Statement
of the
North American Millers' Association
before the
International Trade Commission
October 4, 2002
These comments are in response to the antidumping and countervailing duty (CVD) investigations of hard red spring wheat and durum wheat from Canada.
The North American Millers' Association (NAMA) has 43 member companies operating 167 wheat, corn, oat and rye mills in 38 states and 152 cities. The aggregate production capacity of NAMA's membership is more than 160 million pounds of product daily, which is about 90% of the total U.S. capacity.
This document covers the topics of:
- Historic reasons, including quality and other supply/demand factors which make importing wheat and durum necessary;
- Factors that have reduced spring wheat and durum production;
- Circumstances in 2002 underscore supply and quality concerns;
- Accuracy of import data;
- Over-delivery of quality;
- Likely impact on U.S. industries if duties are imposed;
- Recommendations;
- U.S. trade policy; and
- Summary
Historic reasons, including quality and other supply/demand factors which make importing hard red spring wheat and durum necessary
The most important reason U.S. millers buy wheat from Canada is due to insufficient production here in the U.S. That may seem counterintuitive given the tremendous productivity of U.S. producers. However, for the two classes of wheat in question, it is undeniable. In every year, U.S. durum production is insufficient to meet total usage. That is also the case in nearly every year for hard red spring wheat.
In the case of durum that would be true even if every bushel of durum were of milling quality (grades No. 1 or No. 2 Hard Amber Durum). However, data published by grower groups and available on their various websites show that the portion of the northern plains crop that is of milling quality is always less than 50 percent. Said another way, a northern plains durum crop of 70 million bushels is actually a less than 35 million bushel crop so far as U.S. millers are concerned. Current information shows the levels of No. 1 and No. 2 Hard Amber Durum continues to be low.
For hard red spring, imports from Canada also supplement U.S. supply. In addition, access to Canadian western red spring wheat of a certain protein level allows U.S. millers to utilize more U.S. hard red spring and hard red winter (not less) given the blending attributes of Canadian wheat.
Factors that have reduced spring wheat and durum production
Federal farm programs
There have been major shifts in production occurring in North Dakota. Government farm programs encouraged growers toward soybean production and away from wheat. As a result, North Dakota soybean plantings in 2002 were 2.75 million acres, an increase of 450,000 acres in one year and up from an average of 1.35 million acres between 1996 and 2000.
Between 1996 and 2002, North Dakota spring wheat plantings dropped from 9.6 million acres to 6.9 million acres and production dropped from 314 million bushels down to 168 million bushels. This was largely in response to U.S. government farm policies that discouraged farmers to plant spring wheat.
During that same period, North Dakota durum plantings dropped from 3.0 million acres down to 2.1 million acres and production dropped from 79.38 million bushels down to 50 million bushels. Again, this trend is a result of a combination of federal farm policies that shifted production, as well as low prices in the U.S. market responding to global pressures and macro-economic factors, not imports from Canada.
Conservation Reserve Program
North Dakota and Montana farmers have locked up about seven million acres in the long-term Conservation Reserve Program. We support protecting highly erodible land in a responsible 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.
Karnal bunt
An additional factor impacting total U.S. durum production has been the US' policy on Karnal bunt, a wheat disease of little or no agronomic or grain quality significance. Prior to detection of Karnal bunt in the mid 1990's, the US desert southwest was an expanding area of excellent quality durum production, growing from 70,000 acres in 1991 to 180,000 acres in 1996. Since the imposition of Karnal bunt rules, plantings have been cut nearly in half, down to 94,000 acres in 2001. This, of course, has nothing to do with imports from Canada, but it has affected the supply situation.
Wheat disease pressure
Spring wheat and durum produced in the eastern portions of the traditional growing region are more susceptible to diseases that make the wheat unusable for human consumption. This vulnerability discourages growers from planting wheat.
Circumstances in 2002 underscore supply and quality concerns
The petition to impose duties to restrict wheat imports from Canada in 2002 is particularly ill-conceived in light of supply constraints that the U.S. industry faces, which have nothing to do with imports or prices of Canadian wheat.
