Lessons from US wheat model

17 Nov, 2015 01:00 AM
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29
 
The money farmers provide for export promotion is well worth the investment

THE US Wheat Associates (USW) delivers a US$45 return in increased net revenue to wheat growers from every dollar they invest in overseas marketing, a new economic study has shown.

The USW manages export market development on behalf of US wheat producers and is funded primarily through producer checkoff dollars and other combined programs including with the USDA’s Foreign Agricultural Service (FAS).

Australian industry groups have considered developing a local version of the USW to perform a similar market development function, since the AWB single desk monopoly was deregulated in 2008.

Such an organisation would interact with customers in overseas markets - like flour millers, bakers and food processors - where Australian wheat competes against the US, to improve value and returns for producers.

However, that new marketing body has yet to eventuate, despite efforts to raise warnings about the loss of market share for Australian wheat exports in key Asian markets, to traditional competitors like Canada and US, and the Black Sea region’s expanding influence.

Last week, the USW released a statement about its new economic study which said US wheat producers invested an average of US$4.9 million in checkoff funds per year to promote their milling wheat overseas, between 2010 and 2014.

And for every one of those dollars those producers received up to $45 back in increased net revenue.

The USW commissioned the study with funding from the USDA’s FAS Market Access Program which was designed and conducted by Dr Harry M Kaiser – a director of the Cornell Commodity Promotion Research Program.

Dr Kaiser said the study showed that investing in US wheat export promotion had a large and beneficial impact for producers and the US economy that far exceeded its cost.

“The econometric models we used showed that between 2010 and 2014 the total investment in wheat export promotion by farmers and the government increased total annual gross revenue by US$2 billion to US$3 billion,” he said.

“So for every $1 farmers and the government invested, the estimated return in gross revenue to the US economy was between $112 and $179.”

Dr Kaiser’s quantification of the wheat export promotion program’s impacts was achieved via modelling which accounted for various factors affecting commodity export demand, like prices and exchange rates.

The study also determined that cutting the promotion program by 50 per cent between 2010 and 2014 would have significantly reduced wheat exports by about 15pc, the USW said.

USW president Alan Tracy said his organisation was accountable to wheat farmers and other taxpayers who fund the market development work they do.

He said Dr Kaiser’s research methods were well respected and the conclusions echoed previous studies conducted in 2004 and 2009.

“We can very confidently say that the money farmers provide for export promotion is well worth the investment,” he said.

“In fact, the study predicts that increasing the promotion investment has the potential for even greater returns to wheat farmers, the wheat supply chain and the US economy.”

Australia produces about 23 million tonnes of wheat per year with about 19mt exported to leading markets like Indonesia, Vietnam and Korea.

However, the Australian Export Grains Innovation Centre (AEGIC) has previously warned Australia’s reputation for producing clean and green product won’t be enough to guarantee market share will be maintained and grown, in future.

Former AEGIC CEO David Fienberg told the ABARES conference in March this year that Australia’s value in export markets like Indonesia - worth about $1.8 billion per year – was being eroded by traditional competitors that employ full-time agencies like the USW, which perform pre-competitive marketing functions, with significant budgets.

He also told the conference, markets like the Philippines had the capacity to import 2.2mt of milling wheat per annum but Australia’s portion was only 15,000mt or less in 2013, while the US were “entrenched” in selling 1.8mt, due to the USW’s presence.

Within 10 to 15 years, Russia is forecast to increase its wheat production by as much as 30mmt and the Black Sea countries, located close to Asia, also had capacity to produce soft white wheats, like Australia, he said.

Mr Fienberg said Australia’s traditional competitors were way out in front in terms of customer relationship management and support and “we are in real danger of eating their dust”.

He said the USW had 17 world-wide offices covering 184 countries and 82 employees, including 61 overseas personnel and worked to move wheat buyers to the “value end of the purchase spectrum” by paying premiums for wheat that meets specific needs.

An online report on the USW’s activities for 2013-14 said the US led the world wheat trade with total export sales exceeding 27.4mt with Japan, Mexico and Nigeria its top three customers and sales to Korea and the Philippines remaining strong.

The report said the USW received more than US$11.7m in cost-share funding from the FAS which added US$2.30 for every US$1 contributed by farmers.

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Colin Bettles

Colin Bettles

is the national political writer for Fairfax Agricultural Media
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READER COMMENTS

Interested Party
18/11/2015 12:49:50 PM

Genex I understand the markets are vastly different and both have adapted (or in the case over here were forced to) to their own. I just cannot stand stupid comments. ie "CBH is a mess" and "recorded a $10m loss on their trading desk etc" when this is less than 1/10th of a couple of others. I'm generally pretty quiet but at times someone has to try and wake up that group of a handful over there. In reality they don't know how well off they are. I guess you just can't help some.
Genex
18/11/2015 3:02:45 PM

Unfortunately the cooperative business model is not all its cracked up to be. Co-ops have a much shorter life cycle then commercial business because of the politics that infects it, and that is unfortunately rife over here at the moment to the detriment of the business.
drowning in debt
18/11/2015 3:30:45 PM

for cbh to lose any money on their trading desk is like a poker player losing when he can see the hand of the dealer
Interested Party
19/11/2015 7:50:57 AM

Genex I understand politics is the evil of all but many a co-op has stood the test of (a long) time but it will be interesting to see how you guys over the next 3 to 5 years. Drowning in debt - yet another stupid comment! You obviously have no understanding of trading and the influences on pricing. How are they any different to our Grain Corp or Glencore for that matter both of whom lost many $ms more?
Jock Munro
19/11/2015 10:26:54 AM

Come to the East Genex and drowning in debt and see how growers get treated by the corporates- it is not pretty.
Genex
19/11/2015 12:49:25 PM

Did you sell your shares Jock, could have been a natural hedge mate.
Philip Downie
19/11/2015 2:38:04 PM

To say that we don't sell wheat to the Philippines because of the USWA is quite wrong. We don't grow the type of wheat required for their end products and even if we did our production would be so small as to be useless. You have to ask what are AEGIC being paid to do if they don't do this function? There's a clue on how to fix this, but you have to have the right people? That starts with the people at the top having some vague idea.
Jock Munro
19/11/2015 3:10:32 PM

You have to be joking Genex-are you suggesting that a structure that gouges you whilst you own shares in it is better than a grower owned co op like CBH?
Genex
20/11/2015 5:17:05 AM

Jock did you not read the story on the 29th of October about CBH job cuts where CEO Andy Crane said " freight costs were a concern for CBH as growers paid more than Eastern State and international counterparts." There you go: CBH has admitted to being more expensive than your "gouging" players in the east. Can you believe that?
Interested Party
20/11/2015 8:47:54 AM

Ha ha Genex I don't think Jock (or anyone else for that matter) will fall for that one - even over here a lot have been following the CBH Brookfield saga with Brookfield the ones appearing to be doing the "gouging"
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