WEMC logo

Wheat Industry Issues and Market Problems that Impact Farmers


By Charles H. Rust
Revised 2/96

Keywords: wheat, supply, use, joint ventures, GATT, NAFTA, EEP, foreign investment, grain quality, food safety, exports.


The table, U.S. Wheat: Supply and Use 1976-1992, reveals considerable information about changes in the industry.

     
  1. Land idling programs are reducing acres planted and harvested over time especially the last six years. This reflects the impact of agricultural policy programs.
  2. Yield per acre is slightly increasing&emdash;suggesting that farming technology and farm management practices are steadily improving.
  3. Domestic food use of wheat is slowly increasing. Not only does it reflect a growing population base, but also some change in eating habits as a result of increased popularity of cereals and bread products. U.S. per capita consumption of flour was 110 pounds in the early 1970s, and rose to 141 pounds in 1991.
  4. Feed use of wheat tends to change with price levels relative to other feedstuffs.
  5. Exports have been reasonably consistent the last four years. The major effort on increasing exports in 1987, 1988 and 1989 helped draw down the amount of surplus as indicated by the ending stocks.
  6. The deep reduction in CCC inventory in 1988 started the demise of many country elevators that depended on government storage payments for 20 percent or more of their total revenue.
  7. The decline in farmer-owned reserves also coincides with the loss of government storage payments and aggressive marketing efforts such as the Export Expansion Program.


Factors Impacting the Structure of the Wheat Industry

Mergers and Joint Ventures

In August 1992, Harvest States (a farmer cooperative) and Continental Grain announced a joint venture. It is a partnership known as Tacoma Export Marketing Company, or TEMCO. Its goal is to maximize U.S. feed grain and oil seed export from the Pacific Northwest. Mergers similar to this are taking place in the Great Plains States and the Cornbelt.

The stated reason for the joint venture is the combination of Continental's strengths in international marketing, and Harvest State's strengths in grain origination and logistical management and the Tacoma elevator's capabilities for efficient, high speed export operations.

With its emphasis on feed grain and oil seed exports from the PNW, the joint venture says it will not affect either company's wheat and barley exporting activities, grain marketing to domestic customers, or overseas grain sales from other locations.

GATT - NAFTA

GATT dates from 1947 and is a multilateral arrangement by which more than 100 participating countries agree to hold their trade barriers down to levels that are mutually negotiated.

NAFTA is a trilateral pact, not yet ratified, linking the United States, Canada, and Mexico in uniform trade rules.

Farmers have much at stake in the outcome of GATT and the Congressional acceptance or rejection of NAFTA. GATT has dealt more with trade in manufactured goods than in farm products. It will be significant for agriculture if it resolves the conflict between the European Community and the United States regarding export subsidies for farm products. At present French farmers are resisting the proposed changes. Farmers in some other EC countries have also expressed concern, although not as dramatically.

NAFTA is also more industrial than agricultural. One of the purposes is to divert our industrial firms from the Asian countries to the use of Mexico resources. Thus, the intensive hand-labor portion of U.S. manufacturing would be done largely by factories in Mexico.

It is generally understood that NAFTA would result in some wins and some losses for U.S. agriculture. Some economists predict that exports of grain would likely increase, but fruit and vegetable producers would face more competition from Mexican suppliers. Not so, say some of our wheat producers. Wheat producers have already issued a challenge to the Canadian Free Trade Agreement (CFA) that wheat is illegally entering U.S. domestic markets. They tend to be very skeptical of NAFTA because they argue the playing field is not equal and that Canada will have an advantage.

EEP and Other Credit Guarantees

Wheat farmer representatives and others argue that the Export Enhancement Program (EEP), in combination with GSM 102 and 103 credit guarantees, continues to be the most effective tool currently used to keep U.S. wheat producers competitive in the world market. Most favored nation status has been critical in servicing the 6 million ton U.S. wheat market in China.

On the down side, the targeting part (qualifying) of EEP has placed some regular customers at a disadvantage and occasionally a sales opportunity has been lost.

Food Safety

Food safety is a continuing issue that will challenge farmers and agribusiness in the years ahead. Our ability to measure residues is increasing faster than our ability to determine which levels are detrimental. This puts pressure on the scientific community to measure acceptable levels and to educate food-safety-conscience consumers. Food safety is also an issue with many of our export markets. Many of the emerging economies are very much aware that the U.S. uses additives. Much of their information is inaccurate, but it is the perception that U.S. products have additives and are, therefore, high risk products. Food safety concerns will be with us for a long time and producers will have to do their share to insure products are safe when they leave the farm. Agribusiness will need to be more careful in processing and handling. With the increased use of prepared or partially prepared foods, more attention to safety will be a must.

Grain Quality Issues and Innovation

Increasing the quality of U.S. grain is an important topic, especially considering the increased global competition facing U.S. agriculture. Resolution of the "quality problem" will require individual farmers, merchandisers and end users to take direct action to begin the process. It's difficult to take the first step, particularly if the rewards are not obvious. Reluctance to change can be dealt with in several ways. Market incentives provide financial rewards for change, regulation mandates it, and legislation may do both.

Foreign Investment

Foreign direct investment theoretically contributes to the growth of employment and income in the host country. U.S. policy generally has been to welcome foreign direct investment. However, some economists have expressed concern about the growing dependence of the United States on foreign direct investment especially by the European Community (EC).

These are a few of the key issues that are impacting farmers and rural communities as they deal with an increasingly complex and intertwined world grain market. The U.S. and EC food industries have been aggressive in various mergers and acquisitions to enhance their market share. Expanding global markets require an understanding of cultural norms as well as the eating habits and economic stability of the target market. Often a joint venture can be a win-win situation for the food industry and the farmer. These changes and others will continue to provide new marketing challenges for farmers and the industry.

 

Charles H. Rust is a member of the Western Extension Marketing Committee and an Extension Marketing Specialist at Montana State University.

Return to Commodity Specific Issues Index

Return to Globalization Index

Return to the Western Extension Marketing Committee

This site is hosted by the Department of Agricultural & Resource Economics, University of Arizona
 Questions regarding content: Russell Tronstad
Send all other questions and feedback to: arecweb@ag.arizona.edu

Document located at http://ag.arizona.edu/ext/wemc/papers/WheatIndMarkProb.html