U.S. wheat export system starts at country elevators.

By Claire Hutchins, USW Market Analyst   

U.S. railroads are a crucial part of the most efficient grain supply system in the world. The rail system fulfills an essential logistical function that neither grain handlers nor farmers can perform on their own.  

Yet rail rates and charges paid by wheat shippers make up a large portion of export basis and directly affect the price overseas buyers pay for U.S. wheat. Farmers and the grain companies who rely on domestic rail to ship wheat are also aware that rail rates have increased at a rapid pace at the same time that export competition has also increased 

U.S. Wheat Associates (USW) and many of its state wheat commission membersin 2017 formed a Transportation Working Group (TWG) to address issues of increasing wheat rail tariff rates and U.S. wheat’s competitive market position, especially compared to other commodities shipped from the same destinations to many export terminals.  

The Surface Transportation Board (STB) is a federal regulatory board that has broad economic oversight of U.S. railroads. In early July, the TWG met with STB commissioners to voice support for a possible procedure that would make it easier and more efficient for shippers to challenge unreasonable and uncompetitive rail rates.  

In the past year, the STB introduced the concept of a Final Offer Rate Review (FORR) that would help shippers in this effort. Over a 135day timeline proposed under FORR: a shipper could challenge the railroad’s rate; both the shipper and the railroad could provide evidence supporting their position on the rate; both parties could suggest alternative rail rates; and if the STB finds the railroad is market dominant and imposed unreasonable rates, relief could be offered to the shipper as the difference between the initial rate and the new, lower rate offered either by the shipper or the railroad.  

The USW TWG filed public comments to the STB in mid-August supporting the Board’s FORR procedure.  

The FORR method offers wheat shippers a new system to challenge unreasonable rail rates. The TWG believes the FORR method is necessary because while farmers have faced depressed farm gate prices, wheat rail tariff rates have increased continually over time at a significantly higher rate than the railroads’ variable cost to ship the wheat (see chart). Additionally, wheat rates are substantially higher than the rates faced by similar commodities shipped over the exact same routes (see chart) 

The TWG applauds the STB for proposing the FORR concept and believes it will help wheat shippers throughout the country challenge unreasonable rail rates which could help U.S. wheat reach overseas customers at more competitive prices.  

USW, state wheat commissions and the farmers we represent look to U.S. railroads as our vital partners in a mutually beneficial effort to increase the value of U.S. wheat to end users. We appreciate their consideration of how fair rail rates can help make U.S. wheat more competitive on the world market. 

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By Dalton Henry, USW Vice President of Policy

The dispute between the Chinese and U.S. government over wheat production subsidies continues. Late last month, the U.S. government officially challenged China’s purported compliance with the World Trade Organization (WTO) dispute decision that found China spent billions more on agricultural subsidies than their WTO membership allowed. That case was filed in 2016 by the Office of the United States Trade Representative (USTR) to bring the Chinese programs – and their effects on U.S. wheat producers – under control.

The subsidy programs at the heart of the WTO dispute are China’s Minimum Procurement Prices (MPP) guarantee to Chinese producers. This program would be most similar in U.S. farm policy to our Marketing Loan program. But unlike the U.S. version, the MPP is set well above world wheat prices and, as such, creates an artificial incentive for farmers produce more wheat at the expense of a more diverse range of crops. Last year’s MPP for wheat in China was $8.60/bushel; compare that to the U.S. Marketing Loan program at $3.38/bushel and to current U.S. FOB HRW prices at $5.69/bushel.

It is no wonder then why Chinese producers have dramatically increased wheat production, up 25 percent from before the policy was put in place. Even more distorting to the global market, much of that production is building stocks rather than being made available at affordable prices to China’s flour millers. Those stocks are projected to end this year at an astounding 162.5 million metric tons (MMT), comprising 52 percent of the entire world’s wheat ending stocks. That volume represents more than an entire year’s consumption in China.

 

USDA currently predicts that China will hold more than 162 MMT of world wheat stocks at the end of marketing year 2020/21.

 

The WTO dispute panel recognized this issue in ruling that China had far exceeded its WTO limits on wheat and rice subsidies. In the process of a WTO case, once a ruling has been issued the involved countries agree to a “reasonable period of time” for the policies to be changed and for the offending country to come into compliance. The reasonable period for this case ended last month with China claiming (and the United States disagreeing) that they were in compliance.

