December 20, 2000
Section
301 Committee
Room 223
Office of the U.S. Trade Representative
600 17th Street, NW.
Washington, DC 20508
Re: Docket No. 301-120
Dear Madam/Sir:
This letter is in response to the initiation of the investigation and request for public comment regarding the wheat trading practices of the Canadian Wheat Board, as described in the November 16, 2000 Federal Register.
These comments will provide more detail to those we submitted on October 15, 2000. In those comments we opposed launching the investigation because the North Dakota Wheat Commission petition made or inferred points about supply and demand which are demonstrably false, made or inferred points about quality which are demonstrably false, ignored other important market considerations and proposed remedies that are not relevant to the alleged problem and threaten normal trade patterns upon which our industry depends.
SUPPLY AND DEMAND
According to U.S. Department of Agriculture data, over the last 15 years, U.S. durum production has been insufficient to meet total demand (production minus domestic use and exports) in every year, with an average shortfall of 25.3 million bushels per year. Total demand for hard red spring wheat exceeded production in 12 of the last 15 years with an average annual shortfall of 54.6 million bushels. These data can be found on the North Dakota Wheat Commission web site at http://www.ndwheat.com/wi/markstat/usage_bushel.asp.
QUALITY
The shortfall referenced above would still be true even if every bushel of the U.S. crop were milling quality (grades U.S. No. 2 or better Hard Amber Durum (2HAD)). Unfortunately, it is not. Each year that portion of the U.S northern grown durum crop which is of milling quality is less than 50 percent. In 2000, 43 percent of the northern grown durum crop was of milling quality, according to the Regional Quality Report, which can be found on the North Dakota Wheat Commission web site at http://www.ndwheat.com/wi/durum/cropqual/cqr_grade_dist.asp.
The report states:
"Based on grade distributions among the samples, 43 percent or 42.0 million bushels (1.1 million metric tons) of the crop should grade 2HAD or better, up from 39 percent and 32.5 million bushels (0.8 million metric tons) last year.
"If a buyer combines a specification for 2HAD or better with a specification for a falling number of 250 or greater, 39 percent or 38 million bushels (1.0 million metric tons) of the 2000 crop meet these minimums, versus 30 percent or 25 million bushels (0.7 million metric tons) in 1999."
In fact, the portion of the crop suitable for milling is far lower, as a Falling Number score (an important indicator of quality) of 250 falls well short of the 300-350 Falling Number normally specified by buyers.
To assist buyers of northern grown durum, the North Dakota Wheat Commission web site (http://www.ndwheat.com/wi/durum/durum_contract_specs.asp) provides recommendations for inclusion in a purchase contract. Ironically, even by the Commission's own data, as much as two-thirds of the 2000 crop is not suitable for milling.
For example, to assist discriminating as well as less discriminating buyers, the Commission suggests the following as the basis for purchase contracts:
Rigorous Specifications
U.S. grade No. 1, minimum 85% vitreous kernels
Moisture, maximum 12%
Maximum sprouted kernels 0.1%
Maximum shrunken and broken kernels 0.5%
Falling number 350, no sublot below 325 seconds
Protein, minimum 12.5%, no sublot below 12.3%
Dockage, maximum 0.7%, all deductible from contract weight with reimbursement for freight and insurance on dockage
Relaxed Specifications
U.S. grade No. 2, Hard Amber Durum (HAD) or better
Moisture, maximum 13.5%
Falling number, 300 average
Protein, minimum 12%average
Dockage, maximum 1% average
Yet, data found elsewhere on the Commission web site (http://www.ndwheat.com/wi/durum/cropqual/cqr_quality_factors.asp) show that the average sample of the 2000 crop graded U.S. No. 3, with 75 percent vitreous kernels, 4.7 percent damage (which includes sprout damage), 1.8 percent shrunken and broken kernels, a Falling Number score of 216 seconds and 1.5 percent dockage. Again, by the Commission's own data, it can be seen that much of the crop is not of milling quality.
The poor crop quality is obviously not the fault of the grower but of unfortunate weather conditions. Nonetheless, it must be acknowledged that an insufficient crop that is impacted by quality problems makes access to all sources of wheat a vital consideration for U.S. millers, food manufacturers and other users of wheat.
