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Proposed EU changes in levies spell disaster for U.S. wheat exports

(Tuesday, Sept. 10, 2002 -- CropChoice news) -- This information comes courtesty of U.S. Wheat Associates

U.S. WHEAT ASSOCIATES, Wheat Letter, September 6, 2002:

PROPOSED EU CHANGES IN LEVIES SPELL DISASTER FOR U.S. WHEAT EXPORTS In a relatively rare show of unity on agricultural trade policy, this week the U.S., Canada and Australia, among others, blasted proposed EU rule changes for importing cereals. The proposed system, which would fix import tariffs based on quotas, with duties rising as volume increases, would be disastrous for U.S. wheat exports to the EU. They currently use a more "free market based" variable import levy system.

"The timing couldn't be worse. We believe this is the wrong message, the wrong direction, at the wrong time," said Allen Johnson, who heads the U.S. delegation to the WTO negotiations.

The EU was the fourth largest overall export destination for U.S. wheat in the past marketing year, reports Vince Peterson, USW vice president for Europe. "Their recent proposals to change import levies, if enacted, would have a disastrous effect on U.S. wheat exports," he declares.

Western Europe is the second largest worldwide importer of U.S. hard red spring wheat and the single largest importer of U.S. durum wheat. In addition, half a million tons of soft red winter wheat went to Italy and Spain last year, making the EU the third largest single global market for U.S. SRW. Overall, the U.S. exported 2.2 MMT of wheat to the EU in 2001/02, the largest volume since the mid-1980's. All of the progress, Peterson says, is now in jeopardy.

The wheat exporters are joined by EU wheat importers who want continued access to quality wheats. Antonio Costato, CEO of the Italian mill Grandi Molini Italiani and president of Euroflour, calls the proposal "unfair and protectionist," and tells USW that Italians "will lobby and fight against a reform that may kill the free market."

While the EU may disengage unilaterally from their current system, it must negotiate with its WTO trading partners to set their TRQs, or they will be faced with a formal trade dispute and claim for compensation. That compensation could get expensive, as U.S. durum exports might disappear under this proposal, and it is conceivable that U.S. HRS could lose nearly its entire sales position as well. The damage will go well beyond market losses to U.S. wheat producers, since U.S. railroads, which profitably move 1.7 MMT of HRS and durum from the northern plains to Duluth for export, would lose their business. Additionally, the grain export handling facilities and port authorities on the Great Lakes and St. Lawrence Seaway see the direct benefits from last year's exports to the EU, which represent 70% of all U.S. wheat exports through those ports.

The background, the technical aspects, and the politics of this issue are extensive. USW's trade policy briefing paper on the subject is available on the web at www.uswheat.org, or send an email in response to this Wheat Letter.


The USDA's imminent release of regulations for the farm bill's Hard White Incentive Program, anticipated any day, cannot happen too soon. The drought situation in Australia, as dreadful as it is for the farmers there, is providing a market opportunity for U.S. hard white wheat because of concerns among world millers about whether the amount of Australia's "quality" wheat will be limited.

It's likely that the Australian Wheat Board Ltd will have adequate export stocks at the beginning of their year. "As in the past, they will try to maximize their sales early in the coming calendar year, from January to June," reports Mark Samson, USW vice president for South Asia. "However, their ability to provide the required levels of mid- to high protein HW from June until their next harvest may be challenged."

"In South Asia particularly, the U.S. has the golden opportunity to capture the demand for white bran mid- to high protein wheat during this time frame," Samson advises. "It is an opportunity waiting to be seized."

Australia's crop estimates have gone through several downgrades, falling from AWB's initial forecast of 24 MMT to 15.5-17.5 MMT last month. This week, Australia's Agriculture Minister Warren Truss said estimates of the nation's crops were likely to be downgraded even more as further signs emerged that conditions were deteriorating.

USW has long urged American wheat farmers to produce more hard white wheat in order to re-capture markets where the AWB is providing their white wheat. The farm bill enacted an incentive program for farmers who want to meet this growing demand, but the USDA has not yet released the program regulations.

"We're now far enough along in seeding that the program won't be as helpful to 2002 plantings as it could have been, unless people are betting on the come," observed Daren Coppock, chief executive officer of the National Association of Wheat Growers. For those growers who are now making their winter wheat planting decisions, or may decide to plant the more limited spring variety, immediate USDA action is urgent.

Hard white wheat is grown in the U.S., but domestic millers who seek the high qualities of the class "lock in" much of the supply by forward contracting. As more domestic mills discover the values of American HW, production will increase, but the immediate opportunities in export markets can only be met by a faster adoption of HW wheat varieties that have greatest potential for demand by importers.


The USDA Foreign Agricultural Service Attache in Canada reports that a labor lockout has stopped grain handling in British Columbia. According to the Globe and Mail, FAS reports, "a labor dispute has halted grain shipments through the port of Vancouver, raising fears that a long-term shutdown would batter Canadian farmers already reeling from severe drought and plunging crop receipts. The dispute between the union representing 630 grain handlers and an association of five terminal operators is not yet affecting shipments of other commodities through Canada's largest port. The lockout, which began Sunday at midnight, is also expected to affect longshoremen, truck drivers and other logistical support services at a port that handles about 70% of Canada's grain production. Company and union officials said they see no quick end to the dispute, which has occurred after months of negotiations did not produce a settlement. The grain handlers were locked out after they failed to vote on an offer that was delivered by their employers last week."

