Lessons from US wheat model

17 Nov, 2015 01:00 AM
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.

Colin Bettles

Colin Bettles

is the national political writer for Fairfax Agricultural Media
Date: Newest first | Oldest first


20/11/2015 9:58:55 AM

Interested Party the Brookfield Access fee from 2013 to 2015 remained the same but CBH fobbing costs rose $4.90/t. That cost is passed directly back onto the grower. I'm not a fan of Brookfield but the costs need to be understood and it has to be realised that CBH has failed to search within its own business for efficiency and savings. I'm lucky enough to be close to competition so that options are available, but do however feel sorry for growers that rely totally on CBH.
Interested Party
20/11/2015 3:01:51 PM

That's interesting and thank you Genex but I seem to recall Brookfield's track access fees went up 15% on 1 July this year let alone what happened prior to that so I'm not sure why you think they have remained the same for the past 2 years? We have been watching the whole saga unfold with more than a passing interest.
22/11/2015 6:01:17 AM

If you use those figures of 15% it would then take the rail access fee to $8.05 for 60% of the grain that is on rail. On a 15m crop that equates to another $9m in fees. On the equivalent crop CBH increased fobbing costs of $4.90 have added $73.5m to export costs. That is over 8X the Brookfield charges. 3% increase in receival fees this yr, increase in freight for some- cost containment should have started long before this. Who is asleep at the wheel?
Interested Party
23/11/2015 6:32:12 AM

Genex when you use those figures I agree something is very fishy over there and requires some further digging.
23/11/2015 7:14:11 AM

Genex is spot on. CBH charges are the real talking point. Fact of the matter is CBH is sitting on some major non core losses and while it was on the non core spending spree, it well and truly took its eye off the ball. And the ball is cheaper storage and handling costs. Of course, one shouldn't be surprised when you put a bunch of farmers aspiring for greater personal development in control of a license to print money, at everyone elses expense. Can somebody show me where the sell button is please? Or at the very least can we clean out the board and restructure the thing?
23/11/2015 9:18:54 AM

Interested Party I think we have the foundations of a world class business here but there is real lack of commercial intelligence in that board room that is needed in the new grain export landscape. Competition will see over-capacity with all seeking returns and the east coast happens all over again. At least in WA we have a very different market that will continually see grain on boats but the present situation drives growers like myself to competition.
23/11/2015 8:18:55 PM

You trader stooges are missing the point of this story. It is being spelt out loud and clear that Australian grain growers are now losing share of the global market due to the vacuum left after the removal of the AWB and Single Desk. If some nut jobs think they can take on the US administration which pours billions of subsidies into the US Wheat Associates members pockets, let them put their own money up. They will lose it like throwing packs of $100 bills into the ocean. They did not recognise what they once had due to arrogance and ignorance.
Team Canada
24/11/2015 12:22:04 AM

Jock, can you provide any concrete data on the decline in Australian wheat quality since the wheat board was abolished. We are now 2 years into the post CWB era in Canada and there is lots of concern on export quality. After reading these blogs and the article, how can USW claim the incremental revenue is a direct result of their work. Kaiser did the study, maybe it was biased?
24/11/2015 11:56:45 AM

While you are wasting time looking for your concrete evidence Team Canada. The Aussie and Canadian foolish deregulators have now clearly lost market share and what difference does it make which pellet gets the duck when you are putting less pellets in the air and missing more ducks but your competitors' extra pellets are bringing down more ducks?
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