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Mr. Bolsonaro Goes to Washington

By Ben Conner, USW Vice President of Policy

Two weeks ago, Brazilian President Jair Bolsonaro visited President Trump in Washington, D.C., to help forge closer ties between the two largest countries in the Western Hemisphere. The joint statement published at the end of the visit highlighted several areas for cooperation and expanded commerce. One of those was a commitment to allow “the annual importation of 750 thousand tons of American wheat at zero rate.”

Of course, U.S. wheat farmers would be delighted if Brazilian buyers choose to import all 750,000 tons from the United States, though duty-free treatment mandated by the World Trade Organization (WTO) would apply to all imports from outside existing free trade agreements like Mercosur. Even with competition, annual average U.S. exports to Brazil are likely to increase substantially; and for this, U.S. farmers can thank the hard work of staff at the Office of the U.S. Trade Representative and the U.S. Department of Agriculture, members of Congress who pushed for this outcome, and officials in Brazil who recognized the benefits of closer trade ties with the United States and the importance of complying with WTO rules.

U.S. wheat farmers have long sought expanded commercial ties with Brazil, which is one of the world’s largest agricultural producers but also one of its largest wheat importers. The United States used to be Brazil’s primary wheat supplier, but it has since been supplanted by Argentina. This makes some sense, since duty-free treatment for Argentina and other Mercosur suppliers, coupled with a 10 percent external tariff, made U.S. wheat less competitive.

While Argentine dominance of Brazil’s imports will not be reversed with this new policy, U.S. farmers are hoping for a more stable relationship with their Brazilian customers. Tariffs prevented development of a consistent market in Brazil for a long time but, now with the tariff rate quota (TRQ) open, the opportunity is there for Brazil’s flour millers to consider U.S. wheat every year equally, instead of only after a poor South American wheat crop.

Now Brazil must take the final steps to implement the TRQ. No country has a perfect record of complying with WTO commitments, but U.S. Wheat Associates (USW) is grateful to see President Bolsonaro taking Brazil in that direction on this issue so early in his presidency. Brazil and the United States have much in common as major agricultural exporters and we hope to see our countries to work together at the WTO to advance a trade liberalizing agenda while expanding the commercial relationship between our wheat sectors.

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If Only This Were an April Fools’ Day Hoax

In much of the Western World, on April 1 people go sometimes to great lengths to create mostly harmless “April Fools’ Day” hoaxes. There are many theories about how this odd “celebration” came to be, including an association with the first day of spring in the Northern Hemisphere, when Mother Nature fooled people with changing, unpredictable weather.

On this April Fools’ Day, however, it is no hoax that today the effective tariff applied to U.S. wheat imported by Japan is nearly $20 per metric ton (or 50 cents per bushel) more than the tariff applied Canadian and Australian wheat. That is because the United States is not a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP. In fact, the effective internal tariff on wheat from those CPTPP member countries will drop again on April 1 in 2020 and drop again every April 1 until 2026.

There is no hard evidence that U.S. wheat sales to Japan have gone down because of this harmful situation. Eventually, however, this reduction will be about $70 per metric ton, or 45 percent below the current effective tariff applied to U.S. wheat. Japan has no obligation to change this tariff reduction schedule so that difference will likely shut a major portion of U.S. wheat exports out of the Japanese market and undo decades of market development work.

“We have spent countless hours and millions of hard-earned farmer dollars building demand for U.S. wheat in this market,” said U.S. Wheat Associates (USW) President Vince Peterson last December in testimony to the Office of the U.S. Trade Representative about trade negotiations with Japan.

He continued by saying that achieving a satisfactory outcome in negotiations between the United States and Japan matters a great deal to U.S. wheat farmers who have long ties with Japan.

“That legacy is on the verge of disappearing due to CPTPP,” Peterson said.

USW and U.S. farmers have urged the Trump Administration to act quickly to prevent such losses. Hopefully that will happen long before the next April Fools’ Day.