The FAS report continues: "The Grain Workers Union contends that the offer was delivered without enough time for the union to hold a membership meeting. While a vote was subsequently held on August 29, results of the vote are still unknown, but sources say that it will most likely be rejected. The terminal association, which represents terminal operators Agricore United, Cascadia, James Richardson International, Pacific Elevators, and the Saskatchewan Wheat Pool, said it is "mystified" by the union's position in not being able to find a solution, given that it has been without a contract since Dec., 31, 2000. In the meantime, the Canadian Wheat Board may consider alternatives such as moving grain through other ports such as Prince Rupert, B.C."


USW chairman Jim McDonald recently appointed members of a task force to aggressively address wheat issues in U.S. food aid programs. The group is co-chaired by David Frey, administrator of the Kansas Wheat Commission, and Tom Mick, chief executive officer of the Washington Wheat Commission. The liaison to the USW Board of Directors is Judy Rea, chairman of the Oregon Wheat Commission. Members are: David Torgerson, Minnesota Wheat Research and Promotion Council executive director; Carolyn Logue, Nebraska Wheat Board assistant director; Bonnie Fernandez, California Wheat Board executive director; Chris Holdgreve, Wheat Export Trade Education Committee assistant director; and Dawn Forsythe, USW's public affairs director.

"The challenges confronting the wheat industry demand quick action," McDonald said, referring to food aid issues, including the virtual elimination of programs by the Bush administration. "This group of knowledgeable people can immediately contribute to a working strategy."


U.S. wheat prices are at the highest levels in five years, and are currently supported by the tight supply of quality milling wheat expected to be available during 2002/03. Some fuel for prices is coming from quality concerns over the remaining third of the U.S. spring wheat crop yet to be harvested, reports of further downward revisions in the Australian crop, and quality problems with the already drought-stricken and now partially rain-soaked Canadian crop.

In the U.S., December futures prices are up 81c, 64c and 46c at the Minneapolis Grain Exchange, the Kansas City Board of Trade, and the Chicago Board of Trade, respectively, since early August. October FOB Gulf values for HRS 14% protein, HRW 11.5% protein and SRW are around $202, $187, and $155 per MT, respectively.

At the same time that prices are up in the U.S., Canada and Australia, cheap wheat is offered by nontraditional suppliers, including Eastern Europe and the former Soviet Union. For instance, Russian wheat is at $105 and Kazakh wheat is around $120 to $125.

Weather reports indicate that rain will be moving into the U.S. hard red spring wheat region this Sunday and Monday, slowing harvest progress and adding to concerns about the quality of this year's U.S. crop. As of September 1, USDA reports that 66 percent of the spring wheat is harvested, lower than the 87 percent that was harvested by this time last year, and lower than the 5-year average pace of 80 percent. USDA pegs HRS production at 11.1 MMT, down 14% from last year to the lowest level in 14 years.

Canada's short crop and recent wet weather are also factoring into the recent price rallies. Since Statistics Canada released its production estimate of a mere 15.4 MMT two weeks ago, Canada's wheat situation has deteriorated even further. On Thursday, the CWB announced that it has "withdrawn from the market while we evaluate our harvest and thus our supply." Saskatchewan Agriculture, Food and Rural Revitalization's latest Crop Report indicates that its spring wheat crop is only six percent harvested compared to the 5-year average pace of 38 percent harvested by this time last year. "Recent wet weather and insects have resulted in a further downgrading of yields and quality which were already significantly impacted by drought and frost," the report goes on. "Many areas report sprouting, bleaching, molding, discoloration, lodging and disease from the recent wet, humid weather."

Another bullish factor is Australia. The Australian Bureau of Agricultural and Resource Economics (ABARE) will release its revised production forecasts on Tuesday. Many observers expect ABARE to cut production forecasts again as most of the wheat growing areas in Australia have received little or no rain since their August 1 forecast of 17.1 MMT, which was much lower than its June forecast of 20.5 MMT, and well below its original forecast of just under 24 MMT. The AWB currently pegs Australia's wheat production at 15.5-17.5 MMT, down from its June estimate of 18-20 MMT and its initial forecast of 24 MMT.

How will the nontraditional suppliers react to the two-tiered situation? Can they continue to keep the price low? Will their infrastructures clog at inopportune moments? Can their ports handle the exports? And will the quality begin to affect end use products? Or maybe everything will come together...

If you are interested in the weekly price reports, or to view this Wheat Letter on our web site, please visit http://www.uswheat.org

Dawn Forsythe, Director, Public Affairs, dforsyth@uswheat.org
Kathleen Mullen, Market Analyst, kmullen@uswheat.org
U.S. Wheat Associates
1620 I Street NW #801
Washington DC 20006