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GMO Wheat...A market development-in-reverse program

(Friday, Jan. 24, 2003 -- CropChoice news) -- The following is the text of the remarks of Dan McGuire, policy chairman of the American Corn Growers Association and program director for the American Corn Growers Foundation's Farmer Choice - Customer First program, to the GE Wheat Forum of the Montana Winter Fair in Lewiston, Mont. yesterday.

by Dan McGuire

Itís good to be back in Montana and part of this panel to discuss the implications of genetically engineered or GMO wheat as itís commonly referred to.

GMO wheat has been described as a "solution in search of a problem to solve." I tend to think of GMO wheat as a problem in search of more problems to create. In fact, I would describe GMO wheat as a "market development in reverse" program. But you donít have to accept my description. European wheat importers have described GMO wheat as a "market destructor." Asian importers have similar views. Of course Iím primarily talking about export marketing problems and the negative wheat price implications that go hand-in-hand with that likely scenario. I will also mention some other market concentration issues later.

However, before I go into detail on that export market, I want to first remind the U.S. wheat industry and especially farmers that you have a distinct advantage over corn and soybean growers as it relates to GMOs. That advantage is the fact that world buyers have alerted you in advance and told you in no uncertain terms that they donít want, nor will they buy GMO (Roundup Ready) wheat if you grow it. Given the fact that all the government and industry experts have preached to farmers for years that you have to be better marketers and not just good producers, it would seem that the message from your market should be listened to. I like to say it this wayÖthe customer is always right, even if you donít believe theyíre right for the right reasons. I like to make that point because if those customers have alternative suppliers that are willing to meet their demands if U.S. farmers are not willing, they can and will buy elsewhere. That is sure the case with wheat in the world market.

In the case of corn and soybeans, those GMO varieties were introduced in the U.S. crop production system and sold to farmers without the biotech companies or U.S. grain promotion agencies having checked with foreign buyers or consumers at all. There was no market testing or consumer research done with the customer to determine if this new crop technology, which is very different from conventional crop breeding, was acceptable. But, because of the marketing problems caused by GMO corn, GMO soybeans and GMO canola in world markets some market research has been done now relative to wheat importer, processor and consumer attitudes regarding GMO wheat.

You really need to use that information to guide your decisions about GMO wheat. And, itís not just U.S. market research. The Canadian Wheat Board has done research that also shows that over 80 percent of their wheat import customers donít want and wonít buy GMO wheat. Since I mentioned the Canadian Wheat Board, you might like to know that Canadian CWRS 15.2 percent protein wheat is offered at higher prices than comparable U.S. spring wheat in Europe this week, which is typical, so that says something about the value of quality. To those who say that the Canadian Wheat Board is always underselling U.S. prices I say they need to take another look at whatís going on in the market. The spot price of 14.5% U.S. spring FOB Antwerp was $191 per ton on Tuesday compared to $194.75 per ton for CWRS, CIF Antwerp/Ghent ports.

My experience in the wheat industry includes carrying out market development programs on behalf of both the Nebraska Wheat Board and the Interstate Grain Compact for nearly twenty years. One program that we launched was a Quality Wheat Initiative to capture the high quality wheat import market in Europe. It was launched in the mid-1980s and in 1987 with an identity-preserved sale of Nebraska and Wyoming hard red winter wheat to Finland. Following that we took samples of high quality hard red spring wheat from an export company at the Port of Duluth, Minnesota and personally hand-delivered those samples to importers all over Europe.

Many of those buyers were skeptical that they could get the quality represented in those samples from the U.S. as they knew the blending, etc. that goes on in the U.S. as a result of U.S. grain standards but we assured them that if they would work with us they would get such quality. Both the exporter from Duluth and those of us leading that initiative had made a commitment. The first cargo went into Antwerp, Belgium from Duluth in 1989. It was stored unsold and when the buyers got word of the quality in store they began buying it. Cargoes have been going back to those buyers and more buyers all over Europe every year since. Those sales have all been based on very high quality and top-notch, well-above-average levels of customer service. That wheat quality initiative set the terms of trade for other U.S. exporters if they were to compete for those cash-paying customers. They had to offer similar quality and did in some cases. The entire U.S. wheat industry was the beneficiaryÖfarmers, exporters, ship agents, inspectors, truckers, railroads, port authorities, etc. Other wheat industry groups also took steps to improve wheat quality in exports to Japan and other Asian markets, where Montana wheat is shipped.

