Copyright Prairie Grains Magazine
February 2001

Challenges, Opportunities for U.S. Wheat Industry

By Betty Thom

More prosperous times can be expected for the U.S. wheat production sector, if it can create value for the customer and embrace change, says Terry Garvert, Cargill foodgrains market development manager.

One promising note is that world carryout of wheat has continued to decline over the past four years. In the 2000-01 marketing year, the USDA currently predicts world wheat carryout to be about 110 million metric tons (MMT) with a stocks-to-use ratio of about 18.5%. This is the tightest S/U ratio in the last 40 years. In the 1996/97 crop year, futures prices were $1-$2 higher than they are now, with a 19.7% S/U ratio, Garvert notes.

The difference since then is that the concentration of wheat in the five major producing countries (U.S., EU, Canada, Australia and Argentina) has risen. Importing countries have learned better cash flow management by not carrying the stocks, and this has resulted in exporting countries holding grain until it’s needed.

Still, the annual world rate of consumption has increased an average of 3.5 MMT per year during the past 10 years. This trend is expected to continue to keep up with the rate of population increases, and higher demand coupled with less carryout should boost the price.

However, there are challenges generating demand for U.S. wheat, especially in the poorer countries or those where trade sanctions have recently been lifted.

For instance, recent legislation allows food and medicine to be sold to Cuba. However, U.S. public or private financing is not allowed in Cuba. “This, along with the fact that Cuba is not allowed to export goods to the U.S., puts our cash poor neighbor in a position where there are few reasons to buy our wheat,” Garvert says. Thus, Cuba will continue to import grain from Canada and France, which offers financing packages to enable Cuba’s grain purchases.

Importing countries are also looking for export programs that offer food stability, Garvert adds. The U.S. must realize that threats of economic sanctions can push these countries to seek more reliable suppliers.

Creating more demand for food grains has also been challenging in the number one market for U.S. wheat—within our own borders. “The recent fad for protein diets hit the flour milling and pasta industry square in the face in 1998. The U.S. per capita consumption of carbohydrates actually declined, breaking the 15-year increasing trend,” Garvert says. “Last year while waiting for a flight in Miami, I was shocked when a businesswoman ordered a hot dog. As the vendor got ready to place it on a bun, she said  ‘No, no. Just give it to me on wax paper with some ketchup and mustard.’ That kind of thinking needs to be reversed.”

Harnessing Change
From field to end destination, the grain industry is becoming more efficient. Take grain handling, for example: A train can now load in central Kansas, unload in Houston, and return to load again in five to seven days. Ten years ago, the same trip would take ten to fifteen days, Garvert points out. “The cost of transportation per bushel is less than the cost of a postage stamp…and at today’s speeds, the grain can arrive at the Gulf before a letter mailed the same day,” he says.

Technology is quickly playing a major role in agriculture. The USDA estimates 85% of American farmers have access to the Internet, which Garvert believes will ultimately take cost out of, or add value to the present business plan on the farm.

Producers need to embrace and demand the best of what is available in the new information age, he says. Rural areas need to keep pace with urban and suburban areas on this issue: in fact, it is as important to agriculture as bringing electricity to the farm was in the 1930s, says Garvert.

Technology is allowing farmers to be more productive than ever by using improved varieties, more specific chemicals, and better utilization of fertilizer. However, there is a continued challenge to fund research for even more improvements. Crop yields per acre are increasing, but wheat hasn’t kept pace with corn and soybeans, largely due to more attention on plant breeding and genetic modification of these two latter crops. Hence, these crops have become more profitable, a key reason why total U.S. wheat acres have decreased and shifted to corn and soybeans over the last 25 years, Garvert says.

Thanks in part to technology, the export business is also changing. Twenty to 30 years ago, a few government buyers bought the majority of grain, he says. Today, more than 80% is bought by thousands of private buyers. Information about our grain commodity is as readily available to farmers in North Dakota as it is to buyers in China, says Garvert.

More unique ways of marketing grain are opening up, and Garvert points to new products from his company as examples. Last year, Cargill announced a revenue assurance contract called the “Performance 90,” in which the company provides an upward price adjustment to farmers whose revenue drops more than 10% from the level of what was anticipated at the time the contract was signed, due to declines in either yield or price. This enables farmers to guarantee their per acre revenue to be at least 90% of what had been expected, plus it still allows a revenue increase due to higher yield or prices, he says.

Cargill also has a program for producers that like the concept of securing an average. Its “A+ Contract” guarantees the average price in specified markets, plus the opportunity to earn more if the program’s hedging efforts achieve higher than average results.

Technology is helping producers become more aware of what buyers around the world want, says Garvert. The global grain business has shifted from a commodity mentality to focusing more on delivering specific products and services, and this promises to translate into more opportunities for producers to market specific products around the world.

Still, even with all these changes, the bottom line is still the same, Garvert says. “Everyone still wants the top 10% of what’s available. Our challenge is to create that value for the customer,” he says.