A closer look at China’s claims of compliance reveals changes designed only to work on paper. China notified changes to their policy for the coming year that attempt to cap the amount of wheat that the Chinese government will purchase at the MPP. In theory, a laudable effort, but in practice one with little impact, as the cap is set to be at 37 MMT, 40 percent more than their five-year average annual purchases.

As a result, the cap allows China to adjust the math behind calculating their compliance, without actually changing anything about the operation of the program or the unfortunate creation of burdensome stocks. That’s because with a cap set so far above previous purchase amounts, a farmer can approach a flour miller and demand to be paid the MPP. If the miller refuses, the farmer knows the government will purchase the wheat at the inflated MPP. That dynamic allows the distorting effects of the MPP to reach far beyond the actual bushels that the Chinese government purchases.

Market-based reform will have the potential to improve the situation dramatically for Chinese millers, as wheat would be grown and traded according to quality attributes and actual value, rather than that set by government regs. It would also pave the way to reducing the current wheat storage burden – one similar to the situation faced by China’s corn industry just a few years ago. In that instance, program reforms worked and brought stocks to reasonable levels, providing domestic users with more choice and storage capacity.

China’s wheat subsidies and the excess stocks that they produce have been well-documented by U.S. Wheat Associates (USW) and other groups over time, as has the revenue losses they create for U.S. farmers and indeed other farmers around the world.

USW welcomes the continued work on this case by the USTR and hopes to see an end to distortive policies like this that impede our ability to meet global demand for a diverse supply of high-quality wheat.

 

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By Shelbi Knisley, Director of Trade Policy

U.S. Wheat Associates (USW) supports free trade through multilateral, regional and bilateral trade agreements. USW works closely with the USDA Foreign Agricultural Services (FAS) and the Office of the U.S. Trade Representative (USTR) to ensure favorable terms for wheat exports in all trade negotiations.

An opportunity to do that recently allowed USW to provide comments to USTR in support of negotiating a comprehensive Free Trade Agreement (FTA) with Kenya. That is because Kenya imports around 2.0 million metric tons (MMT) of wheat annually. Expanding market opportunities in Kenya would benefit U.S. wheat farmers and provide Kenyan flour millers with better access to quality supplies of milling wheat.

Map of Kenya. A detail from the World Map.

USW believes the negotiations should prioritize market access for U.S. wheat and resolution of sanitary-phytosanitary (SPS) issues and in our comments, we laid out these specific objectives:

  • Achieve an agreement with duty-free treatment and improved SPS and other non-tariff provisions for wheat of U.S. origin.
  • Eliminate Kenyan tariffs on U.S. wheat, which would create an advantage for U.S. wheat exports and help offset the shipping disadvantage currently faced by the United States compared to other suppliers, particularly between the European Union and Black Sea Region. Preferential access to Kenya would help make U.S. wheat shipments more competitive in the region.
  • Eliminate Kenya’s Certificate of Conformity requirement or Kenya should accept Federal Grain Inspection Service (FGIS) certificates and other standard trade documents as fulfilling that requirement, without requiring additional third-party inspections on U.S. wheat prior to shipment.

In February 2020 the U.S.- Kenya Trade and Investment Working Group adopted a phytosanitary protocol for Kenya that would allow U.S. wheat growers in the Pacific Northwest (PNW) access to Kenya’s wheat market for the first time in over a decade. Historically Kenya has maintained a non-scientific SPS barrier against U.S. wheat from this region due to concerns about the potential presence of a plant disease known as flag smut.

Africa is a rapidly growing continent, but one where the United States has had limited opportunities for trade negotiations. A high standard FTA with Kenya has the potential to serve as a model for other African countries to pursue trade agreements with the United States.

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By Vince Peterson, USW President

As a new decade and a new future for wheat export market development dawned in January 1980, the urgency facing the wheat-producer boards of both Great Plains Wheat and Western Wheat Associates could not have been much greater.