 

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An In-Depth Look at the WTO Panel Report on China’s Grain Subsidies

By Ben Conner, USW Vice President of Policy

On February 19, 2019, the World Trade Organization (WTO) released the final report of the panel in the U.S. case alleging that China has not complied with its domestic support commitments on wheat and rice. While the panel disagreed with a few arguments, it agreed with the accusation that China was far out of compliance due to the operation of the market price support (MPS) program for certain commodities.

U.S. Wheat Associates (USW) believes it is important for its overseas customers and the farmers it represents to better understand why the United States brought this case to the WTO and how the panel reached its conclusion.

Most countries with sizable agriculture sectors provide some domestic support (subsidies or safety net programs) for farmers. The countries that negotiated the WTO Agreement on Agriculture (AoA) established disciplines for domestic support because they had experienced the price suppressing effects of foreign or, in some cases, domestic agricultural subsidies. The WTO members agreed to set limits on the types of support that could impact farmer’s production decisions and, thus, distort trade. A government subsidy that incentivizes the farmer to plant more wheat than barley is one example. On a large enough scale (such as across a country), that additional production can significantly suppress wheat prices for other wheat farmers who are not eligible for these subsidies.

Developed countries like the United States, Japan, and European states provided most agricultural subsidies at the time the AoA was negotiated. Over time, these countries either reformed their programs or have stayed within their limits. However, within the past decade, trade distorting domestic support has shifted significantly to developing countries, with China and India leading the way. Those countries are, in many cases, far out of compliance with their WTO commitments.

The U.S. government recognized that if any countries are allowed to flout WTO rules consistently, the incentive for others to follow the rules collapses. It also kills the potential for productive negotiations, since negotiating partners must be convinced that others will uphold their end of the bargain. Therefore, in 2016, the U.S. launched this case against China both to address the particular concerns in China and to demonstrate that the rules apply to all countries (Australia, Brazil, and Guatemala recently launched similar cases against India over its support for sugar production).

In the China domestic support case, the U.S. legal team chose to focus specifically on a measure called market price support (MPS) to demonstrate that China had breached its commitment on aggregate measurement of support (AMS). MPS sets a commodity’s floor price at which a farmer can sell to a government buyer instead of to a private buyer. This keeps internal prices artificially high and signals farmers to produce more of the supported commodity.

The AoA has a specific formula to calculate how MPS contributes to AMS: the quantity of eligible production multiplied by the difference between the annual support price and a fixed reference price established in the AoA. This was a legal case, so there were arguments about everything, but the most important question was what constitutes eligible production.

China’s argument was that eligible production is only the amount procured by the government. But the panel agreed with the United States, saying eligible production is the “amount of product which qualifies to be purchased from producers,” not the amount that is, in fact, purchased. The only limitations in Chinese rules were that the price supports only applied in six provinces (covering approximately 80 percent of production) and to wheat that met basic quality standards (99 percent of production in those provinces). In 2015, this was 103 MMT out of the 130 MMT produced. In its notification to the WTO for that year, China claimed only 21 MMT. Under that notification, China claimed it was complying; under the panel’s methodology, this quantity put China far out of compliance.

The 2015 support price was 2360 renminbi (RMB) per metric ton (MT) and the panel confirmed that the fixed reference price was 1698 RMB/MT. The difference between the two times the 103 MMT of eligible production equals 68 billion RMB, or 22.4 percent of the value of production. Since China’s WTO limit is 8.5 percent, China’s AMS for wheat in 2015 was nearly triple its allowed limit. This AMS figure only accounts for MPS – the panel did not review a suite of other subsidies available to Chinese wheat farmers that would likely increase the size of China’s AMS violation. The panel made a similar finding for rice and did not make calculations for corn due to technical reasons.

The United States and other countries have been arguing for years that China has a responsibility to bring its programs into compliance so that its farm production decisions are no longer based on artificial price signals or other incentives that violate China’s WTO commitments.

Now they – and thousands of wheat farmers outside China – have a WTO panel decision to back them up.