- USDA
estimated the size of the U.S. wheat crop at
1.625 billion bushels, down 61 million
bushels from the previous forecast and a drop
of 333 million (20 percent) from the 2001
crop. This means the 2002 crop will be the
smallest crop in 31 years.
- All
wheat stocks on September 1 totaled about
1.74 billion bushels, down 19 percent in one
year.
- 2002
hard red spring wheat harvested acres are
down 10.2 percent, the largest cut since USDA
began keeping that statistic for August and
September. The previous largest reduction in
harvested acres was a 3.5 percent cut.
- Northern plains durum production will decline for the second year in a row, and carryover stocks continue to decline.
- 2002 winter wheat production at 1.14 billion bushels, will be the lowest since 1970. Harvested area was the smallest since 1917.
- USDA estimates the hard red winter carryover stocks at about 400 million bushels, down from 775 million bushels in June. If ending stocks go below 400 million bushels, the stocks-to-use ratio of 19 percent would be the lowest on record.
- An October 2002 US Wheat Associates quality analysis of the hard red spring crop reported "This week's data changed very little from last week with the exception of falling number. The average falling number value of 339 seconds dropped from last week's average of 368 seconds. With this drop in falling number we can tell that there is some sprouting in some areas, especially the northern part of the HRS wheat growing region." (Falling number values are an extremely important indicator of quality. They measure sprouting in the kernel, which is damaging to the baking qualities of the wheat.)
- The October 2002 US Wheat Associates durum crop quality analysis stated "The most significant change this week is an increase in damage from 1.9% last week to 4.3% this week. Damage has ranged from zero to 42% on the collected samples with 11 out of the 116 samples collected showing 10% or more damage. The increase in damage is mostly weather related." (Note that 4.0% damage is the maximum allowed by the USDA grain standards for grade 2. Wheat with more than 10% damage is assigned an official grade of 5.)
The bottom line is that U.S. millers will be facing quantity and quality constraints again this year, and Canadian imports will play and important role in filling that void.
Accuracy of import data
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.
Over-delivery of quality
The protein content of wheat is an important indicator of functional quality. The petitioners allege the CWB gives away protein for free, inferring such practice puts U.S. growers at a disadvantage. In fact, the ITC reported after its last investigation that both c untries over-deliver protein in small amounts. This is to be expected as buyers' contracts routinely specify financial penalties for under-delivery. In fact, the report stated 65 percent of U.S. shipments over-delivered protein while 54 percent of Canadian shipments over-delivered protein.
Likely impact on U.S. industries if duties are imposed
As a practical matter, imposing a CVD would have the effect of severely restricting shipments of wheat to the U.S., or locking them out altogether. That, of course, is the goal of the petitioners. However, that would be a counterproductive remedy. If a CVD is imposed, the wheat it prevents from entering the U.S. would simply be diverted to overseas sales, displacing U.S. wheat sales in those important export markets. That would also have a depressing effect on the world wheat market to the detriment of growers.
Wheat milling in the U.S. is a very mature industry. Despite that maturity, market forces have resulted in the permanent closing of mills comprising more than nine percent of the industry capacity in the last year. Restrictions would have the immediate effect of further damaging U.S. companies, not because of market forces but rather because of government intervention. It would also make the U.S. an even more attractive target for imported products like pasta to the detriment of growers.
If U.S. millers did not have access to Canadian hard red spring wheat and durum to supplement U.S. production the following would occur in the short term. The limited supply of U.S. high quality wheat and durum would need to be blended with lower quality wheat to satisfy quantity demand.
In the case of bread and similar products, this would result in quality that would be noticeably lower than current consumer expectations and sales would suffer.
In the case of durum, pasta quality would be less than the quality readily available in imported pasta. Imported pasta as well as competing foods such as rice and potatoes would take market share and volume away from U.S. pasta producers. Also, pasta companies who tried to maintain high quality raw materials would be at a significant price disadvantage to imported pasta or competing foods.
