June 1997
A New Millennium, A Higher Demand for U.S. Wheat Quality
by Tracy Sayler
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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.
Freer trade brought about by the General Agreement on Tariffs and Trade, as well as the downfall of communism in many parts of the globe, has meant fewer government wheat-buying agencies and more purchases by the private sector. This change will dramatically increase the number of potential wheat buyers and provide new opportunities for U.S. wheat growers.
But not with business as usual.
Winston Wilson, who steps down this summer after serving as USW president since 1982, says that privatization increases the number of buyers and produces a much more quality-conscious and competitive buying environment. When millers and processors purchase wheat directly, they usually do so with much tighter buying specifications.
"U.S. wheat farmers and the rest of the U.S. wheat industry need to be prepared to meet these requirements, which not only includes dockage or moisture or protein, but varieties that are developed for specific end uses," says Wilson.
New players will join long-time U.S. wheat buyers who already are more demanding about quality. Japan, the most consistent cash buyer of U.S. wheat, started doing something on Nov. 1, 1996, that no other large customer of U.S. wheat had ever done before: requiring that U.S. wheat be cleaner before it is imported. The island country purchases its wheat solely through the Japanese Food Agency, which no longer allows wheat of more than 0.5% dockage to be loaded under its contracts.
U.S. wheat exported to Japan and other Pacific Rim countries is shipped out of Portland. John Oades, director of USW's west coast office there, advised the U.S. wheat industry early last year that tighter Japanese dockage specifications were coming, and that other Pacific Rim cash customers including Taiwan and Korea may follow.
"Farmers, elevators, and grain handlers will need to take steps to avoid almost unavoidable dockage discounts to come, and to help the U.S. stay competitive in Pacific Rim markets," said Oades. He recommended the consideration of several options:
Optimizing cleanliness from the combine, including custom harvesting.
Segregating cleaner wheat (under 0.5% dockage) as it goes into farm, elevator, and sub-terminal storage.
Installing and using supplemental cleaning equipment at storage and handling facilities. "There is strong evidence that cleaning is less expensive in the country than at the export terminal," said Oades.
On-farm quality control
There's no question that some quality aspects are uncontrollable. For example, weather conditions that triggered the 1993 scab outbreak in the Red River Valley; the Canadian crop that was deteriorated last year by a snowy autumn; or the narrower protein bridge in recent years between hard red spring (HRS) and hard red winter wheat (HRW) classes, influenced in part by better HRW genetics, but also by weather stress in the HRW growing region.
One manageable factor is cleanliness, a complaint importers have concerning U.S. wheat. Dockage is a nongrade-determining factor in the U.S. wheat marketing system, with dockage levels subject to negotiation between buyers and sellers. However, our two most notable bread wheat competitors, Canada and Australia, have regulations which ensure that only minimal dockage levels are contained in exports, and these are uniform for all Canadian and Australian wheat buyers.
Many would like to see cleanliness become a greater priority for the U.S. wheat industry, including Warren, MN, grower Don Loeslie.
"If we don't, under greater global privatization we are going to pay for it with lost sales. The buyer does not want to pay freight for dockage. Why would you want to pay freight on something you can't use?" says Loeslie, who has served on the board of the Minnesota Wheat Research and Promotion Council since 1986.
"If you as a farmer had to buy your diesel fuel only from the government, and for every 1,000 gallons of diesel you received a gallon of water, you'd have no choice but to find a way to make it work. If you suddenly could buy the diesel yourself from other suppliers, you'd go to the seller who doesn't include the water," he says, analogizing the public-to-private shift in global wheat purchasing.
Loeslie, the only producer in the U.S. to serve both as president of the National Association of Wheat Growers (1983) and as chairman of USW (1989-90), doesn't believe cleaner wheat could be mandated.
"The grain trade and lawmakers would kill it," Loeslie says. A lot of U.S. growers might not like a regulated system either. A study several years ago at North Dakota State University (NDSU) points out that the net costs of satisfying new grade limits would be reflected in compressed margins, or more likely, passed along to producers as lower elevator bid prices.
"We could do what our competitors are doing, voluntarily. And we can do it at less cost. It's a myth that the Canadians have better wheat than us. They have less dust and dockage, which makes it cleaner, not better. Our wheat on average has higher protein and less moisture than Canadian wheat. We really do have the best quality wheat in the world. But to put millions of dollars into developing a good quality variety, and then for the sake of cleanliness to lose a sale is flat out unacceptable."
Loeslie practices what he preaches. He purchased an on-farm cleaner called "Kwik Kleen" about five years ago to remove dockage from his grain going into storage. "It's better to clean as it goes in the bin. You're not storing weeds then. Taking the dockage out of grain before storage helps prevent moisture and bug problems. Less dockage means better quality, and by taking out the smaller kernels you're also going to increase your test weight." The cleaner has paid for itself, says Loeslie. "Even more so if we had livestock, or lived close to a feedlot to market the screenings."
