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.

At the meeting of the North Dakota Grain Growers Association, Minnesota Association of Wheat Growers, and Minnesota Barley Growers Association, Galvin concentrated his remarks on three focus areas: the outlook for U.S. ag exports; details of steps taken by trade negotiators recently to help alleviate wheat and barley trade problems between the U.S. and Canada; and additional steps being taken on the world trade front to ensure a better playing field for U.S. wheat and barley growers.

"U.S. farmers have much at stake in making sure that the focus is on opening markets rather than building walls."

— Tim Galvin, special trade advisor to
USDA Secretary Dan Glickman

Export Outlook

Fiscal year 1998, which ended on September 30, 1998, marked the second straight year that exports have declined. Just as the record export level of two years ago helped to drive commodity prices and farm income to record levels, the current slowdown in world agricultural trade is a key factor behind today’s lower prices, Galvin said.

A number of forces have contributed to this slowdown, he said, including the global economic crisis. Currently, 25% of the world is in a recession, mostly in Asia, the Former Soviet Union, and Latin America. Unemployment in those countries is up, the middle class has shrunk, consumer confidence is weak, and their economies are expected to remain anemic through 1999.

On the positive side, interest rates in these countries are dropping, currencies are stabilizing, stock markets have risen from their recent lows, and some foreign investment is starting to return – all trends which, if they continue, should help set the stage for recovery in the Year 2000, said Galvin. Also contributing to the slump – especially for bulk exports, such as grain – is the fact that record and near record world grain production in 1997 and 1998 has again swelled grain stocks to burdensome levels. Not only have the major exporting nations had good crops in recent years, but so too has China, which is the wild card in the world grain trading picture because of its alternating position as in importer or exporter, depending on its domestic grain production.

"China, for example, has been exporting corn, rather than importing it. The bottom line is that large world stocks are weighing heavily on current prices," said Galvin. Also a factor is the strong U.S. dollar and the strong U.S. economy relative to other weaker currencies and economies, which encourages imports of foreign goods.

A subsiding but still large global grain supply combined with still-ailing economies for many countries will result in further decline in U.S. ag export potential in 1999, said Galvin.

Processed and consumer-ready products, such as red meats and horticultural products, continue to grab a larger share of the U.S. export total and in the current year are projected, for the first time, to account for the largest slice of the U.S. export pie- nearly 40%, said Galvin. Nevertheless, the USDA anticipates export declines across virtually all markets. "Even in the case of the NAFTA countries, we expect some decline after sending record exports to Canada and Mexico in the year that just ended," he said.

The U.S. won’t be alone in this fact: global ag trade has fallen from a record $300 billion in 1996 to $275 billion this past year and a projected $256 billion in the coming year. That’s a $44 billion drop in world ag trade in three years – nearly a 15% decline.

"One can only imagine how much worse the situation would be, especially for U.S. exports, if we were not pumping out record amounts of export credits, or backing IMF relief efforts," said Galvin. "Our export credits have been the difference in allowing major customers such as South Korea to continue to import our products, and our export credit program would be dead in the water if IMF financing hadn’t been available to allow some of these countries to restructure their finances. We’d also like to think that our efforts to donate over 4 million metric tons of wheat – to places likely Russia, Indonesia, and the Middle East – are helping to stem the decline as well."

U.S.-Canada Agreement "the first step"

Galvin summarized steps announced in early December aimed at reducing trade problems along the U.S.-Canada border.

"As Secretary Glickman emphasized several times on the day the agreement was announced, we view the agreement as a first step in our efforts to eliminate the many trade irritants that have plagued our trading relationship with Canada for far too long," said Galvin. "We sought to increase access for U.S. products moving north, and inject greater transparency with respect to imports from Canada. We believe the agreement makes measurable progress on those two objectives."

The USDA, working jointly with the U.S. Customs Service, will begin to require more detailed information on the quantity, price, variety, and quality characteristics of imported grain, said Galvin. "This ‘continuous audit,’ will help provide the information that we need, on an on-going basis, to assess whether grain is being imported into this country in a way that does not undercut U.S. prices," said Galvin.

In a further effort to shed more light on grain trade, USDA representatives and their Canadian counterparts will meet quarterly to exchange information on grain production and marketing, including their current projections for exports of wheat, barley, corn and oats to each other, said Galvin. The quarterly meetings will also include a review of the subsidies, credits, and other means that each country uses to facilitate grain sales, and a review of actions by third countries, such as the European Union, that may have a direct impact on grain trade.

