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In This Issue:
1. Premiums Rise as Supplies of High Protein Wheat Fall
2. Wheat Grower Organizations Welcome New Trade Enforcement Actions Challenging China Policies
3. U.S. Wheat Associates Promotes Ben Conner to Director of Policy, Henry Moving to Capitol Hill
4. Season’s Greetings from U.S. Wheat Associates
5. USW Holiday Schedules
6. Wheat Industry News

PDF Edition: Wheat Letter – December 15, 2016

USW Crop Quality Reports: http://www.uswheat.org/cropQuality


1. Premiums Rise as Supplies of High Protein Wheat Fall
By Stephanie Bryant-Erdmann, USW Market Analyst

As the Dec. 9 World Agricultural Supply and Demand Estimate (WASDE) confirms, global wheat supplies are at a record high this year. USDA increased its estimate for 2016/17 global wheat production to 751 million metric tons (MMT), up 2 percent from 2015/16 and 6 percent above the 5-year average. USDA now forecasts Australian wheat production to reach a record 33.0 million metric tons (MMT), up 35 percent year over year, if realized.

Higher yields tend to be associated with lower protein. As discussed in the Nov. 3 Wheat Letter, quality test results from Stratégie Grains, UkrAgroConsult, Canadian Grain Commission and other international agricultural groups show lower-than-average protein in the supplies from wheat-exporting countries.

Lower average protein content is problematic for many end-users. According to work done by Shawn Campbell, USW Deputy Director, West Coast Office, nearly all of the world’s high protein wheat exports (13 percent protein on a 12 percent moisture basis or higher) originate from just six countries: Australia; Canada; Kazakhstan; Russia; Ukraine; and the United States. High protein wheat production in these countries accounts for an average one-fifth of their total production in a normal year.

High protein wheat supply and demand factors are driving the growing premium between the Minneapolis Grain Exchange (MGEX), which trades hard red spring (HRS), and the Chicago Board of Trade (CBOT) and Kansas City Board of Trade (KCBT), which trade soft red winter (SRW) and hard red winter (HRW), respectively. Last December the intermarket spread between MGEX and KCBT averaged 36 cents. Fast forward to this December, and the MGEX to KCBT spread averages $1.47.

If the same high-yield, lower-than-average protein correlation also plays out in Australia, there will be little help from that corner for buyers searching for high protein wheat, further supporting the MGEX to KCBT and MGEX to CBOT spreads.

The demand for higher protein wheat also supports HRW protein spreads, which have widened significantly this year at both Gulf and Pacific Northwest (PNW) ports. Over the past 15 years, the average premium for 12 percent protein (12 percent moisture) at the Gulf has been 12 cents per bushel. This year that premium is 46 cents per bushel. The 15-year average premium for 12 percent protein HRW at the PNW is $1.05 per bushel. Since the beginning of the 2016/17 marketing year on June 1, that average premium is $1.64 per bushel.

Despite the increasing premiums for higher protein HRW and HRS, U.S. HRW exports are 25 percent ahead of the 5-year average and U.S. HRS exports are 29 percent ahead of the 5-year average. While the average protein content of HRW exports this year is down from last year due to increased demand for all HRW, 12 percent protein shipments account for 31 percent of all HRW shipments to date, up from 27 percent last year. The brisk pace of HRW and HRS exports and anecdotal reports from traders indicate buyers are breaking from the hand-to-mouth buying pattern that has been prevalent this past year to secure supplies of higher protein wheat. Forward contracting for high protein needs now makes sense.

When evaluating competing prices of high protein wheat, buyers should be sure to convert protein values quoted to a common moisture basis. Because water can be readily removed (by drying) or added (by tempering), exporters quote protein using a fixed moisture basis, but they do not all use the same basis. The United States specifies protein on a 12 percent moisture basis. The European Union and the Black Sea region typically use a dry-matter (0 percent) moisture basis. Australia uses an 11 percent moisture basis and Canada uses a 13.5 percent moisture basis. Below is an example of how moisture basis impacts actual protein received, and the conversion equation.

Please call your local USW representative if you have any questions about the U.S. wheat marketing system, U.S. wheat supply or moisture basis calculations.

