June 1997
Quality Wheat Marketing: What the Future May Hold
by Robert Drynan, Executive Director of the Portland-based Wheat Marketing Center
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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.
The U.S. Wheat Grading Standards could undergo important changes to identify milling quality. The new Single Kernel Classification System (SKCS) which is now being tested by the Federal Grain Inspection Service could become the basis for modifying the numerical grade to represent millability.
This system can provide information of great value in projecting potential flour yield: uniformity of individual kernel hardness, kernel size and kernel weight. Kansas State University has already successfully demonstrated that combined, these measurements are reliable predictors of flour yield potential.
The system requires a sample of no more than 0.5-0.7 ounces, is objective and rapid, suitable for use in export inspections, or in breeding laboratories for screening purposes. The numerical grade could be changed to represent degrees of milling quality. Buyers then would need to specify minimum and maximum limits to other grading factors such as test weight, damage, foreign material, shrunken and broken kernels, and wheat of other and contrasting classes which today are part of the numerical grade.
Net-basis wheat marketing
Since millers, domestic or importers, are essentially interested in purchasing wheat, not screenings or water, is it so remote to expect that at some future time wheat will be bought and sold on a net wheat basis?
Assume the following: the price of a specific wheat in today's pricing system is US $180 per metric ton loaded on a ship. The combination of screenings (dockage, foreign material and shrunken and broken kernels) is 2.5%, and the moisture content is 12.5%. Using the metric system, the buyer in fact is getting in each ton he purchases 125 kilograms of water, 25 kilograms of screenings and 850 kilograms of wheat! He in effect is paying $180 for 85% of a ton of wheat, and is required to pay additional costs of handling and transportation for the undesirable water and screenings.
Another way to state the case is that the real price per ton of wheat, not counting screenings and water, is $180 / 85% = $211.77. What if a buyer said, "I'll pay you $211.77 per ton of wheat and the seller will discount the factors moisture, dockage, FM and SH&B from the invoice." Suppose that the seller was able to select cleaner, drier wheat sufficient to increase the proportion of wheat from 85% to 86%. The buyer would have to pay the seller 86% x $211.77 = $182.12, but he would still be paying the same price for the wheat, and bear lower freight and handling costs.
If all export wheat were bought and sold on this basis, the advantage claimed by the Canadian and Australian Wheat Boards of clean wheat would be substantially diminished. In fact the screenings would suddenly have positive value, because the wheat buyer would receive them, paying only the cost of freight and handling, and sell them at the cost of feed, a profitable arrangement in most markets!
Trade alliances
Wheat is traded as a commodity, but wheat today is not so much a commodity, as it is an industrial raw material, with intrinsic values that cannot be measured by the criteria applied in commodity marketing. The dynamic in foreign wheat markets today, is competition among millers. The more successful buyer of wheat will achieve a competitive advantage over the others. It would not be surprising if overseas millers sought out and developed alliances with grain exporters who would assist them to obtain competitive advantages in their markets. The exporter might agree to provide exclusive services to a single miller in a determined market. It can be demonstrated that it is possible for both parties to benefit from such an arrangement.
Feed Wheat Class
Today, discounted wheat, with sprout damage or low test weight, is often blended into higher quality wheat, essentially increasing the value of the discounted wheat. In a discriminating market, such as envisioned above, low quality wheat would probably have to move into a market category which might be classified, either in fact or in practice, as feed wheat. A feed wheat class evolving out of a market need could overcome most, if not all of the tendency toward abuse.
Identity-Preserved Marketing
Identity Preserved (IP) marketing of the new Hard White Wheat class, and of selected varieties of all of the other U.S. classes is a growing practice. It is often referred to by the catch phrase niche marketing, but it is simply impossible to niche market the 13 million tons of wheat moving through the ports of the Pacific Northwest. The IP system is a phenomenon which is defining the quality parameters of future wheat marketing, identifying desirable quality attributes which are not abundantly available, today. The incentives in the IP system itself should provoke expansion to the point that those qualities will become commonplace, displacing varieties of less desirable attributes and ultimately requiring no special treatment. The IP system thus becomes the market's natural vehicle of self-transformation. The IP or niche marketing system of today can be a telescope to view the future.
Varietal Certification
In the U.S. we have yet to solve the problem of the release of commercial and public wheat varieties which lack essential milling and end-product functional qualities. In France that problem was addressed by the introduction of a system in which the wheat grower must submit a statement certifying the variety of wheat he is selling to a merchant. It includes a system of penalties for falsification of that statement. The system is not rigidly enforced at the delivery site, but spot checked through samples sent to testing laboratories.
The system has the advantage that merchants would buy undesirable wheat varieties only at substantial discounts, discouraging their continued planting, and offering a proper reward for the cultivation of acceptable varieties.
In the 1970s the countries of Western Europe imported annually about 3.5 to 4 million tons of blending wheats from Canada and the United States. Today, they import less than a quarter of that amount, in part due to this system which discourages production of undesirable wheat varieties. Would such a system, modified to our needs be possible in the United States? It would clearly facilitate a capability to specialize wheat production to meet specific end-users' needs.
Contracted Production
Millers in the United States have already begun the process of contracting the production of selected wheat varieties, to meet both economic and functional quality requirements which they are unable to identify through normal commodity marketing channels.
Farmers receive a premium for producing those wheats, which may compensate for diminished yield potential and possible risks associated with conditions which prevent them from meeting minimum contract specifications. Such potential exists for export markets as well.
Arizona and California farmers have been producing selected desert durum varieties for export to Italian millers since the early 1980s. Japanese flour millers have been visiting Pacific Northwest elevators for years and collecting samples of specific wheat varieties. Their interest has intensified as talk of the dissolution of the Japanese Food Agency's role in wheat imports has become more common.
Some Japanese and Korean milling companies have gone so far as to establish offices in Portland, Oregon. Might this signal future plans to acquire U.S. country elevator capacity or possibly to contract production of selected wheat varieties in the Pacific Northwest?
Call it a threat or an opportunity, stifling or stimulating, demanding or challenging, terrifying or exhilarating, a curse or a boon, we are indeed living in interesting times.
Three U.S. Wheat Quality Priorities
The overseas staff of U.S. Wheat Associates last year prioritized three wheat quality issues in order of importance as limitations to the competitiveness of U.S. wheats in world markets:
Cleanliness - the need to improve cleanliness (dockage, foreign material, shrunken and broken kernels) comparable to that provided by Canada and Australia, for those customers willing to specify and pay for it.
Quality uniformity - The need for more uniform and consistent wheat quality, both within and among cargoes.
Protein content disparities - The need to devise a mechanism to successfully compete with the Canadian and Australian Wheat Board practices of supplying greater protein than specified in a contract. n