"We have also agreed to explore further the idea of eliminating North America as a destination for subsidized European oats," said Galvin. "We believe that these provisions, taken together, will add a new measure of transparency and understanding regarding the flow of grain between our two countries." With regard to increased access for U.S. grain, the agreement for the first time will allow individual U.S. producers to move wheat into 27 designated elevators in Western Canada. Under the program, producers will be able to ship wheat under a "master phytosantiary certificate," obtained just once per year, rather than requiring the testing of each and every truckload sent by a producer into Canada. Initially only Montana and North Dakota will be able to utilize this program, but it will be reviewed after six months for possible expansion to other states, said Galvin.

The agreement will also allow wheat, barley, and other grains to be transhipped from MN, ND, and MT through Canada to U.S. ports without the need for testing or a phyto certificate — an option that should provide more competitive transportation alternatives for producers in northern tier states. This program will also be reviewed after six months for possible expansion to other states, he said.

In addition, based upon scientific information provided by the U.S., Canada has agreed to immediately recognize 14 northern tier states from Montana to Maine as free from Karnal bunt, with additional states likely to be recognized next year and the following year.

In the case of livestock, the agreement will allow U.S. slaughter hogs to enter Canada without the testing and quarantine restrictions that are applied to breeding animals. The current pilot project that allows feeder cattle from two states to enter Canada will be expanded to several additional states, provided those states apply under the program. The USDA will also work with Canada to ensure that the U.S. is provided additional information on the size of Canada’s cattle herd, including the number of cattle on feed and cattle slaughter numbers, he said.

The issue of animal drugs and crop pesticides- including which ones are approved for use in each country and which ones —are not — remains an important issue that clearly requires additional attention, said Galvin. However, the agreement calls for the two countries to produce by April 1999, a comprehensive comparison of their animal drug approval status, and to work toward the joint evaluation of drug approval and the harmonization of allowable residues within the year. The agreement also provides a blue print for resolving the even more complex issue involving pesticide approvals and use. In addition, the two countries have agreed to complete a study within six months’ time on the issue of pesticide price differentials, looking at things such as the effect of respective patent laws in each country.

"We’re under no illusion that (this agreement) is going to have an immediate impact on prices or grain flows. However, we believe it’s a strong beginning to our effort to put many of these issues behind us and set the stage for further trade improvement," said Galvin. "We look forward to working with you, your states, and your representatives in Congress to ensure that we make concrete progress in leveling the playing field with Canada."

Global Trade Action Plan

When most people think of the U.S. ag trade agenda, they tend to think almost exclusively of the next round of talks under the World Trade Organization (WTO, the successor to General Agreement on Tariffs and Trade, or GATT).

"But in fact our current agenda is much broader than that. Certainly the upcoming WTO round is the centerpiece of our efforts, but it’s flanked by two major regional trade initiatives – the Free Trade Area of the America’s (FTAA) and the Asian Pacific Economic Cooperation (APEC) forum – and accompanied by a host of critical bilateral discussions with countries such as China, Taiwan, Canada and so on," Galvin said.

Six objectives underpin the U.S. negotiating strategy in global trade talks, he said:

1) Export subsidies must be eliminated. Under the Uruguay Round, developed countries cut expenditures for export subsidies by 36% and subsidized quantities by 21%. But by the Year 2000, the EU is still allowed to outspend the U.S. by more than 10 to 1 ($8 billion vs. $600 million). "This particular corner of the playing field absolutely must be leveled," said Galvin.

2) Domestic farm subsidies need more discipline. This will help reduce global trade distortions. The EU proposes to follow the U.S. lead in this regard with its Agenda 2000 reforms, but the fact remains that even if Agenda 2000 is enacted as proposed, the EU’s livestock and dairy sectors, for example, would continue to rely on market intervention and export subsidies for support. "And even with more decoupled payments in the case of grains, the EU proposes to maintain total farm support expenditures at current levels, in contrast to our situation here in the U.S., where financial support for farmers has been generally on the decline," he said.

3) Tariffs must be reduced further. Under the Uruguay Round of GATT, developed countries cut their tariffs by an average of 36%, but tariffs facing most U.S. products remain too high — about 50% on average — compared to less than 5% for products entering the U.S. "To take wheat as a specific example, even after the current Uruguay Round tariff cuts are phased in, we’ll still be looking at tariff rates on wheat of 245% in Switzerland and 206% in Japan, for wheat that exceeds current quotas," said Galvin.