I relate this information because it reflects the investment made by wheat farmers with their wheat check-off dollars aimed at creating demand for what they grow. That investment of farmer money has been going on for fifty years. Those millions of farmer dollars are combined with millions of federal tax dollars every year and used to fund and maintain foreign wheat promotion offices all over the world. Those check-off dollars, which come right off the check when you get paid for your wheat, are used to promote your wheat to foreign buyers. Itís intended to increase exports, which then is expected to increase wheat prices at the farm level for you, the farmer. But even with all that investment, U.S. wheat exports last year, at 961 million bushels were only 54% of the 1.77 billion bushels the U.S. exported in 1981/82. In this current 2002/03 marketing year, U.S. wheat exports are forecast to drop to 950 million bushels, or only 53% of the 1981/82 export level. And according to a USDA-ERS report last March the U.S. share of world wheat trade in MY 2001/02 was the lowest in more than 40 years.

So, without going deeply into the issues of U.S. farm and trade policy I will just say that the verdict is in and lowering U.S. loan rates and wheat prices neither makes the U.S. more competitive, nor increases wheat exports. On the issue of being competitive, there are some market factors over which farmers have no control. The weather is the obvious one. Another is the value of the U.S. dollar relative to foreign currencies.

Apparently others are policies like NAFTA and the U.S./Canada Free Trade Agreement that resulted in massive increases in wheat imports into the U.S. And, Iím not just talking about Canadian wheat coming across the border anymore. Within the past few months both U.K feed wheat and French milling quality wheat cargoes have been imported into U.S. ports on the east coast. Thatís an important issue, because given U.S. trade and farm policy, which eliminated Section 22 from our laws, tariffs or duties are no longer placed on wheat imports that damage the U.S. domestic market and domestic wheat price. This is an important issue, because if U.S. farmers were to grow GMO wheat, U.S. millers might import conventional wheat from Europe and elsewhere so as not to jeopardize not only their market with U.S. consumers but also their market for flour and wheat products that they export from the U.S. to buyers around the world that wonít accept products made from GMO wheat. So, you see GMO wheat has potential far reaching market implications.

The biggest wake-up call for farmers is the impact on wheat prices that lost markets and reduced U.S. wheat exports are likely to have. That economic analysis is certainly open to some speculation and varying views. Iím going to use a couple of approaches in trying to get a handle on what might happen, and offer my opinion on what is likely to happen.

First, Iím going to review some conclusions made by USDAís Economic Research Service in their Wheat Yearbook, published in March of 2002. It contained a special article with the title, Economic Analysis of Ending the Issuance of Karnal Bunt Phytosanitary Wheat Export Certificates. Iím going to use this example because it projects what could happen if the U.S. were to deregulate the Karnal bunt quarantine system. And while thereís technically no "quarantine" on GMO wheat, I believe that foreign buyers feel their warnings about it amount to a kind of "quarantine." So, I see some useful parallels between these two marketing concerns. Karnal bunt, sometimes called partial bunt, is caused by a fungus that affects flour quality if more than 3 percent of the grains are bunted because it produces trimethylamine, which gives a fishy odor. Pasta products made with flour contaminated with such bunt can have that unacceptable odor. According to the USDA report, "many U.S. trading partners will not accept U.S. wheat exports unless the wheat is certified to be from areas where the bunt is not known to occur. So, consider a similar or worse marketing problem from GMO wheat as I go over the data. The USDA report suggested the following market impacts if they ended issuing the certificates:

  • If even a few important wheat-importing countries maintain prohibitions, shipping companies may have concerns about shipping wheat from a deregulated U.S. wheat sector. Ship owners wishing to protect their interests may insist on a certificate from an authoritative U.S. source that unequivocally confirms that the cargo is free from the bunt spores.
  • Shipping vessels that carried contaminated wheat to countries without prohibitions would have to be sanitized to ensure that later cargoes from other sources going to countries that continue to have prohibitions will not be contaminated. Under U.S. deregulation, spores could spread through the storage and transport equipment to other products like corn and soybeans. The costs of testing and sanitizing to ensure freedom from the disease would likely be considerable.
  • Even though the bunt poses no health risk, many U.S. wheat export markets have a precautionary stance against the acceptance of wheat without a certificate thus, if the U.S. were to stop its certification, U.S. wheat would not meet those importing countriesí phytosanitary requirements.
  • Adverse reactions would first fall on hard red winter and soft red winter producers in Central and Southern Plains states, but because U.S. wheat is blended, we also assume that HRW and SRW from northern states that might not be susceptible to the bunt cannot be certified as free of spores.