They were under the strain of discussions and negotiations for months in the effort to merge the two existing regional wheat market development groups into one, single national association. Then, on January 4, these farmer leaders and all U.S. wheat producers sat in disbelief hearing President Jimmy Carter address the nation and summarily cancel 17 million metric tons (MMT) of existing wheat, corn and soybean sales contracts between U.S. exporters and the former USSR. That was 17 MMT of production that had already been grown and harvested and scheduled for movement by truck, barge, rail car and ocean vessels through the U.S. grain export system; 17 MMT of system revenue, margins and farmers’ annual income – all cancelled.

In announcing this action and a longer-term grain embargo as sanctions against the Soviet Union’s invasion of Afghanistan, the President promised protection to farmers. He also said he had faith that our competitors would not exploit the opportunity to take up the cancelled U.S. sales. Never was such a naïve assumption more foolishly made. Spurred on by the unfilled Soviet demand, export origins in Europe and South America were quite literally handed a windfall on a silver platter. It is hard to criticize them for taking up that opportunity, but that was the spark for many of them that launched them into a new permanent place as competitors of the United States in the export market.

A crisis was at hand and it was becoming clear that no action of the government was going to heal the long-term financial damage and repair the loss of export markets suffered on that day. Those making an honest historical analysis can fairly claim that the next 20 years of high inventories, stagnant prices, booming farm programs and an export subsidy war all had their roots firmly planted in that one single policy decision.

The newly founded U.S. Wheat Associates (USW) had more than its hands full as a national market emergency now far outpaced any internal issues that may have seemed monumentally disagreeable during the merger discussions. Those were now just minor bumps in the road by comparison to the tasks in front of them. Ultimately, USW’s new leaders and staff fought hard to replace the lost export sales, build a reputation for reliability and create a more conducive policy environment for global trade.

Never Again

One of the longer-term benefits to the U.S. wheat industry and its domestic and overseas customers that came out of this very difficult time originated in a very simple thought and demand: “This can never be allowed to happen again.” The U.S. grain export industry from farm to port were all completely unified in the pursuit of legal protection from an action of this nature for all time. These political efforts were successful. The U.S. Congress eventually passed, and the President signed, new contract sanctity laws which, short of a national emergency or war, precluded even the President from canceling any pre-existing grain export sales contacts.

The implications of this important protection echoes through the years to today, a new time of global crisis and uncertainty in the face of the coronavirus pandemic. Selfish hoarding is causing shortages and prices to rise. To combat that, some countries retreat behind protectionism to limit, tax or cut off exports in order to secure their own domestic supplies and hold down inflationary prices at home – with little apparent concern about the effects their actions will have.

Today, very concerned import-dependent countries are rightly asking: “Are there adequate supplies of wheat in the United Stated to cover all of our demand? Is there hoarding or a price shock? And, will our vessels be loaded?”  We are quite humbled and yet proud to be able to tell them yes, there is plenty of wheat available. In the commercial market, there is no hoarding and prices remain relatively low during this time. Perhaps most importantly, as opposed to governments that hide from global obligations, the U.S. government has declared the entire U.S. food industry, from farm to table and to export, to be essential services. We are also very pleased to know USDA’s agencies that handle grain inspection and phytosanitary compliance and certification are committed to making every effort possible to maintain those services to both domestic and export markets during this time.

No Export Taxes

As for the export taxes that some countries are so quick to consider and employ as the easy tool to control their own domestic market and economy, our country’s founders took care of that issue for us in 1787 when they wrote the Constitution of The United States of America. Article I, Section 9, Clause 5 states that “No Tax or Duty shall be laid on Articles exported from any State.” No export taxes. Period.

Situations such as the Soviet Grain Embargo and, perhaps, the coronavirus pandemic, while very difficult to experience and understand, can provide lessons and new policies that continue to serve wheat farmers, our country’s export supply industry and our customers securely and quite well.

Today, in part because of what happened back in 1980, the U.S. wheat store remains open, equally and fairly to all market participants at home and abroad.

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By Shelbi Knisley, USW Director of Trade Policy

India has invoked the “peace clause” on its domestic agricultural support limits for rice, by notifying the World Trade Organization (WTO) that it has breached its support limits. By claiming its subsidies are part of its public stocks program for food security, invoking the “peace clause” cannot be challenged under the WTO. This is concerning to U.S. producers as many of the same subsidy programs that caused India to exceed its limits on rice are also applied to wheat, which have been shown to distort trade.

