The Road Back From Sanctions

USW case studies illustrate the difficulty of rebuilding wheat export marketshare in previously embargoed markets

A  favorite U.S. foreign policy tool, when dealing with countries following policies that the U.S. government officially opposes, is to impose unilateral sanctions. Even when there are also multilateral sanctions, like in Iraq and Libya, the U.S. may impose its own set of conditions and criteria.

But the evidence indicates that sanctions rarely work and are usually counterproductive, at least in the grain trade.

For a time in the 1990s, no wheat sales were permitted to a group of countries that comprised of Vietnam, Cuba, Libya, Iraq, Iran, Sudan, and North Korea, closing as much as 20% of the world’s wheat market to U.S. wheat sales.

Although most of the sanctions are now officially removed or eased, U.S. Wheat Associates finds that market entry back into these countries is not an easy task, as detailed in the following case studies – some of these previously sanctioned markets show promise, others remain essentially closed.  USW is funded in part through wheat checkoff dollars to promote the sale of American wheat around the world.

Iraq
First on the list of difficult situations is Iraq, which was sanctioned by the UN as well as the U.S.

For the couple of years immediately following the 1991 Gulf War, the U.S. continued to sell wheat to Iraq under the UN sanctions. However, as is now well documented, the Oil for Food (OFF) program became a tool for Saddam Hussein’s manipulation, and a large share of bidders could not or would not perform to Saddam’s terms. The Australian Wheat Board was then able to capture a large share of the market under OFF. Any possibilities for U.S. wheat exports came to a definitive halt when Saddam Hussein refused to buy from the U.S. after the inspectors left Iraq.

Better opportunities exist now, though tendering shipments with the newly constituted Iraqi Grain Board different from the Oil for Food program is taking time to develop.  USW is hoping to bring Iraqi wheat buyers and quality control technicians to the U.S. this year, to familiarize them with the U.S. marketing system and to demonstrate the viability of working with normal trade terms

Iran
Iran offers a different set of challenges. Although President Clinton eased restrictions on the sale of food to Iran (and Libya and Sudan) in April 1999, the Iranian buyer – GTC, a government agency – is not inclined to allow U.S. wheat into the country.

USW has nurtured relations with Iranian millers, who have expressed an interest in using U.S. wheat and, at a couple of points over the past couple of years, U.S. wheat sales were under discussion. Some millers have even discussed the possibility of buying American wheat through other companies outside Iran and re-selling it to themselves.  It has occurred that just when talks and contacts might be made, something happens on the bigger geo-political stage, and talks break off.

Libya
Changes in wheat trade relations with Libya have been slow but steady over the four and a half years since an ease was made in sanctions here. USW – the first commodity group to go into Libya in 1999 – has tried to renew relations with Libyan wheat buyers whenever and however possible, and good sales happened from time to time, resulting in total U.S. wheat exports of 352,000 metric tons over the last 4 years.

Now that the door is opened wider, thanks to better relations between Tripoli and the White House, USW is cautiously optimistic about competing more directly in this 750 TMT wheat import market. A U.S. wheat crop quality seminar in Libya to report on the 2004 U.S. wheat harvest, with 70 Libyans in attendance, is a solid step forward.

Sudan
The ban on exports to Sudan was lifted in 1999 after eight years, but restrictions and difficult licensing requirements still exist that make trade difficult, resulting in less than 100 thousand metric tons of U.S. wheat sold commercially into this country over the past four years.

Sudan, while one country, is essentially three markets. Darfur, the site of recent violence, must rely totally on food aid, and the U.S. government recently announced wheat purchases and a 200 TMT release from the Bill Emerson Humanitarian Trust for the two million suffering people in this remote section of western Sudan.

The north and south areas in Sudan have two separate consumption patterns, divided by language, culture and a long running civil war. The U.S. has contributed wheat as food aid but, because of the trade sanctions, millers and buyers are not familiar with the U.S. marketing system or wheat qualities that are available using appropriate specifications. The licensing requirements are also a disincentive to the traders who would otherwise offer U.S. wheat commercially to Sudan, especially when these traders have many other options that are not as difficult.

