FMD-MAP: FMD program essential for U.S. wheat export effort: A briefing by James Frahm
A briefing for the
U.S. House of Representatives
April 17, 2001
April 18, 2001
Vice President of Planning
U.S. Wheat Associates
America is a big and powerful country, and our farmers are the smartest -- and most dedicated -- in the world. Unfortunately, all of these assets do not develop the wheat export market. Developing that market is absolutely essential to this country’s wheat growers, since we need to export almost half of the wheat grown in the U. S every year. What we don’t use or export will sit in our bins and depress prices.
U.S. Wheat Associates, the industry’s export market development organization, is tasked with ensuring that as little of that wheat as possible sits in silos here in the U.S. With the support of 18 member states, we work to increase demand from over 100 importing countries.
This country is the world’s largest wheat exporter. Last year, 104.9 million tons of wheat was traded globally, and 29.7 million tons of that was U.S. wheat. That gives us a global market share of 28%, but the other way to look at that is that our competitors have a 72% market share. Our primary competitors in the wheat market -- Canada, Australia, the EU and Argentina -- are aggressively pursuing our customers. And we are aggressively pursuing theirs.
People who are unfamiliar with global commodity trading are often surprised to find that exporting wheat is not a simple proposition. No wheat customer is the same. Each has specific needs, whether it is assistance in specifications and purchasing, education on milling and storage, or information on wheat quality and traits. USW is the only organization that can meet those customer needs, and we could not do it without the financial assistance that you give us.
A promising region for U.S. wheat is the Arabian Gulf. For decades it was a relatively small market and, besides, it was largely captive to the Australian Wheat Board because of freight advantages and traditional preferences. But the Gulf is now becoming a world player in flour exports, with significant recent increases in milling capacity, and importers in the United Arab Emirates, Kuwait, Bahrain and Oman are looking look at origins other than Australia to produce a wide range of flour qualities and bring down their wheat costs.
Throughout the region, U.S. Wheat Associates is aggressively engaging the market, and we are starting to cut into Australia’s market share. Our market specialists focus on activities that address several important questions: “Why was Australia so successful?” “What was preventing these buyers from buying U.S.?” They monitor the market for windows of “value opportunities” for U.S. wheat over Australian and other origins, they build confidence in the U.S. marketing system, and they demonstrate the performance of U.S. wheat. Finally, when the time comes for major purchases, USW even helps the buyers write specifications that will attract a response from U.S. suppliers.
One of the most exciting markets in the Gulf is the United Arab Emirates, where dynamic new companies are aggressively competing. U.S. wheat exports to UAE have doubled over the last five years, the result of USW working for many years to ‘nurture’ the buyers and provide services to them. Our wheat farmers from Montana and Nebraska were over there last spring, meeting the new buyers and personally promoting their wheat.
The mills in the UAE are anxious to learn more about the U.S. marketing system, quality control, inspection process and the identity of potential suppliers. So Paul Dickerson, a USW vice president, went there earlier this spring for risk management presentations and overviews of the U.S. marketing system. The buyers were interested in USW’s guidance and, ever on the lookout for ways to trade smart, discussed possibilities of combination cargos of wheat and feed grains.
Some of the “tug-of-war” between the U.S. and our competitors for market share is especially evident in Bahrain. The mill in Bahrain had hired a new general manager in 1999. After determining that 75% or more of the mill’s cost of production comes from raw wheat, his first act was to take a look at wheat import prices. One of our marketing specialists, Mike Spier, met with the manager several times, and Spier came to the conclusion that the buyer was truly looking at the bottom line. Mike was able to show him that the bottom line said to buy a blend of soft red winter wheat and hard red winter wheat, to meet his exact needs at the lowest cost. In August 1999, his company purchased -- for the first time -- 10,000 metric tons of SRW and 10,000 MT of HRW. During the 1999/2000 marketing year they made another purchase of U.S. SRW and HRW wheat for a total of 38,000 MT.
But -- to give you an idea of how tough the market is -- as of March 1 of this year, they had still not purchased U.S. wheat for this marketing year. So, to meet the constant challenge presented by a strong competitor like Australia, Mike returned to Bahrain on March 11, met with the mills and reassured the buyers that the U.S. has the quality and variety of classes to meet their end use demands at competitive prices. Undoubtedly, other suppliers will try to counter our moves yet again, but we will not give up on this market.
As a result of increases in the region’s milling capacity, especially in support of flour exports, and the need to expand their supply source, there are clear opportunities for U.S. wheat. We are working to bring the Gulf states into a program that we use in Egypt. Nearly one hundred Egyptian millers and food companies have signed agreements with U.S. Wheat Associates to use at least 70% U.S. wheat in their products. In exchange for this commitment, they can use a trademarked red, white and blue logo, indicating the product is made with American Quality Wheat. What is truly amazing is that, even during these times of heightened tensions in the Middle East, consumer surveys show a high recognition that the“logo-ed” product is, indeed, of high quality.
Millers and bakers in the Gulf states have seen the success of the American Quality Seal in Egypt and, through milling and baking tests and other kinds of education provided by USW, they have now experienced the success of U.S. wheat in their products. Last month, our experts in Egypt began exploring the possibility of some of those buyers committing to the American Quality Seal program. Weaning them away from Australia and others, especially to the extent that they commit to use U.S. wheat for 70% of their needs, will be a tremendous leap forward. I am confident that we will do it.
USW is jointly funded by wheat growers and government dollars. Growers fund USW through check-off contributions to state wheat commissions which, in turn, support USW’s market development operations. State funding supports USW’s operations here in the U.S. and the placement of U.S. staff in targeted overseas locations. States have also funded targeted overseas promotion and education programs that are specific to the markets for their class of wheat.
As the world markets liberalize, as a state buyer for a country is replaced by a host of private buyers for individual flour mills, each of which in turn has very specific wheat quality requirements for their specific end products, the need for market development expertise multiplies exponentially. For instance, in the Middle East and East Africa, in 1992, there were about 20 buyers who controlled the vast majority of purchases. In 1999 there were 140 buyers -- a sevenfold increase. To meet the needs of these new buyers, USW is on the ground, helping to educate them, promoting the benefits of American wheat, and assuring their satisfaction with their purchases.
We aren’t alone in our efforts. The Canadian and Australian wheat marketing systems are dramatically different from ours. They have single desk exporters - the CWB and the AWB - which are government sanctioned monopolies. They do not hesitate to engage in price undercutting to win markets. They do it regularly, persistently and, sometimes, egregiously. Without U.S. federal help, we would be ceding the changing markets to the wheat boards.
In this dynamic, competitive world market, we need to strengthen the programs that will enable us to sell the products of the American farmer. The budget submitted to Congress represents a cut in the current marketing plan level for all cooperators. Rather than discussing cutbacks, which appears to be a real possibility if this budget passes as presented by the White House, we should be talking, instead, about providing the tools -- and the funding -- to step up our export marketing activities. Looking at the total federal budget priorities, however, as things stand right now we would be grateful for funding at the current marketing plan level. And that’s a shame, because there are markets out there that might be ours if we could afford the extra time and personnel to raise the level of engagement with our competitors.
U.S. Wheat Associates really makes a difference for America’s wheat farmers, working day-by-day, hand-in-hand with the world’s wheat buyers, but we can’t do it without FMD and your support.