The “peace clause” was accepted at the Bali Ministerial in 2013, where WTO members agreed temporarily to not challenge a developing country’s domestic support programs that exceed their agreed-to limits, if the support was in the form of stocks for food security purposes. There are other conditions that must be met, including that the programs must not distort trade.

With all due respect to India’s right to help feed its large impoverished population, it is hard to believe a country that is the largest exporter (making up a quarter of global exports) of rice can claim the “peace clause” for the purpose of food security. India implements minimum support prices (MSP) and input subsidies for many of its crops (including wheat), far exceeding its allowable limits for trade distorting domestic support policies. Policies such as these tend to be some of the most trade distorting programs because they directly encourage additional production. As a result of these hefty subsidy programs, Indian rice and wheat production increases and at times leads to larger stocks and increased exports.

India also has schemes with its wheat subsidies that affect the global wheat market. India is the second largest producer of wheat and, in general, is not considered a large participant in global wheat trade. India has used these market distorting policies to increase wheat production and accumulate stocks overtime.

Based on historical trends, once India’s wheat stocks exceed 20.0 million metric tons (MMT), they become burdensome. Then India struggles with storage capacity and will dump them on the international market at prices assumed to be subsidized by the Government of India (GOI). At such times, India becomes a significant wheat exporter, averaging around 4.0 MMT during the period of exports.

Currently India’s wheat stocks are forecast at a near record 24.0 MMT for 2019/20 (USDA-FAS PS&D), therefore it is expected India will soon need to push those excess wheat supplies onto the market at discounted prices, especially as production is forecast to be the highest on record.

While India should be commended for trying to meet its WTO notification obligations, unfortunately the GOI still uses methodological tricks to disguise its true support levels. With these tricks, India tries to claim a negative support level for wheat production. But as the Office of the U.S. Trade Representative (USTR) demonstrated in a 2018 counter notification, wheat and rice support levels have been out of compliance at levels well beyond what India now admits, leading to over production of these commodities and burdensome stocks.

Those excess stocks have significant implications for U.S. wheat producers. A 2015 study conducted by Iowa State found that India’s wheat subsidies cost U.S. wheat farmers $358 million in lost revenue. As India’s programs continue to grow and distort the global market, USW will continue working to raise awareness of their effects to help ensure fairness in global trade for wheat producers everywhere.

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By Dalton Henry, USW Vice President of Policy

The U.S., Mexico, Canada Agreement (USMCA) is moving steadily, if somewhat slowly, to becoming an implemented trade treaty. Mexico’s government first ratified the agreement in June 2019. At the request of the U.S. House of Representatives, the agreement was revised and signed again by all three countries in December 2019, after which Mexico’s government voted to ratify the revised agreement.  President Trump signed the U.S. implementing language for the agreement in a widely attended ceremony on January 29, 2020. And now, ratification is being considered by Canada’s parliament, a process many trade watchers expect to run through March 2020 at least.

The latest step puts us a mere hop, skip and a jump from having a new trade agreement in place with two of the U.S. agriculture’s largest customers. Most importantly to wheat industry stakeholders, the new agreement moves us past the bold threats of withdrawal from NAFTA and fully protects access to U.S. wheat on a duty-free basis for Mexican customers, modernizes sanitary and phytosanitary (SPS) provisions and removes the largest remaining barrier (eligibility for grades) for U.S. producers who want to sell wheat to Canadian elevators.

On that final point, USMCA assures that U.S. wheat sold in Canada is not automatically graded as feed. It is one of the more significant new provisions in the USMCA. President Trump specifically mentioned it in his remarks at the White House signing ceremony. Western Canadian wheat growers support it.

Under the agreement, U.S. farmers interested in taking wheat across the border will still have to verify that wheat is one of the varieties registered in Canada. But it is worth celebrating that farmers near the Canadian border will have additional local outlets for grain, potential market arbitrage opportunities and a basic fairness between growers on either side of the border. These grain grading changes will give Canada a reprieve from the threat of non-compliance with the WTO’s “national treatment” standard and forces legislative changes that the Canadian government had promised to make for the better part of a decade (but never actually put into place).

Necessary changes in domestic regulations across all three countries are still needed. Those changes will be followed by a 60-day monitoring period to verify the changes are being implemented. An exchange of letters between the three countries is the seal for the deal. Wheat growers and buyers in USMCA – the new NAFTA – are very much looking forward to that day.