Grain trade must be involved
Paul Manol, grain marketing specialist with FGIS in Washington, DC, agrees that the best opportunity to clean wheat is before it reaches the first point of sale. "If it's cleaned before it's marketed, dockage can't make its way into the system, because it's not in the system," he says.
But on-farm efforts to improve quality won't be meaningful unless the grain trade also is involved. In many respects, country elevators already are, says Mel Maier, administrator of the North Dakota Wheat Commission (NDWC).
According to an informal NDWC survey last year, nearly 50% of 96 country elevators in North Dakota said they either already have installed, or plan to install, additional or upgraded cleaning equipment to meet the demands of U.S. wheat customers for cleaner wheat.
One-quarter of the elevators who responded said that in addition to deducting dockage from payable weight, tighter customer specifications are causing them to discount prices offered to farmers. For example, one elevator said it deducted a penny for each percentage point of dockage above 3.0%.
Also, 38% of respondents said they've been forced to lower producer prices to cover cleaning costs or absorb the risk of dockage discounts at destination. This was most common among western ND elevators, which ship a larger share of their wheat to the Pacific Northwest (PNW), the port of departure for shipments to Pacific Rim markets. Elevators in northwest ND were the most geared up for cleaning, followed in order by the southwest, northeast, and southeast.
Cleaning costs, screening values, and transport costs are critical factors that impact wheat cleaning decisions, according to a 1992 study at NDSU. Quite simply, elevators clean when it is economically profitable for them to do so.
And that's why any changes to the high-volume, low-margin grain trade can't be expected overnight; reforms are more likely to evolve from demand or occur incrementally.
"Everything would have to be handled separately. Cargill wouldn't be interested in something that is going to be more complex and be more costly unless the customer is willing to pay back its investment and changes in infrastructure," says Gary Lee, CEO of the start-up United Spring Wheat Processors and previously a senior execuive with Cargill.
In most markets, there's always a consumer segment that is willing to pay a premium for quality. But that opportunity is limited in the bulk commodity and flour milling business, and that's why more agribusinesses and producers are looking to value-added agriculture for a high-margin niche. For example, Lee points out that a wheat variety grown in Canada and segregated exclusively for the frozen dough market garners a premium of close to 85 cents a bushel.
Perhaps the grain trade can communicate more closely with producers to ensure that wheat is harvested and stored efficiently to maximize quality, says Bob Zelenka, executive director of the Farmers Elevator Association of Minnesota. He points out that with 75% of available grain storage in Minnesota on-the-farm, and only 25% in commercial hands, on-farm management is crucial.
"Our role as elevators has evolved from storage and more to handling. To best market grain, we rely on the grower now more than ever. There's a real need for producers to have a good handle on proper grain harvesting and storage techniques. Maybe farmers and elevators need to work better together on how to best handle grain for better quality," says Zelenka.
"If we can build markets by simply doing a better job of providing cleaner wheat, we should do it," says Loeslie. "We generally don't have dirty wheat. We can just have cleaner wheat. Product quality continues to evolve to gain market share all the time, just like the car has become more fuel efficient, and appliances more energy efficient. We should do it as a matter of pride."
Grain standards have tightened up some over the years; most recently, the USDA's Federal Grain Inspection Service (FGIS) tightened up specifications concerning odors in grain, such as sour, musty, or "commercially objectionable" smells. The factor can take grain down to a sample grade, says Zelenka, who adds that the government is even developing equipment that can sniff out grain odors.
Cleaner wheat no quality cure-all
Dockage isn't a concern for all U.S. wheat importers. In fact, high dockage levels are more tolerable in countries where screenings are valued as animal feed.
In general, countries with low cleaning costs, high domestic screening values, and low import tariffs would prefer to buy wheat at a slightly lower price and incur the cleaning costs domestically, according to a conclusion by NDSU agricultural economists in 1993. Other countries with high cleaning costs, import duties, screening disposal costs, or low screening valueswould be willing to pay a premium to import wheat that has been cleaned intensively before export.
The world wheat market can be viewed as being comprised of market segments with different needs. Manol of FGIS suggests putting forth a better menu list to meet the needs of importers; having a number of factors as optional criteria to be requested in a load to be custom ordered.
Maier says the U.S. spring wheat industry is doing a better job of meeting tighter dockage requirements. Where improvements are needed, he says, are intrinsic qualities such as gluten strength, which enables breads to retain their shape while baking and provides the strength needed in baked products to support heavier ingredients added to bread such as whole grains, raisins, nuts, or dried fruits.
Gluten strength and protein are key characteristics that normally make U.S. HRS coveted globally for blending and improving wheats with weaker gluten. But these characteristics have fallen off in recent years. Overseas bakers would also like to see better water absorption, which relates to loaf volume, from U.S. HRS.
"The performance hasn't been there. We don't have the mixing strength we used to have and that's one of the biggest problems we need to deal with," says Maier.