While a world wheat model was not available to appropriately estimate trade flows by wheat class and country, USDA did develop a scenario based on the expert judgment of USDA analysts which concluded:

  • About 60 percent of U.S. customers would find about 55 percent of U.S. exports unacceptable.
  • In the first year, U.S. exports of HRW and SRW are calculated to increase to those markets still accepting them, while overall U.S. wheat exports are calculated to drop nearly 7 million tons (257 million bushels), or 25 percent below baseline levels.
  • In the second year of the scenario, U.S. wheat exports are estimated down 9.5 million tons (349 million bushels), 35 percent below the baseline.
  • In the third year, U.S. wheat exports are 20 percent below the baseline levels. A market results in a small premium for U.S. competitors that are free of Karnal bunt and reduces long-term U.S. wheat exports by 15 percent below baseline levels. This long-term decline represents a loss in market share despite the development of alternative regulatory mechanisms in markets accounting for 80 percent of U.S. wheat exports.
  • The decline in exports under the scenario reduces the farmgate price of wheat. Prices decline from the baseline by 17 and 19 percent, or 45 and 53 cents per bushel, in 2003/04 and 2004/05, respectively.
  • With domestic prices lower, the U.S. area planted to wheat declines relative to the baseline, but the response is muted somewhat over the initial years because of U.S. farm programs that make up part of the revenue loss from low prices, with marketing loan benefits.
  • With lower wheat prices, domestic wheat feeding increases sharply, by 32 and 107 percent, or by 88 and 295 million bushels, in 2003/04 and 2004/05, respectively and wheat feeding remains above the baseline level by about 32 percent in 2007/08.
  • Cash receipts for wheat are estimated to drop below the baseline by $915 million and $1.293 billion in 2003 and 2004 respectively and by the final year of the analysis, cash receipts remain below the baseline by $1.167 billion.
  • Cumulative wheat cash receipts decline by $5.8 billion below the baseline over the 2003-07 period.
  • The farm price of corn is estimated to decline below the baseline by 4.5% in 2003/2004 as livestock producers shift from corn to lower priced wheat in their feed rations. As a result, cumulative cash receipts for feed grains decline by $1.2 billion below the baseline.
  • The total cumulative value of U.S. ag exports is estimated to fall by over $6.3 billion during the period, including downward adjustments in the value of exports of commodities other than wheat.
  • Because prices of all ag commodities decline from the baseline, cumulative cash receipts from farm marketingís are estimated to be $10.4 billion below the baseline.
  • The cumulative total reduction of national net farm income from 2003 to 2007 is $5.3 billion and the cumulative marketing loan payments associated with all crops increases by $2.0 billion over the 2003-07 period.
  • Other important issues include contamination of vessels and handling facilities, regulations for the transshipment of grain through the St. Lawrence Seaway, and possible trade impacts for other grains such as corn and soybeans if the bunt quarantine system is deregulated.

The USDA scenario I just reviewed on the bunt issue is mild compared to what I expect would result from the introduction of GMO wheat. Iíve done my own estimate of how wheat exports and wheat prices might be impacted. I use the USDA baseline projections for wheat ending stocks for the 8 marketing years from 2002/03 to 2009/10 and then increase those ending stocks numbers by 235 million bushels. That number assumes that 85 percent of U.S. hard red spring (HRS) wheat exports are lost each year if GMO wheat is introduced. The lost exports of HRS could be less than that but there could also be losses of HRW, SRW, durum and white wheat exports that together easily could amount to that level. By using the continuing higher level of ending wheat stocks and some historical wheat price to ending stocks relationships, I conclude that wheat prices would drop below the USDA baseline by at least 25 cents per bushel the first year and will have fallen by at least $1.55 per bushel by the final year. Actually, these negative price impacts may be overly conservative. I didnít try to estimate the impact on farm program payments because of lower wheat prices but I imagine it would be about three times higher than what USDA estimated the impact to be in their economic scenario on the bunt issue. I feel confident projecting serious losses from GMO wheat because I calculate that GMO corn has cost the U.S. about half a billion bushels in lost corn exports over the past 7 years and is causing corn prices this year to be $1.15 per bushel less that they otherwise would have been.