4) Tariff-rate quota reform. TRQs should be substantially increased or effectively eliminated by cutting the out-of-quota duty.

5) Discipline state trading enterprises. STEs, like the Canadian Wheat Board, are monopoly importers and exporters that can distort trade and provide an unfair advantage, and at the very least, their operations must be made much more transparent, said Galvin.

6) Strengthen sanitary and phyto-sanitary measures. SPS measures — using false or unproven health concerns to block ag trade — cannot be used to disguise protectionist intentions. "Sound science must govern the establishment of SPS measures," said Galvin.

Also looming large is the need to ensure that the WTO dispute settlement process works to provide timely and effective relief as differences arise, said Galvin. "The WTO has received nearly 150 (148) complaints since January 1995 – one-third of those cases (49) filed by the U.S, more than any other country. It is generally agreed that the process takes too long or often lingers inconclusively," he said.

The WTO negotiations are scheduled to begin formally by the end of 1999, with a ministerial meeting to be held in the U.S. next December.

The FTAA negotiations officially began this April, and the timetable calls for concrete progress by next year and conclusion of the FTAA agreement by 2005, said Galvin."Regional initiatives such as the FTAA and APEC are useful opportunities for the U.S. and its like-minded trading allies to lock in increased market access when and where we can get it, especially if the WTO negotiations play out over a number of years, as seems to be their tendency," said Galvin.

Ag trade benefits U.S. farmers

Additional trade agreements will benefit U.S. farmers, said Galvin, as previous trade agreements have led to real, measurable gains in exports and farm income. In the case of NAFTA, those gains should be $1.5 billion a year by the time the agreement is fully implemented in 2008, he said.

"In the past year alone, our exports to Canada and Mexico increased by 11%, despite the fact that our exports overall declined by 6%. In the case of (GATT), over $5 billion in additional annual exports should be realized by the Year 2005," he said. Even with the current downturn in exports, the U.S. still exported about $17 billion more in ag products than it imported. The U.S. exported 15 times as much feed grains as we imported, 12 times more wheat, and 60% more red meat, said Galvin.

U.S. farmers have much at stake in making sure that the focus is on opening markets rather than building walls, said Galvin.

"There’s often a sense among those who are opposed to new trade agreements that after the trade agreements of the past decade, the U.S. should perhaps just sit on the sidelines for awhile and wait things out — as if the global march toward freer trade would stop without the U.S.," said Galvin. "But the fact is that today there are over 30 trade agreements in Latin America, and the U.S. is a party to only one — the NAFTA. In the meantime, because Canada, for example, has a free trade agreement with Chile, and we don’t, Canadian exports enjoy an 11% price advantage in the Chilean market compared to U.S. products. Our farmers here in the U.S. lose out as a result."

Surveys suggest room for
risk management improvement

Recent surveys by Farm Futures questioned farmers on a number of topics, including marketing knowledge and risk management. The survey produced some illuminating findings, several of which are summarized below. Almost 70% of those surveyed manage risks through farm program payments.

Percent using technique a lot 

69% Used government farm program
39%  Diversified operation by raising crops and livestock
39%  Varied maturity dates of seeds
35%  Used contract inputs to lock in a good price
30%  Bought crop insurance
25%  Used crop-share land rents
20%  Kept a credit line open to take advantage of attractive input prices
16%  Used multi-year leases
13%  Irrigated
10%  Shared expenses with landlord
8%  Refinanced loans to take advantage of lower interest rates
6% Hired custom operators to improve timeliness of crop operations
6%  Hired custom operator to reduce machinery expense
3%  Diversified by raising crops not normally grown in the area
3%  Leased equipment rather than bought
2% Rented equipment rather than bought 

• Although the number of producers with written marketing plans has increased, this practice has been adopted by just one in seven farmers.

• Percent of farmers using computerized financial records: 24% 

• A September, 1996 Farm Futures marketing skills test found that farmers were more familiar with marketing terms such as put, call, and strike price compared to a similar survey in August, 1989. However, only 6% of those surveyed scored an "A" on the marketing test, answering 18 or more of the 20 questions correctly. And 60% of the respondents received a score of 70% or less.

• Conclusion: Educational efforts need to extend beyond one-dimensional approaches to risk management, which address strictly marketing fundamentals or crop insurance. Instead, farmers need to understand all components of risk and be able to put together comprehensive risk management plans.

Source: Survey research by Farm Futures magazine