Demand for U.S. produced durum wheat would decline. In the longer term, production of both semolina and pasta would move offshore where adequate supplies of high quality durum wheat are available at competitive prices. Once again, demand for high quality durum in the U.S. would decline.
Recommendations
In addition to pursuing the elimination of the monopoly powers of STE's, NAMA believes there are additional steps the USTR could take to ease tension surrounding wheat imports. Most of these recommendations were made by the 1995 Canada – United States Joint Commission on Grains but to varying degrees have not been fully implemented.
Equal access to Canadian markets for U.S. growers
NAMA believes there has not been sufficient progress in opening the Canadian market to delivery by U.S. growers. Due to simple supply and demand considerations, Canada is not likely to ever be a major market for U.S. wheat. However, in those years when market conditions are more favorable to such shipments into Canada, cross-border trade should be encouraged.
Varietal control
Canada has a system of varietal control for wheat classes. This restricts the ability of U.S. growers to deliver non-approved varieties into the Canadian marketing system. The Commission recommended “Canada examine the issue of non-registered varieties of grain with the intent that such varieties when grown or received are priced to market value, and that registered and non-registered varieties from U.S. and Canadian producers can be received, handled and transported in the Canadian system in a manner that ensures varietal integrity.” NAMA supports this recommendation.
Infrastructure
The Commission recommended “both countries pursue the long-term goal of providing reciprocal access to the other's grain transportation and handling systems.” NAMA supports this recommendation.
Grading and regulatory regimes
The Commission recommended “the grain inspection authorities in both countries standardize their methods and develop a common basis for the science of measurement.” NAMA supports this recommendation.
End-use certificates
Canada requires that U.S. wheat be accompanied by an end-use certificate as a means of ensuring that varietal controls are maintained. The U.S. also requires end-use certificates for imported wheat from Canada to prevent that grain from being re-exported with the benefit of programs supported by the U.S. government. As the Commission reported, end-use certificates have little functional usefulness, raise costs and are a visible irritant to wheat trade. Since the Commission reported that the U.S. will continue its end-use certificate requirement so long as Canada does, NAMA recommends the elimination of end-use certificates by both the U.S. and Canada.
U.S. trade policy
NAMA has a long-standing policy of strong support for the Administration's stated position to impose disciplines on the actions of State Trading Entities (STE's) during the next Round of World Trade Organization (WTO) agricultural negotiations. As a strategy toward that goal, we do not think the dumping/countervailing duty investigation is necessary or desirable.
In fact, unilateral actions singling out the Board could undermine support for a more reasoned, rules based trading approach to the subject. The worst thing that could happen to the Administration's strategy on STE's would be to make the Canadian Wheat Board (CWB) a sympathetic character to the Canadian farmers who currently side with the forces of reform.
The case for imposing disciplines should remain focused on the monopsony/monopoly powers wielded by STE's and their potential for distorting trade. NAMA feels 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. The only forum for that discussion will be the multilateral negotiations under the WTO auspices, toward a universal and permanent solution.
As is obvious from its many statements, the Administration remains focused on a multilateral solution to the STE issue. Given the nearly monthly policy pronouncements from the Administration (and the growers praise for them), this subject is clearly a top priority and it cannot be inferred that the issue has been relegated to the 'back burner.' The NDWC cannot claim that its concerns are being ignored. Coupling that with the fact that the 2002 wheat crop will be one of the smallest in decades makes the petition especially inappropriate.
Summary
U.S. millers occasionally buy Canadian wheat for specific milling or baking properties and to supplement the insufficient U.S. crop. This is consistent with the North American Free Trade Agreement, the purpose of which was to facilitate the flow of goods and services. To punish participants in that commerce would not be appropriate.
Based on the evidence and on the milling industry's experiences as daily participants in the market, Canadian wheat is not unfairly traded into the U.S. market. In the strongest possible terms we urge the International Trade Commission to deny the petition.
For additional information contact:
Jim
Bair
NAMA Vice President
202.484.2200 ext. 107
jbair@namamillers.org
or
Paul
Green
NAMA trade consultant
202.484.2200 ext. 106
pgreen@namamillers.org
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