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Fighting for Fairness Through the Rules-Based Trading System

On Feb. 15, 2019, the United States submitted a counter notification, co-sponsored by Canada, in the World Trade Organization (WTO) Committee on Agriculture on India’s market price support for pulse crops – based on publicly available information. With this counter notification, the U.S. government continues to use the rules-based trading system established by the WTO as an appropriate and welcome step toward fairness and transparency for all its member countries.

In May 2018, the U.S. Trade Representative (USTR) formally questioned data India has reported to the WTO about its market price support programs for wheat and rice from marketing years 2010/11 to 2013/14. And in 2016, U.S. Wheat Associates (USW) and the National Association of Wheat Growers (NAWG) welcomed two trade dispute actions by the USTR challenging Chinese government policies that distort the wheat market and harm wheat growers throughout the rest of the world.

Specifically, in September 2016 a U.S. trade enforcement action challenged the level of China’s trade-distorting market price support programs for wheat as well as for corn and rice. In describing its action, the USTR said domestic price support to Chinese farmers “significantly exceeds China’s aggregate measure of support commitments under the WTO Agreement on Agriculture.” In December that year, a U.S. dispute case alleged that China is not fairly administering its annual tariff rate quotas (TRQ) for corn, rice and 9.64 million metric tons of imported wheat. This request stated that China’s TRQ administration unfairly impedes wheat export opportunities.

The WTO is expected to announce the panel decision in the next few weeks on the original U.S. challenge to China’s domestic agricultural subsidies. The TRQ challenge also continues moving through the dispute process at the WTO.

Progress in these dispute cases indicate the WTO dispute mechanisms continue to provide an effective way to challenge unfair practices and policies. But the approach represented by the Trump administration’s use of unilateral tariffs and the threat of escalation to challenge unfair trade practices threatens the stability of the global trading system. That said, instability channeled properly could be beneficial to the trading system and result in greater long-term stability if it results in eliminating trade barriers, rather than creating new ones.

The past two decades have been a lost opportunity for the WTO negotiating function as major countries like China have refused to take on new responsibilities. Perhaps this unfortunate situation will be the wake-up calls countries need to realize that restricting trade and unfairly advantaging domestic industries in global markets winds up hurting everyone.

USW’s stakeholders hope that that the Administration’s alternative policy does result in positive shifts toward a more open trade environment that encourages strong domestic development in all countries. Yet the Administration’s continued use of the WTO dispute settlement and counter notification processes is also a positive sign that trade disciplines, supported by most of the world, will remain an essential part of global trade.

 

 

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Educating Government Leaders About the U.S. Wheat Value Chain

U.S. Wheat Associates (USW) is looking forward to joining 22 U.S. wheat production, handling, milling and food processing organizations at an event in Washington, D.C., Feb. 14, 2019, to educate U.S. government officials about our industry. The event is sponsored by the National Wheat Foundation with a goal to demonstrate the breadth and influence of the wheat industry to the U.S. economy and food supply as well as its prominent place in the global food supply chain.

 

USW agrees that helping Administration officials, members of Congress and their staff understand the many challenges U.S. wheat growers have faced the past few years is very important. Our organization participated in a similar event a year ago that came at a critical time when Congress was debating the 2018 Farm Bill that was approved and implemented in December. That legislation renewed export market development programs administered by USDA’s Foreign Agricultural Service — programs that help USW continue its trade service and technical support activities with the world’s wheat buyers, millers and food processors.

Senator Pat Roberts of Kansas (center) with Phil McLain (right) of North Carolina representing the National Wheat Foundation and Gordon Stoner (left) of Montana representing the National Association of Wheat Growers at the first educational meeting on Capitol Hill in February 2018.

 

USW and many of our state wheat commission members work closely with the organizations participating in the event including public and private seed producers, crop input companies, farm equipment manufacturers, railroads, Wheat Quality Council, Wheat Foods Council, Wheat Marketing Center, North American Millers’ Association, American Bakers Association and Grocery Manufacturers Association.

