or to register, please visit http://bit.ly/wCKXqM.
- Condolences to Maynard Satrom, former USW Board Director, and his family on the death of his wife Jeanette.
- Condolences to the family of Nebraska farmer Ray Davis, who passed away in February. Ray was a treasured wheat industry leader who was very active in his state’s wheat industry, served as President of both the National Association of Wheat Growers and USW legacy organization Great Plains Wheat. He also served as a USW director.
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