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By Vince Peterson, USW President

Today, I had the unique privilege to accept an invitation to the White House to represent U.S. wheat farmers, our state wheat commission members and U.S. Wheat Associates (USW) as President Donald Trump signs implementing legislation for the U.S.-Mexico-Canada Agreement (USMCA) into U.S. law (that’s my viewpoint at the ceremony in the picture above).

While this invitation came addressed to me, it is only because I occupy a specific desk at USW with the consent of our U.S. farmer board of directors. I sincerely hope that everyone associated with our organization feels the same pride I do to witness this important national event because everyone put in a tremendous amount of work to help bring it about.

The trade agreement USMCA will replace (after Canada’s parliament approves it and implementing changes are made, as we are sure will happen) opened mutually beneficial trade between U.S. wheat farmers and Mexico’s flour millers and wheat food industry. Under the North American Free Trade Agreement (NAFTA), USW focused on helping Mexico’s buyers, millers and food processors solve problems or increase their business opportunities with U.S. wheat classes—as it does with all U.S. wheat importing customers. This effort, supported by wheat farmers and the partnership with USDA’s Foreign Agricultural Service, has fostered a productive relationship that has endured through many challenges.

So, when the Trump Administration announced in 2017 it intended to renegotiate NAFTA, USW quickly engaged in the process on many levels to advocate for continued duty-free wheat trade and other improvements in the agreement.

For example, I invited José Luis Fuente, President of the Mexican Millers Association (CANIMOLT), to address the USW board of directors meeting in October 2017. Sr. Fuente had been appointed as an advisor to the Mexican Minister of Agriculture in the negotiations. He made a passionate plea for USW to work together toward resolving the trade agreement as soon as possible. In addition, our former Vice President of Policy Ben Conner was granted status as an advisor to the U.S. Trade Representative and was one of only a few agricultural industry representatives who participated in side-briefings at almost all the official negotiating sessions. Vice President of Communications Steve Mercer, his team and our friends at the National Association of Wheat Growers (NAWG) published an on-going series of press statements, social media posts, comments and fact sheets supporting our positions. As the U.S. Congress considered the agreement, NAWG’s staff and its dedicated farmer officers and directors continued to advocate for its passage.

Regional Vice President Mitch Skalicky and our staff in Mexico City steadfastly maintained contact with Sr. Fuente and our other customers. Then, last year at a USW marketing conference in Mexico, USW and Mexican millers renewed our agreement to work together toward approval of the USMCA. We also made it very clear that our commitment to serving their industries was among our most important goals.

“We have 14 farmers here representing 13 different state wheat commissions, and U.S. Wheat Associates staff from 3 offices here to show you that we take your business seriously,” Past Chairman Chris Kolstad told the millers. Those farmers, state commission members and USW, he added, “are all united in our desire to earn your full trust in the United States as your primary source of imported wheat.”

After I received the White House invitation to the USMCA signing ceremony, I forwarded a copy to Sr. Fuente with a note of thanks and congratulations to him and CANIMOLT members for their work and the collaborative effort toward a favorable agreement for each of us.

“We congratulate U.S. Wheat Associates on behalf of the Mexican millers for all of the collaborative work, negotiations, and achievements attained (in negotiating the new USMCA),” Sr. Fuente responded to Mitch Skalicky and me. “I am very happy and proud to have been part of the effort and above all to confirm the excellent relations and friendship that exists between the Mexican milling industry and the U.S wheat industry.”

That is a humbling and generous confirmation that our relationship stayed strong throughout the negotiations. USW will continue to work hard to make our partnership even stronger in the future.

José Luis Fuente, President of CANIMOLT, addresses the USW Mexican Wheat Trade Conference in June 2019.

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By Elizabeth Westendorf, USW Assistant Director of Policy

Of the more than 1.9 million metric tons (MMT) of international food commodities the United States donated in 2018/19, more than 800,000 MT of it was high-quality milling wheat. Given the important role U.S. agriculture plays in supporting the neediest people around the world, farmers representing U.S. Wheat Associates (USW), the National Association of Wheat Growers (NAWG), U.S. Grains Council (USGC), and USA Rice spent 14 days in Kenya and Tanzania in November to see how donation programs help improve lives.

