Monday, April 5, 2010
The Value of Reliability
Our brand promise is familiar: “U.S. wheat is the world’s most reliable choice.” In a season of surplus and wide variability in prices, U.S. Wheat Associates (USW) continues to make this case because U.S. wheat growers have consistently produced abundant supplies of excellent quality wheats and earned an enduring reputation for reliability and value over many years. It is also important to take every opportunity to provide valid proof of our brand promise.
Let us examine current world wheat prices, for example. Global wheat prices are down since near record global stocks quickly replaced the supply shock of 2007/08. However, U.S. FOB wheat prices are now higher than wheat from the Black Sea region and parts of Europe. The difference grows when the value of the U.S. dollar rises in relation to the euro and other currencies. In spite of the fact that U.S. soft red winter (SRW) is an excellent, proven wheat for confectionary use and baguettes, and that hard red winter (HRW) is a consistently superior bread wheat compared to Black Sea region crops, the difference in price has attracted some buyers.
Beyond the inherent quality and functional value of U.S. wheat, U.S. private exporters today must pay an additional premium to draw stocks out of storage because of various incentives for many of the market participants. Index funds, for example, are holding long positions in wheat contracts in U.S. exchanges. Their managers can hold because the funds invest in a basket of commodities where losses in wheat might be relatively small and offset by gains in energy and other commodities. Grain elevators approved by CME/CBOT for physical delivery of wheat also have an incentive to store wheat. Under a variable storage rate structure implemented by the Commodities Futures Trading Commission (CFTC) last year, storage premium charges increase or decrease based upon the "carry" in the market that is implied by futures-market spreads. Currently, the charges are attractive. Many U.S. farmers also have an incentive to store wheat in hopes of higher cash prices because the cost can be offset by revenue from other crops and savvy price risk management; some of their optimism about future prices may accrue back to the fact that they planted about five million fewer acres of SRW and HRW last fall compared to the year before.
The EU and Russia are fortunate to have large exportable wheat surpluses in 2009/10. Recent EU sales to what some consider unusual buyers, however, actually reflect the concept of reliability. That is due to Argentina's inability to be a reliable wheat supplier in recent years, in large part because of political problems. That forces some Latin American buyers to consider other sources and brings into play today's significant price differences between the U.S. and other origins.
The Russian grain industry has stepped rather boldly into the global grain market. We believe supply drives this effort, certainly above any measure of functional milling or baking quality compared to wheat from the U.S. and some other suppliers. Yet, as USW President Alan Tracy wrote in the Jan. 7, 2010, issue of Wheat Letter, Russia's stated willingness to sell grain from government intervention stocks at prices below their acquisition cost is troubling. That amounts to a direct export subsidy presumably from the Russian government (Click here to read more: http://bit.ly/8YlU5B). It is also important to consider that the Russian government banned wheat exports during the supply crisis of 2007/08 (as did Ukraine and Argentina). The Russian trade is apparently now having trouble meeting delivery requirements because of logistical problems. In addition, indications are that Russian wheat producers are beginning to question why they earn so little for their crop. In the face of such uncertainty, we seriously question whether Russia can truly stake a claim as a reliable supplier of high quality milling wheat -- and so should international wheat buyers.
In contrast, the U.S. wheat industry’s commitment to add value to the consistently excellent quality and variety of its wheat supply is established, proven, and (perhaps above all) reliable. For decades, the U.S. wheat store has remained open to international buyers, even when supplies were tight. That is easy to overlook at a time when some wheat-exporting countries are aggressively offering their product. In good years and bad, U.S. wheat growers have supported USW’s effort to work directly with buyers to answer questions and resolve issues in purchasing, shipping, or using their six classes of wheat. With U.S. wheat, buyers also get professional technical assistance, education, information, and personalized consulting that help strengthen overseas milling, storage and handling, and end-product industries. As always, USW stands ready to help meet our customers’ needs.
That is why we believe U.S. wheat is the world’s most reliable choice.