Issue 27
March 2000

The big change in international wheat business

There are many more private buyers in the world these days, and they're looking at your wheat differently than the old government buying agencies did.

By Lisa Jager

What's the biggest change in the international wheat marketplace over the past decade? Pose that question to anyone who follows world wheat market trends, and the answer will always be the same: privatization.  In a nutshell, this means that governments around the world are getting out of the grain buying business and turning it over to private buyers.

In any given year, the U.S. depends on foreign buyers to purchase about 50% of wheat produced by American farmers, making these buyers a significant and important customer for farmers' products.  Privatization of grain buying is having a significant impact on how international wheat business is conducted, resulting in a much more competitive marketplace.

Paul Dickerson is vice president of overseas operations for U.S. Wheat Associates, the wheat export development organization based in Washington, D.C. that is supported in part by the wheat checkoff in Minnesota and other wheat-producing states. He says that 10 to 15 years ago, about 80% of wheat purchases were government-controlled and 20% were private.  "Today that figure is reversed," Dickerson says. "And even where the public sector still functions, the private sector is often allowed to participate." 

Although privatization has occurred to some degree in nearly every part of the world, it is more pronounced in some regions.  Dickerson says the Latin American region is now 100% privatized, while in Asia "things haven't changed that much."  He says in Africa, privatization "has been hit or miss" and in the Middle East, Egypt, a large buyer of U.S. wheat, is now allowing both public and private purchases.

Dickerson says privatization has resulted in a very competitive buying environment, calling it a "dog eat dog world."  He says when governments controlled purchases, they bought large volumes of wheat at a fixed price, and they also told flour millers at what price to sell flour.  That has all gone by the wayside today.  Now, simple economics govern purchases with price being an important factor in private sector purchases, resulting in much more competition both among buyers and sellers.

A greater interest in quality is another result of privatization.  While government buyers were generally not as interested in quality, private buyers are becoming increasingly interested in quality, along with other factors.  "Buyers are now becoming very picky and choosy," Dickerson says.

Bill Wilson, a professor in the agricultural economics department at North Dakota State University, says that privatization has resulted in an intensely competitive market with private buyers evolving to become "more specific in respect to their purchases," including quality.

"It used to be that U.S. domestic millers purchased the No. 1 and 2 wheats, with the rest going offshore," Wilson says.  "That's all changed now, foreign purchasers are much more demanding."  Wilson says this has resulted in foreign buyers shifting from No. 2s and 3s to high 2s and No. 1s.

Three factors behind privatization

So why the shift to privatization?  Wilson attributes the shift to three factors, citing the third factor as most important:  1) changes imposed by international banking organizations such as the International Monetary Fund; 2) changes countries/governments made as the result of participation in or outcomes of bilateral trading negotiations such as the North American Free Trade Agreement and other agreements; 3) the fact that government buying organizations are not very efficient, as they are not commercial entities and therefore do not have a commercial interest in the commodity.

Dickerson says another major change in the world marketplace in recent years is that China and the Soviet Union are no longer significant wheat importers.  He said in the mid 1980s, China and the Soviet Union accounted for approximately 30% of U.S. wheat trade, while today they are importing much less, partly because of their own larger production.

Gregg Doud, vice president for markets and policy at World Perspectives, a global agricultural consulting firm, agrees, saying that the change in imports by the former Soviet Union and China represents one of the most "distinctive changes in this decade." 

Doud attributes the situation in China to the "Lester Brown factor."  Doud says Brown, founder and president of the Worldwatch Institute, spoke in China in the mid-1990s, telling the Chinese they were "going to starve to death" resulting in China investing in a massive grain production program.  (Brown wrote a book called "Tough Choices: Facing the Challenges of Food Scarcity and Who Will Feed China: A Wake-Up Call for a Small Planet").  Doud says that as a result, China increased grain production over an approximately five-year period from 100/110 million metric tons to 125 million metric tons, taking China out of the grain market.  China is the top wheat producer and user of wheat in the world.

Europe is a bright spot

Although wheat demand has grown in countries other than China and the former Soviet Union, it has not been enough to offset drops to these two former large wheat purchasers, Dickerson says.  One bright spot in recent years is the European Union (EU), which may surprise some who think of the EU as a large grain producer and exporter.

According to Vince Peterson, USW regional vice president for the European Region, U.S. wheat exports to the EU have more than tripled during the last six years.  This is good news for hard red spring (HRS) and hard amber durum (HAD) producers in the Northern Plains, because these two classes account for the majority of U.S. wheat purchases by the EU. 

U.S. HRS exports to the EU have increased from 360,000 metric tons in the 1993 marketing year to 1.2 million metric tons in 1999, while HAD purchases increased from 130,000 metric tons to 370,000 metric tons.  Collectively, HRS/HAD exports to Europe have increased from 4% of total U.S. exports of these two classes to 20%.

"Europe uses U.S. HRS wheats, generally both 14 and 15% protein levels, to act as blending wheats to bring the baking quality of their flour up to required processing levels," Peterson says.  U.S. durum wheat is used both as a blending wheat to upgrade European durum quality and to supplement seasonal shortfalls in domestic production."

Peterson says changes in EU policies, including a reduction in import duties, have contributed to the U.S. wheat export increases.   Also, USW has intensified its marketing efforts in the EU to inform buyers there about the qualities of U.S. wheat and educate them about the U.S. wheat marketing and purchasing system.  Peterson says USW efforts include crop quality seminars within Europe, as well as sending trade teams to the U.S. and buyers to marketing courses conducted at the Northern Crops Institute in Fargo.

Such USW activities are being conducted throughout the world to educate buyers in privatized countries who are unfamiliar with U.S. wheat, or are new to the world of purchasing, particularly within the U.S. system.

Dickerson says among its many activities, USW is trying to assist buyers by better  educating them about the U.S. market and how purchases are made, along with working to learn about specific quality requirements of buyers.   Such assistance is conducted through the annual crop quality seminars conducted by USW around the world, as well as smaller scale individual assistance.

Although privatization means new buyers in the marketplace, that hasn't necessarily resulted in increased demand, however.  Dickerson says that for the 7th year in a row, world wheat demand has been flat.  This situation is compounded by several consecutive years in a row of generally good weather and large crops in leading wheat producing regions around the world.

So what might turn this situation around? 

"The market needs a major crop failure or a significant increase in demand or improving economies," Dickerson says.

In the meantime, USW and others will continue to work with emerging buyers around the world to help these new customers learn about U.S. wheat and how to purchase it, hopefully resulting in satisfied customers who will continue to seek out U.S. wheat.

Bruce Hamnes, a Stephen, MN producer who serves as chairman of the Minnesota Wheat Research and Promotion Council and vice chair of USW, points out that U.S. wheat promotion efforts are vital when major wheat export countries are all vying for a greater share of international grain business, in an arena where new players are making purchasing decisions.

"With fewer governments and more private buyers in the global wheat market now, it really is important to educate these new buyers on the 'when, why, how, where, who' questions on purchasing American wheat," says Hamnes.