Country
Moisture basis used
Example: 13% Protein
Protein Converted to
Dry-Matter Basis
Australia
11.0
13.0
14.6
Black Sea
0.0
13.0
13.0
Canada
13.5
13.0
15.0
European Union
0.0
13.0
13.0
United States
12.0
13.0
14.8

Equation to calculate protein content based on different moisture basis:
Example: You have a sample of wheat with 10 percent protein on a 13 percent moisture basis (mb) and want to convert to 12 percent mb.

Equation: Protein1/(100-mb1) = Protein2/(100-mb2)
10/(100-13) = Protein2/(100-12)
10/87=Protein2/88
Protein2= (88*10)/87 = 10.1%


2. Wheat Grower Organizations Welcome New Trade Enforcement Actions Challenging China Policies

USW and the National Association of Wheat Growers (NAWG) welcome two trade dispute actions by the U.S. Trade Representative (USTR) challenging Chinese government policies that distort the wheat market and harm wheat growers throughout the rest of the world. USW and NAWG are encouraged to see the U.S. government take such a strong position on trade enforcement, which is crucial for building confidence in existing and new trade agreements.

The USTR filed a request on Dec. 15, 2016, for consultations with the World Trade Organization (WTO), alleging that China is not fairly administering its annual tariff rate quotas (TRQ) for corn, rice and 9.64 MMT of imported wheat. This request states that China’s TRQ administration unfairly impedes wheat export opportunities. The USTR announced the TRQ action simultaneously with a request that the WTO form a dispute panel in the case it filed in September against China’s excessive market price support for domestic wheat, corn and rice production.

“As with its price support case, the USTR is shining a light on other policies that pre-empt market driven wheat trade, stifle our export opportunities and force private sector buyers and Chinese consumers to pay far more for milling wheat and wheat-based foods,” said USW President Alan Tracy.

“The facts in these two cases go hand-in-hand, demonstrating how Chinese government policies create an unfair advantage for domestic wheat production,” said Gordon Stoner, president of NAWG and a wheat farmer from Outlook, Montana. “Both actions call attention to the fact that when all countries follow the rules, a pro-trade agenda and trade agreements work for U.S. wheat farmers and their customers.”

China’s wheat TRQ was established in its WTO membership agreement in 2001. Under that agreement, China is allowed to initially allocate 90 percent of the TRQ to be imported through government buyers, or state trading enterprises (STEs), with only 10 percent reserved for private sector importers. The private sector portion of the TRQ is functioning well enough to be filled in recent years, in part because Chinese millers are trying to meet growing demand for products that require flour from different wheat classes with better milling and baking characteristics than domestically produced wheat provides. However, China's notifications to the WTO on TRQ usage show an average fill rate of only 23 percent.

The WTO does not require that TRQs fill every year, but it has established rules regarding transparency and administration that are intended to facilitate the use of TRQs.

“When you consider that China’s domestic wheat prices are more than 40 percent higher than the landed cost of U.S. wheat imported from the Pacific Northwest, it would be logical to assume the TRQ would be fully used if the system were operating fairly, transparently and predictably as the rules intend. It is clearly not operating that way,” said Tracy. “This troublesome administration of China’s wheat TRQ is restraining export opportunities for U.S. wheat farmers and farmers from Canada, Australia and other wheat exporting countries to the detriment of Chinese consumers.”

The facts also argue against potential claims that enforcing the TRQ agreement would threaten China’s food security. China produces more wheat each year than any other single country and currently holds an estimated 45 percent of the world’s abundant wheat supplies. If China met its 9.64 MMT wheat TRQ, it would move up from number 14 to number 2 on the list of the world’s largest wheat importers, and its farmers would still produce 90 percent of domestically consumed wheat. Opening the wheat TRQ would also allow private sector millers and food producers to import the types of wheat they say they need, but cannot now obtain, and the benefits would be passed on to China’s consumers.

USW and NAWG also applaud the USTR’s request for a dispute panel in its WTO challenge to China’s trade-distorting market price support programs for wheat, corn and rice. It is a crucial step toward reining in a policy that costs U.S. wheat farmers between $650 and $700 million annually in lost income by pre-empting export opportunities and suppressing global prices, according to a 2016 Iowa State University study sponsored by USW.



3. U.S. Wheat Associates Promotes Ben Conner to Director of Policy, Henry Moving to Capitol Hill

USW is pleased to announce that Ben Conner has been promoted to Director of Policy to lead the USW policy team’s efforts and manage relations with wheat value chain organizations.