The team, funded by USDA’s Foreign Agricultural Service export market development programs, consisted of: Nicole Berg, NAWG Treasurer and a wheat farmer in Washington state; Denise Conover, Director of the Montana Wheat and Barley Committee and a wheat farmer in Montana; Tim Gertson, USA Rice member and a rice farmer in Texas; Linsey Ogden, Washington representative for the National Sorghum Producers; Adam Schindler, USGC representative and sorghum farmer in South Dakota; Jeffery Sylvester, USA Rice board member and a rice farmer in Louisiana; Jesica Kincaid, USA Rice Manager of International Policy; Molly O’Connor, NAWG Trade Policy Advisor ; Katy Wyatt, USGC Manager of Global Strategies; and Elizabeth Westendorf, USW Assistant Director of Policy.

Denise Conover helps WFP staff load bags of US wheat into a truck for transport.

One of the most impactful days for this unique team was a visit to the Kakuma Refugee Camp in Kenya with the World Food Programme (WFP). Some of the more than 200,000 camp residents from nine different countries have lived there for 20 years or more. In partnership with USAID, WFP is feeding 98 percent of the camp with more than half of their food supplies coming from the United States.

When the team met with the refugee-led Food Distribution Committee in the camp, its chairman, a man named Nelson, emphasized that they were always very happy with the high quality of U.S. food they received and, specifically, the excellent quality of wheat flour. The wheat is delivered to the camp in bags and refugees are given a stipend to assist with the milling cost. This is more efficient than transporting flour and helps support the local milling industry.

An important part of programs like WFP’s work in Kakuma is logistics. To gain a better understanding of that side of the work, the team also visited WFP’s office in Mombasa, Kenya, which is one of the largest ports in Africa. From its base in Mombasa, WFP supports feeding programs in Sudan, South Sudan, Mozambique, Rwanda, and Uganda. WFP has been working in Mombasa for 30 years and regularly receives U.S. food shipments.

Trip participants look at typical commodities used in the camp feeding programs.

The team meets with the refugee-led Food Distribution Committee. The Chairman, Nelson, is standing and giving an overview of their system.

While the emergency feeding programs the team observed in Kenya are vital, seeing some of USDA’s agricultural development programming completed the full picture of food assistance work that utilizes U.S. commodities. For this, the team traveled to Tanzania and observed a Food for Progress project run by Small Enterprise Assistance Funds (SEAF) and funded through the monetization of wheat. They also observed U.S. Grain Council’s successful Food for Progress project that works to support poultry farms and feed mills in country. The team members met with the mill that purchased the monetized wheat and talked to the bakery that used some of the flour. Food for Progress is unique because while funding agricultural development work, it also supports local industry and builds commercial capacity.

The team visiting a greenhouse project that allows refugees to grow their own food on irrigated land.

The U.S. agricultural industry and farm families continue to support international food assistance work. Trips like this allow our farmers to see the programs up close and in action, instead of just hearing about them in conference rooms and at board meetings. By gaining this practical experience, they are better able to spread the news about the effectiveness and value of the programs and be active partners in ensuring that these programs continue their good work long into the future.

Header Photo Caption: The team with the refugees on the Food Distribution Committee in front of a feeding center. 

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By Dalton Henry, USW Vice President of Policy

Each year, the Office of the U.S. Trade Representative (USTR) compiles and publishes the National Trade Estimates (NTE) report — a comprehensive report detailing barriers that U.S. exporters, including wheat farmers, face in markets around the world.

The first step in compiling the massive report (last year’s came in at 537 pages), is to collect feedback from the export stakeholders. U.S. Wheat Associates (USW) participates in this process each year by consulting with our offices overseas, talking to customers and researching trade barriers. That work culminated last week when USW submitted to USTR its compiled information, covering barriers in a dozen wheat importing countries.

Each year, many of the challenges highlighted in USW’s submission are issues that remain unresolved. This year, however, USW’s reports about on-going concerns with China and India were substantially changed.

The new report on barriers in China reflect the progress made since last year to bring China’s wheat import tariff rate quota (TRQ) and wheat subsidy policies into compliance with the government’s WTO commitments. This year’s report reflects the progress made in those areas as a result of the two WTO cases the United States won last spring, and China’s initial policy proposals to address those WTO rulings.