 

The National Wheat Foundation (NWF) works to advance the U.S. wheat industry through strategic research, education and outreach collaborations. It is a non-profit organization headquartered in Washington, D.C., governed by a nine-member board of directors and managed by staff of the National Association of Wheat Growers, the NWF’s sole member.

 

Assistant Secretary of Agriculture Steve Censky (right) talks with USW Vice President of Communications Steve Mercer (left) at the 2018 educational event on Capitol Hill.

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USW Shares Trade Opportunities with a Post-Brexit United Kingdom

By Ben Conner, USW Vice President of Policy

Last week, U.S. Wheat Associates (USW) submitted comments to the Office of the U.S. Trade Representative on negotiating objectives for a potential trade agreement between the United States and the United Kingdom (UK). The UK has been part of the European Union (EU) since before the creation of the World Trade Organization (WTO) and until recently has had no independent trade policy.

The 2016 “Brexit” vote to leave the EU changed this, and left the UK scrambling to hire new trade negotiators (even outsourcing leadership of the negotiations with the EU to a former negotiator from New Zealand) to untangle the decades of integration with the EU and figure out what may be put back together. The UK will also be busy negotiating new trade agreements outside the EU to replace the ones it will lose, unless a post-Brexit deal with the EU precludes an independent trade and regulatory policy.

There were pros and cons to Brexit for the British people, and the same is true for its effects on trade relations between the United States and the UK. There is now an opportunity to expand trade between both countries and address some of the tariff and regulatory barriers that have increased the costs of importing certain kinds of U.S. wheat. Unfortunately, one of the risks of Brexit is that our customers may see their markets limited due to the loss of unfettered access to continental markets.

The UK is also free to pursue a regulatory policy that emphasizes science, in contrast to the so much of what we’ve seen out of the EU. The UK has typically been one of the strongest voices for reasonable, science-based regulatory policies within the EU, and USW is but one of many opinions hoping for improved policies in a post-Brexit UK, while also encouraging EU leaders to stand up to activists who are often either dismissive or irresponsible about modern farming practices and technologies.

While there are always challenges, U.S. wheat farmers want to have positive trading relationships with both the EU and the UK. We hope that the Trump Administration can negotiated high-standard, modern free trade agreements with both.

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2019 Trade Policy Outlook

By Ben Conner, USW Vice President of Policy

If there is anything we learned from 2018, it is that the trade policy landscape is unpredictable. While many upcoming or ongoing issues are known, there are a range of possible outcomes within each, some of which could drastically alter the trade landscape in the future.

Let us start with China. This week, U.S. and Chinese negotiators met in Beijing to work toward resolving the current trade dispute, which has seen tariffs slapped on over $300 billion in trade. According to the U.S. Trade Representative, there is a hard deadline of Mar. 1 to reach a deal that will at least prevent further imposition of tariffs. U.S. wheat farmers have been shut out of China since March 2018, leaving their Chinese customers scrambling for other sources. The next couple months could reveal if trade will resume this year, or if the conflict will continue.

The United States has also initiated formal processes for trade negotiations with Japan, the European Union, and the United Kingdom (U.S. Wheat Associates will submit comments on the UK negotiations next week). However, there are still a number of unknowns, such as the scope and length of negotiations with Japan, the inclusion of agriculture in negotiations with the EU and the nature of the UK’s post-Brexit relationship with the EU.

The new U.S.-Mexico-Canada Agreement (USMCA) will likely be submitted to Congress this year to replace the North American Free Trade Agreement (NAFTA), but shifting political dynamics in the United States complicate Congressional approval and implementation of the agreement.

There is the threat of new tariffs on automobiles under Section 232 authority, potentially covering hundreds of billions in trade. While this is mitigated somewhat due to side letters negotiated alongside USMCA and the promise to avoid imposing tariffs on Japan and the EU while negotiations are ongoing, declaring automobile imports to be a national security threat has the potential to enrage U.S. trading partners and lead to new retaliatory measures.