OTHER MARKET CONSIDERATIONS
Deferred Delivery
For planning and risk management purposes, U.S. pasta manufacturers seek to lock in semolina (milled durum) prices. In response, millers will likewise attempt to lock in durum supplies for delivery in the future. U.S. growers and traders are less willing to sell for future delivery than the Canadian Wheat Board. Surely a miller seeking durum with deferred delivery should not be penalized for accepting the only offer received.
Conservation Reserve Program
On October 1, 2000, the Conservation Reserve Program (CRP) increased by another 2.5 million acres, bringing it to a total of 36.4 million acres. Further, the Administration has been urging Congress to expand the statutory cap on the CRP from its current 36.4 million acres to 40 million acres. In the two primary hard red spring and durum production states – North Dakota and Montana – 181,688 and 263,629 acres, respectively, were added to the CRP. Total CRP enrollment for those two states now stands at 3,332,766 and 3,456,812 acres, respectively.
We support protecting highly erodible land in a conservation program. However, many of the CRP acres in those two states can be farmed in environmentally sustainable ways and should come back into production. Otherwise the CRP contributes directly to the need for imports of Canadian wheat.
IMPORT DATA INCLUDE PRODUCTS
It is important to note the little known fact that official U.S. statistics on imports of durum are misleading because they include not just the raw durum, but finished pasta products in durum equivalents as well. Over the last five years, pasta imports have contributed 5-17 million bushels annually in durum equivalents to the durum import figures, a range of 28 to 61 percent of the total.
INAPPROPRIATENESS OF THE PROPOSED REMEDY
In the Federal Register notice, USTR stated its desire to receive comments on, among other things, appropriate action under section 301 which could be taken in response to the petition. We believe the remedies proposed by the petition are inappropriate, as they do not address the anti-competitive trading alleged. We have no knowledge of, nor stake in, the unfair pricing in third country markets as alleged by the petition. It makes no sense to damage one U.S. industry (milling and food manufacturing) as a response to a problem in which that industry has no role.
Further, the actions sought by the petitioner would undermine the Administration's commitment in the 1998 U.S. - Canada Record of Understanding (ROU) to address and resolve agricultural trade issues with Canada through consultative, non-adversarial processes.
Finally on this point, we note the irony of the petition's proposed remedy, i.e. restricting shipments of grain to the U.S. If that were to occur, even more Canadian grain would inevitably end up in the third country markets in which the petitioner seeks to compete.
COMMITMENT TO RESOLVING STATE TRADING ENTERPRISE ISSUES IN THE WORLD TRADE ORGANIZATION
To repeat our previous comments, we are firm supporters of the Administration's stated position to impose disciplines on the actions of State Trading Entities (STE's) during agriculture negotiations in the next Round of World Trade Organization (WTO). As a strategy toward that goal, we do not think the 301 investigation is necessary or desirable. In fact, unilateral actions singling out the CWB and relying on anecdotal evidence could undermine support for a more reasoned, rules based trading approach to the subject.
The case for imposing disciplines should remain focused on the monopsony/monopoly powers wielded by STE's and their potential for distorting trade. We feel strongly that exporting STE's cannot support monopolies in any form and must be forced to accept a progressively larger exposure to competitive market forces. Our only forum for that discussion will be the multilateral negotiations under the WTO auspices, toward a universal and permanent solution.
SUMMARY
In summary, supply and demand considerations including quality problems in the U.S. crop, make access to the entire North American wheat crop absolutely essential to remain efficient and competitive. We also remind you that cross-border trade is legal and was a highly supported goal of this Administration when Congress was considering the North American Free Trade Agreement.
For these reasons we strongly encourage you to deny the actions sought by the petitioner. We appreciate any consideration that can be given our comments. If we can provide any additional information please allow us the opportunity to do so.
Sincerely,
North
American Millers' Association
National Grain Trade Council
American Bakers Association
Borden Foods Corp.
American Italian Pasta Company
New World Pasta Company
Barilla America, Inc.
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