While the report shows some progress in the China section, it highlights a growing area of concern in India. India runs subsidy programs very similar to China, including minimum purchase prices and input subsidies. USW and USTR have demonstrated previously that India is well outside of its WTO limits in the level of government subsidies. Those subsidies have spurred excess production and subsequent wheat stocks that, once at a critical mass, India must subsidize to dump onto the world market. USDA projects that Indian wheat ending stocks will exceed 20 million metric tons (MMT) for 2019/20 — a level that historical data shows will likely result in India resuming wheat exports in the near future.

USW’s most recent NTE report can be found online here. It provides an overview of the key issues that USW works on every year and supplies USTR with up-to-date information on ongoing problems in wheat trade. In doing so, it fills a vital role in the enforcement of trade rules, something that U.S. farmers and their customers overseas want to see more than ever.

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By Dalton Henry, USW Vice President of Policy

While the trade policy headlines from the month of October have mostly been written about a possible “phase one” trade deal between the United States and China, much less has been said about the recently revised and published China Tariff Rate Quota (TRQ) rules for importing wheat and other agricultural products – though their impact could be nearly as significant for the affected commodities.

China’s TRQ rules were expected to be changed because of the World Trade Organization (WTO) ruling last April that found China had not complied with the terms they agreed to upon joining the WTO in 2001. TRQ’s govern the import of specified levels of products at a specific tariff rate that is lower than the global or Most Favored Nation (MFN) rate. Without TRQ, Chinese importers cannot profitably access the world market for wheat, as China’s MFN tariff is 65%. Restricted fill rates on TRQ over the past decades have proven to be the biggest constraint to growing market share for imported wheat in China. Today, imported wheat rarely exceeds 5% of mill use.

Upon accession to the WTO, China established a 9.64 million metric ton (MMT) TRQ for wheat, but that annual TRQ has never fully filled, despite world wheat prices and market conditions conducive to doing just that. When the United States filed the case at the WTO in 2016, they alleged that China had used a series of policies in administering the TRQ that were not “transparent, predictable or fair” and by doing so they, “…limited opportunities for U.S. farmers to export competitively priced, high-quality grains to customers in China.”

That limitation has had effects beyond the impacts on U.S. farmers though, as it also severely limits Chinese millers’ access to high quality wheat grown outside of China. In especially short supply in the domestic market are both soft wheats – often used for pastries and cakes as well at higher protein spring wheats, which are necessary for pizza crusts and hamburger buns.

When the United States won the WTO case, China agreed not to appeal and that they would come into compliance with the ruling by December 2019. That put the case on a relatively fast track to be completed, spanning just under three years since it was filed, much to the joy of U.S. wheat farmers who had long pushed for U.S. government action to force change in the TRQ administration.

U.S. Wheat Associates (USW) has been reviewing the new measures along with the U.S. government and Chinese flour millers. USW Regional Vice President for China and Taiwan, Jeff Coey, has found several of the new rules promising, especially the announcement’s stated goal for both the state and non-state portions of the TRQ to be fully utilized so long as market conditions allow it. Full utilization of both segments of the TRQ hasn’t previously been stated as a goal, leading to significant optimism about access to wheat supplies in 2020. Other positive changes include the allowance for more state-owned entities to apply for TRQ allocations and for non-state-owned entities to apply for the portion of the TRQ that was previously reserved for the state – essentially giving both groups the potential ability to import for the first time.

The TRQ changes and the need for quality wheat supplies may make China a significant wheat importer in 2020. If the changes are in fact implemented, and Chinese millers can respond to market signals, most of the 9.36 MMT TRQ should be used. The net result of that would be China becoming a top world wheat importer, even as they have adequate domestic wheat stocks on hand. From a quality supplier point of view, this opens many opportunities for the United States to provide technical expertise and assistance to our Chinese customers. While allowing those customers access to lower costs and wheat with specialized end-use applications that distinguishes U.S. wheat from domestic supplies.

As with so many issues in trade policy, only time will tell how effective these announced changes will be in allowing Chinese millers to source imported wheat. Both the U.S. government and U.S. Wheat Associates will be closely monitoring the changes to ensure compliance with the WTO ruling, but for now 2020 looks likely to start off on a better foot for U.S. producers and their Chinese customers.