Current USW Vice President of Policy Dalton Henry will depart USW on Dec. 30, 2016, to take a position as Legislative Director for U.S. Congressman-Elect Roger Marshall. Henry will have the opportunity to work on policy affecting his home district in Kansas.

“We recognize that this is an opportunity Dalton should not pass up and, while we will miss him at USW, we congratulate him and thank him for his service to wheat farmers in Kansas and across the United States,” said USW President Alan Tracy. “Trade policy is a critical part of our mission to open new overseas markets and Ben is well prepared to take up to the challenge. With Policy Specialist Elizabeth Westendorf focusing on food aid, innovative breeding and production policies and other areas, our policy team will keep advancing our aggressive USW trade policy agenda.”

Conner joined USW in 2014 as Assistant Director of Policy at the organization's Headquarters Office in Arlington, VA, after spending five years working in agriculture and trade policy in the office of U.S. Sen. Mike Johanns. He also has extensive academic experience in international affairs and agricultural economics. For more information, visit http://bit.ly/1mW1Hgq.


4. Season’s Greetings from U.S. Wheat Associates




5. USW Holiday Schedules

USW Headquarters and West Coast offices will be closed Friday, Dec. 23, 2016 and Monday, Dec. 26, 2016 for the Christmas holiday, and Friday, Dec. 30, 2016 and Monday, Jan. 2, 2017 for the New Year’s holiday. Please contact your local USW office for holiday schedules.

“Wheat Letter” will resume its bi-weekly schedule in 2017 on Thursday, Jan. 12.


USW “Commercial Sales” report will not be published Dec. 29, 2016. “Price Report” will not be published Dec. 30, 2016


6. Wheat Industry News

Quote of the Week: “We are characterizing wheat proteins important for both health and nutrition all the way to product quality, to give us a better understanding of celiac disease and protein reactivity.” — Dr. Chris Miller, director of wheat quality research at Heartland Plant Innovations. Read the full article “Has wheat gluten changed over time?” here.

Columbia-Snake River System Extended Maintenance Closure Begins. On Dec. 13, the Portland and Walla Walla districts of the U.S. Army Corps of Engineers closed the river system for the start of the 2016/2017 extended lock maintenance closure. The system will remain closed until Mar. 20, 2017, while major work is completed at six of the eight navigation locks on the Columbia and Snake Rivers to ensure continued safe and efficient operations for decades to come. During the closure, the Corps will be conducting weekly conference calls to provide updates to stakeholders. These calls are open to the public and the call information and schedule can be found on the Corps' extended closure website. PNWA has created a factsheet with more details of the closure and the work that is being completed at each project. We also will be in close contact with both districts to monitor the progress of the closure. For more information, contact Heather Stebbings.

Legislation Will Authorize Projects to Improve U.S. Waterways System. Before adjourning last week, both the U.S. House and Senate passed the “Water Infrastructure Improvements for the Nation Act,” which included legislative language from the biennial “Water Resources Development Act.” The Act authorizes critical projects that improve and modernize the U.S. waterways system and makes adjustments to funding mechanisms to enable other changes. Continued investments in projects that deepen waterways, widen channels and reliably connect multiple modes of transportation are key to maintaining the United States’ world-class transportation infrastructure. The return to a regular schedule of considering and passing water infrastructure legislation is welcome news for industries dependent on efficient port and river systems that facilitate exports. More information about the legislation, including fact sheets and letters of support can be found here: http://transportation.house.gov/wrda-2016/

Kansas Wheat Commission Research Foundation Receives $200,000 Grant. The Dane G. Hansen Foundation in Logan, KS, has awarded the grant to assist with a greenhouse expansion project at the Kansas Wheat Innovation Center (KWIC) in Manhattan, KS. The new space will include separate rooms for potting, seed processing, soil preparation and a soil room to receive and handle bulk potting. Special temperature control and grid lighting systems are also included in the project. Read the full announcement here.

Henry Receives Young Alumni Award. Kansas State Univerity has named USW Vice President of Policy Dalton Henry as one of its 2017 Distinguished Young Alumni. Each year this award recognizes two K-State graduates who are younger than 35 and are using the scholarship, leadership and service experience they acquired at K-State to excel in their professions and contribute to their communities. Congratulations, Dalton, from all your USW colleagues. Read the full story here.

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