And, of course to offset the damage from GMO-driven lost wheat exports, you would have to assume that the Administration and Congress keep funding in place for farm programs that would offset the price damage done by lost exports. I donít think we can assume that given the hostile nature were seeing right now on the drought disaster payment legislation thatís attempting to be moved in Washington right now.

In addition to the negative market impact of GMO wheat and given all the warnings that farmers have received from foreign buyers, I would have to assume that if farmers plant GMO wheat, they donít really care about the foreign market anymore and theyíre willing to abandon the 50-year investment that they, their parents and grandparents have made in foreign market development. If thatís the case, those same farmers need to be working to change farm policy in Congress. They need to lobby for reinstating true price support loans at cost of production plus a return on investment levels. They need to lobby for a grain reserve and they need to lobby for reinstatement of Section 22 to protect their domestic market from imports.

If farmers were to allow GMO wheat seed varieties to be sold and then actually plant them just to be able to use Roundup herbicide or generic glyphosate for weed control, thinking that they will simplify their farming lives, they better do a little more research on that issue. Corn and soybean farmers were thinking that way, but now their finding out that a number of weeds have become resistant to Roundup and they are having to use two and sometimes three applications on their RR soybeans to control those weeds. They are also finding that they have to go back to using herbicide mixes as well. As I wrote this speech on Tuesday, I heard a radio ad on a farm station telling farmers those problems with roundup resistant velvetleaf and other weeds can be solved by using Dupontís Authority herbicide in a tank mix. So, if weed resistance to glyphosate or Roundup that is required for use on GMOs is going to be a problem for wheat, like it is for soybeans and corn, which I expect it will be, whereís the big advantage in future? Going back to tank mixes and pre-emergent applications would seem to negate what were supposed to be the big selling points and benefits.

And, a wheat farmer from Colorado recently published an article pointing out that in its new 2003 technology agreement Monsanto has begun referencing their U.S. patent number PTO #6,239,072 which also covers premixes of glyphosate with the other herbicides needed to control Roundup Ready volunteer crops such as volunteer RR corn in RR soybean fields. That Colorado farmer says that the patent precludes other chemical companies from selling to farmers any commercial premixes of glyphosate with the grass specific post emergence herbicides the patent mentions, even as those herbicides begin to go off patent in a few years. Consequently, if other chemical companies could sell them at a better price, they wonít because if farmers cannot apply such premixes, they wonít bother selling them. The wheat farmer also points out that even if other seed companies gain free access to the RR gene upon expiration of its patent, or even if farmers regain their right to save seed, Monsanto can still come after them for spraying glyphosate mixed with other chemicals to control volunteer RR plants. [That article by David Dechant is available at http://www.cropchoice.com/leadstry.asp?recid=1299]

The issue of seed saving is also a big deal because GMOs and seed patents prevent farmers from exercising that right that they had for centuries. And, donít forget, you farmers paid check-off dollars into land grant university research to help develop much of the wheat variety germplasm that some biotech companies are now patenting and blocking you from saving. That will certainly force the price of wheat seed higher in the future.

In closing, you also have issues of liability and cross-pollination contamination that could threaten your economic future if you grow GMO wheat and the pollen contaminates conventional or organic wheat grown by another farmer.

Whereís our state and federal government when a plan for assigning liability and economic damages should be placed up front on the biotech companies that are pushing GMO wheat before it is ever introduced? In the face of world buyers saying they donít want GMO wheat and numerous U.S. and Canadian farm organizations warning against its introduction, biotechs continue to push it.

I urge you to raise these issues with your elected and appointed state and federal representatives. And to those who say we should just file suit against Europe, Japan and other markets in the WTO to force them to accept GMOs, I ask where were these folks when the same anti-customer strategy was tried on the issue of the EU banning hormone fed beef. The U.S. "won" that WTO suit, but Europe still buys no U.S. beef unless itís hormone free and very few companies are offering that. I doubt that Montana or U.S. wheat farmers want to be on the learning side of that lesson again when it comes to testing the resolve of European or global consumers and government officials again. Rural America really canít afford any more of those U.S. experiments with telling the rest of the world what they have to eat.

It was a pleasure being here and I wish you success in 2003.