Australia grabbed this market while the U.S. was absent, and the Canadians made good inroads as well when the market shifted from a solid HRW market to a higher protein market favoring Canadian wheat.

USW sees the need to provide millers and bakers here with information on flour performance and value of U.S. wheat compared with Canadian and Australian, but U.S. government funding restrictions for market development limit USW efforts. USW also watches the food aid donations closely, trying to ensure that it reaches the intended market in order to prevent possible damage to the U.S. quality image for the longer term, commercial trade.

North Korea
There’s not much opportunity American wheat producers can look forward to in North Korea, with relations so strained that the U.S. and North Korea can’t even agree on how to talk to each other.

Although the U.S. officially eased sanctions, North Korea is more a candidate for food aid than a viable commercial market. Until recently, the U.S. was making sizeable wheat donations, but even that has been cut dramatically, from 200 TMT in 2001/02 to 24 TMT during the last marketing year. In fact, in the last marketing year the Japanese have donated more U.S. wheat to North Korea (25 TMT) than the U.S. government (24 TMT), according to USDA statistics.

Vietnam
Even though the milling and baking industries in Vietnam recognize the value of U.S. wheat and graciously invite USW’s collaboration as their industries develop, the way back from sanctions has been a long, long road for the U.S. wheat industry.

In 1994, the U.S. lifted its 19-year trade embargo, and the first U.S. wheat was sold into Vietnam three years later in 1997, after representatives from Binh Dong Flour mill attended a USW buyers conference. The U.S. government had granted limited exceptions to the sanctions in 1992, and USW has been working with industry there ever since.

Vietnam’s potential as an important market for the U.S. in the long-term is excellent, but American wheat still faces tremendous competition and other obstacles. In 2002/03, India became Vietnam’s major wheat supplier, with Australia dropping to second with a 28% market share. China, Pakistan and the Ukraine also made inroads into the market, capturing a combined market share of 12%. Now, India has dropped out of the equation for the moment, and Australia has targeted Vietnam as a priority market.

Although Vietnamese millers recognize that U.S. dark northern spring wheat and soft white wheat are premium wheats which produce premium-priced flours, U.S. exports remain low due to higher freight costs, and a lack of port infrastructure to make shipments from the U.S. feasible, in addition to Australia’s push to recapture market share through price discounts.

USW continues our collaboration with prospective Vietnamese buyers, and mills have started demanding U.S. wheat from their buying groups, resulting in small lots being transhipped through Malaysia, Indonesia and the Philippines as well as by containers. Recent infrastructure improvements coming through development may prove pivotal, as a mill with port and storage capacity for Panamax vessels was brought online in 2003, and other port projects are underway that will increase the opportunities for U.S. wheat. As mills continue to develop their technical proficiency and market savvy, USW expects buyers to source greater amounts of higher quality wheat from the U.S.

Cuba
After 40 years of sanctions, the U.S. agricultural community began selling food to Cuba three years ago. By every indication, the wheat trade has been good for America’s farmers, with Cuba buying nearly a million tons of U.S wheat since trade resumed 2001/02.

Impediments still come up that obscure trade, however, including a U.S. regulatory proposal that would require Cuba to prepay for wheat and other products before the goods are even shipped, rather than before delivery, which is far more restrictive than normal cash sales as practiced throughout the world. The change would increase costs, create tremendous logistical problems, negatively impact the price for agricultural products and generally make U.S. exports less competitive.

USW, other commodity groups and concerned members of Congress called on the White House to drop consideration of any new onerous requirements, and have urged that the U.S. move beyond old and ineffective policies and conduct trade with Cuba on a more normal basis.

New legislation might help: The recently introduced Agricultural Export Facilitation Act of 2005, brought forth by Sens. Larry Craig (R-Idaho), Max Baucus (D-Mont.), Pat Roberts (R-Kan.) and others, would authorize Cuba to make payments directly to U.S. banks, clarify that Cuba’s payments do not have to be received before exports leave U.S. shores, make it easier for U.S. citizens to travel to Cuba to market agricultural products and expedite temporary visas for Cuban nationals to visit the United States to inspect goods before they are shipped.