Finally, there is the possibility that the World Trade Organization (WTO) Appellate Body will cease to function by December 2019. This is the culmination of over a decade of complaints by the United States about the way the Appellate Body functions. It is important for other countries to engage the United States to find a solution, because if a solution is not reached, it will mean the effective end of the WTO’s dispute settlement function and the ability of countries to enforce trade commitments.

In other words, based on the uncertainty these trade issues represent, we cannot expect 2019 to be less exciting than 2018.

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Farm Bill Renews Export Market Development Partnership with the Federal Government

U.S. farmers consistently produce enough wheat to meet domestic demand and still have about half of their crop available to overseas customers year. They support U.S. Wheat Associates (USW) with a portion of 17 state checkoff programs to build and maintain overseas demand. In turn that support qualifies USW to apply for program funding appropriated by the U.S. Congress and administered by USDA’s Foreign Agricultural Service.

 

This public-private partnership started in the 1950s and has earned a legacy of success giving wheat farmers the ability to maintain bases of operation and local USW representatives to conduct trade service and technical support activities with buyers, flour millers and wheat food processors.

 

The partnership was renewed in the Agricultural Improvement Act of 2018, which established the Agricultural Trade and Facilitation Program and provides funding for the Market Access Program (MAP), the Foreign Market Development (FMD) program and other programs available to USW and many other organizations representing U.S. farmers, ranchers and dairy producers. President Trump signed the Farm Bill into law on Dec. 21, 2018.

 

Pres. Trump signs the new U.S. Farm Bill into law on Dec. 21, 2018. National Association of Wheat Growers President and wheat farmer Jimmie Musick, (sixth from left) witnessed the signing.

 

 

Without the federal programs renewed in the current Farm Bill, USW would not be able to fulfill its mission to mission to develop, maintain, and expand international markets to enhance wheat’s profitability for U.S. wheat producers and its value for their customers.

 

USW thanked Congress for renewing the long-term investment in export market development programs.

 

“We also thanked the National Association of Wheat Growers for working to present our positions on export development funding and we are very pleased that members of Congress and their staff addressed those concerns effectively in this Farm Bill,” said USW Chairman Chris Kolstad, a wheat farmer from Ledger, Mont.

 

An additional change in the legislation now allows Congress to appropriate discretionary funds to cover the cost of administering the export market development programs, rather than covering costs from the appropriated program budgets. The law also establishes a Priority Trust Fund to be used at USDA’s discretion to help meet requests that exceed the appropriated program funds. Another important change now allows qualified organizations like USW to use program funds to conduct market development activities in Cuba.

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To Ag or Not to Ag*

By Ben Conner, USW Vice President of Policy.

To Ag. That is obviously the answer. The question is if the trade negotiations between the United States and the European Union should include agriculture at all. We already covered that in August after the two governments agreed to begin negotiations.

This week, U.S. Wheat Associates (USW) submitted comments to the U.S. Trade Representative on wheat growers’ priorities for the negotiations. The first priority, of course, is that the negotiations should cover agricultural products like wheat. That would avoid running afoul of WTO rules requiring free trade agreements to cover substantially all trade. It would also avoid a likely quick death in the U.S. Congress should an agreement without agriculture be presented to it.

The second priority is that the threat of Section 232 tariffs on automobiles produced in the EU should be dropped. Not only is it an ill-conceived idea to treat imported cars as national security threats, but the potential for retaliation is enormous since the U.S. imported about $40 billion in passenger cars from the EU in 2017.

Assuming those issues are addressed, USW wants to see protective EU wheat tariffs eliminated. Most EU imports from the United States are duty-free, but only for wheat that meets certain quality thresholds. Full tariff elimination would benefit buyers in the EU who may see opportunities to import U.S. wheat with different qualities.

The most significant challenges U.S. wheat growers currently face in the EU are non-tariff barriers also designed primarily to protect EU wheat producers. Pesticide residue and plant breeding regulations, phytosanitary tests and labeling requirements can disrupt U.S. wheat imports and create additional market uncertainty. A comprehensive agreement with the EU is long overdue and should end this sea of troubles.