Bert D'Appolonia, retired chair of the NDSU Cereal Science Department, who serves on occasion as a technical consultant for U.S. Wheat Associates, agrees.
"Cleanliness isn't the factor it was in the 1980s. Supply and demand is part of the reason (a larger supply, as in the 80s, allowed buyers to be more selective) but the customer has been vocal about this issue and now we're seeing more cleaning. For Asia it seems to be working, which is great," says D'Appolonia. "But strength has been the issue the last few years. We've heard it a lot of different places. Europe, Africa, the Mid East; not as much in Asia, probably because the quality going over is a better strength wheat from Montana and western ND."
Pat Berglund, director of the Northern Crops Institute in Fargo, says that U.S. grain marketers can meet the buyer's concern about dockage, and in turn, buyers concerned about it can specify for it in their contracts, as the Japanese are doing. But intrinsic quality is not as easily influenced. "I'm worried about spring wheat's position as a blending wheat. I think it's a real issue," she says.
A change in the weather would do wonders; the biggest concern for many growers in the Red River Valley in recent years has been fusarium head blight or scab. Growers have turned to varieties such as 2375 which is more tolerant to scab, but is only fair at best in its milling and baking characteristics. Where scab isn't a problem, the bottom-line feature for many wheat growers begins with yield, not a variety's milling and baking characteristics.
Crop breeding over the long-term, enhanced perhaps by the advent of genetic engineering, may help provide a balance among the need for yield, quality, and disease tolerance. "Scab is the big thing. Solve that and we'll have a better shot of raising a better quality crop," says Ben Handcock, who heads the Wheat Quality Council in Pierre, SD.
Raising too many varieties, however, may be part of the problem. Only a handful of hard wheat varieties are grown in Canada and Australia, giving them more control over the uniformity and consistency of their supplies. "We have a mish-mash of varieties," says Manol of FGIS. "I'm not saying we should grow one HRS variety, but maybe we can get by with five or ten."
Price and Politics
"Everybody complains about quality, but most countries still buy on price," says Handcock. Better quality wheat can be delivered if contract specifications are more defined by the buyer, if a system of premiums and discounts are in place to ensure supply, and if the order is segregated through the marketing system, says Jim Peterson, marketing specialist with the NDWC.
But the competitive U.S. marketing system won't allow quality to be given away, a trump card afforded to the government-controlled wheat boards in Canada and Australia. Indeed, research on Canadian wheat sales from 1980 to 1994 found that Canadian wheat brought an average premium of 36 cents per bushel in Canadian currency, but the additional cost imposed on the Canadian system to achieve those premiums was between 57 cents and 76 cents in Canadian money.
State Trading Enterprises (STEs), trade-speak for government wheat boards, remain an unresolved international political issue. That does not mean the U.S. should shrug off quality improvements that can be made. The U.S. has inherent grain marketing advantages that would only become more attractive to world grain buyers if quality improves.
"No one will ever be totally dependent on Australia and Canada, because of the unreliability of their production and infrastructure," says Peterson. "From the United States, buyers know they can always get wheat quickly, at different load sizes, from several port locations. Those are inherent advantages Australia and Canada will never be able to compete with."
Delivering better quality wheat, then, would only solidify America's position as the largest wheat exporter in the world.
"Nothing can illustrate the importance of quality more than a trip through the produce section of a grocery store and watching the selection of fresh fruits and vegetables," says Mohall, ND, grower John Cook, a past president of the North Dakota Grain Growers Association. "When we as American consumers shop for bananas, strawberries, lettuce, you name it, we inspect meticulously. We don't really care what that apple orchard or orange grove yielded, what matters is appearance and taste. If what we see is poor quality, we'll buy elsewhere. Many of our wheat customers are no different." n
(Agricultural economists William Wilson, Demsey Johnson, David Cobia, and Dan Scherping can be credited for much of the NDSU wheat quality research referenced in this article.)
Dockage Not a Major Barley Concern
The costs of cleaning barley beyond the current level of cleanliness would outweigh the potential benefits, according to Mark Ash and Mack Leath, with the USDA's Economic Research Service.
Costs of cleaner barley ($3.9 to $7.2 million) would outweigh the benefits, they found in a study released last year. Cleaner, dockage-free barley does not always make for more buyers. Dockage is not a major concern in domestic malting and feed markets, and most export buyers are looking for feed barley, not top grade.
Although dockage is not a major concern for foreign feed barley users, buyers do want accurate certification of how much dockage is present so they can properly value the grain. The reason that export grains are measured for dockage and assigned grain values is so that foreign buyers can identify what kind of grain they are buying. n
What's the difference between dockage and foreign material?
Dockage is non-wheat material that can be removed or cleaned from wheat. Foreign material is similar to the shape of wheat, making it more difficult to remove, as good milling wheat would be lost in the cleaning process. Dockage has no effect on flour quality, but does affect the amount of wheat to be milled. Because foreign material cannot be easily separated from wheat, it is an official U.S. grading factor, while dockage is not. n