*With sincere apologies to Bill Shakespeare.

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Administration Help Needed to Protect U.S. Wheat Exports to Japan

Following is a transcript of oral testimony by U.S. Wheat Associates President Vince Peterson at a public hearing held Dec. 10, 2018, by the U.S. Trade Representative (USTR) on potential trade negotiations with Japan.

“Thank you for the opportunity to speak on behalf of U.S. wheat farmers about trade negotiations with Japan.“Our mission is to develop, maintain, and expand international markets for U.S. wheat farmers, and one of our most critical markets is Japan.

“Given its demographic and consumption trends, Japan is generally a market where we seek to maintain our strong 53 percent market share, but today we face an imminent collapse. Frankly, this is because of provisions negotiated by [a previous administration] for our benefit under the Trans-Pacific Partnership. Our competitors in Australia and Canada will now benefit from those provisions, as U.S. farmers watch helplessly.

“Over the immediate past 5 years, Japan is our largest, most reliable and valuable market. The importer is Japan’s Ministry of Agriculture, Forestry, and Fisheries or MAFF. MAFF is the only entity that can import duty-free; all others must pay a prohibitive tariff. After MAFF imports, it resells wheat to flour millers with a significant mark-up; currently in excess of $150 per ton. This is the equivalent of a 60 to 70 percent ad valorem tariff at today’s prices.

“While we certainly wouldn’t hold up this system as an example, it has historically worked for us in Japan. Wheat is higher priced than elsewhere, but MAFF still imports enormous quantities of high quality American wheat. Since the wheat market in Japan is relatively stable, there tends to be little variation in quantity of imports from the US, Canada, and Australia, the three principal suppliers.

“This will start changing in 2019 as the CPTPP (Comprehensive and Progressive Trans-Pacific Partnership) takes effect.

“There will be an immediate seven percent drop in the mark-up for Canadian and Australian wheat. By April it will have gone down by 12 percent. In very real terms, as of April 1, 2019, U.S. wheat will face a 40 cent per bushel, or $14 per metric ton, resale price disadvantage to Australia and Canada.

“After 9 years the U.S. will face an automatic premium of 70 dollars per ton. But by that, time most of the market will be long gone.

“Japanese food processors are looking at ways to reduce their exposure to U.S. wheat right now. They will reformulate products to adapt to wheat from different origins because they will have to. If they don’t, their competitors will.

“We are relieved that this Administration is prioritizing negotiations with Japan. We urgently need a solution that will fix the enormous vulnerability created by CPTPP.

“There are other improvements that can be made, such as ‘WTO Plus” sanitary and phytosanitary rules, but for us, nothing is more important than fixing the mark-up disparity.

“American farmers have been travelling to Japan promoting U.S. wheat since shortly after World War Two. We have had an office in Tokyo for over six decades. We have spent countless hours and millions of farmers’ hard-earned dollars building this market.

“During that time the Japanese milling industry has become an indispensable partner for U.S. wheat, particularly for farmers whose wheat is exported out of the Pacific Northwest. All of that is at risk without a quick U.S.-Japan agreement.

“U.S. wheat farmers and Japan’s flour milling industry hope that we can maintain provisional equivalence for U.S. wheat imports while our two countries conduct ongoing, good faith negotiations.

“We thank you for understanding the plight of these farmers, who are already facing severe trade disruptions in other markets. As you are well aware, the United States has not sold one kernel of wheat to China, our fifth largest export market, since March 1, 2018.

“We urge you to act quickly to save our market in Japan. Thank you.”

For more information about what is at stake for U.S. wheat farmers under the CPTPP agreement, visit the USW website at https://www.uswheat.org/policy/trade-negotiations/ and click on “Trans-Pacific Partnership (TPP).” Use this link to access USW’s written submission to the USTR on trade negotiations with Japan.

Vince Peterson, President, U.S. Wheat Associates

 

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