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Blockchain in Agricultural Commodity Trading: Dream or Reality?

By Tanner Ehmke, Manager, Knowledge Exchange, CoBank; Reprinted with permission;
View the original report here.

Key Points:

  • Blockchain innovations in agriculture are numerous but have been slow to gain industry-wide acceptance, particularly in global agriculture commodity trading.
  • Previous attempts to digitize trade finance with tools like bank payment obligation (BPO) have been slow to take hold, raising doubts among market participants of new digitalization efforts like blockchain.
  • Commodity agricultural trade faces unique challenges, including the blending of grain along the supply route, and the lack of digital documentation within sections of the supply chain.
  • Digital solutions are quickly evolving, creating an environment where blockchain technologies may be more viable in ag commodity trading in the near future.
  • Investment in storage, transportation, and sensors to segregate and track commodities through the supply chain is necessary to give buyers visibility, with high-value or value-added commodities like non-GMO and organic grain where provenance and tracking are desired.

Introduction

Blockchain, the distributed ledger technology behind cryptocurrencies like Bitcoin where identical records of transactions are stored on multiple computers, is still in its infancy but has seen a flood of pilot programs and proof-of-concepts from companies around the world as they race to harness its power of transparency. The agriculture and finance industries in particular have captured the spotlight as ripe for disruption by blockchain technologies. Adoption of most blockchain technologies across agriculture, however, has been limited to date. Banks and agribusinesses nonetheless remain keen on finding distributed ledger solutions to deploy industry-wide and potentially achieve efficiencies from faster transaction speeds, less cumbersome documentation, and simpler and faster payments between buyers and sellers around the world.

EXHIBIT 1: Process of Domestic Supply Chain for U.S. Soybean Export via Barge; Graphic Source: CoBank

Other digital solutions that promised to transform the commodity trading sector, such as bank payment obligation (BPO), are recent reminders that change can be hard work without industry-wide acceptance. Until numerous roadblocks to blockchain solutions are resolved, such as a lack of a digital ecosystem for paperwork like bills of lading and letters of credit for parts of the supply chain; improvement in global industry protocols in quality; standards in language; investment in storage and transportation for segregation; and technological advancements in sensors to monitor movement of commodities along complex trade routes, industry-wide adoption of blockchain in agricultural commodity trading will struggle to grow beyond proof of-concept. But, if successful, blockchain could be transformative across the sector, bringing value across the supply chain from producers to consumers.

Complex Supply Chains

Blockchain applications for agriculture abound. Ripe.io, GrainChain, AgriDigital, OriginTrail, and IBM Food Trust are just a few of the blockchain-based technologies created for commerce in agriculture. Yet in the complex global agricultural commodity space where crops like corn, soybeans, and wheat are blended from numerous farms and pass through multiple hands before reaching the final destination, a blockchain solution that links the supply chain and creates transparency of transactions from beginning to end remains in idea phase. The biggest challenge for the widespread adoption of blockchain technologies in agricultural commodity trading is the complexity within the chain of custody (Exhibit 1). Grain leaving the farm is often comingled at a country elevator, then blended again at a rail or barge loading facility, then comingled again at the export facility where it is loaded on an ocean vessel for export. At the receiving port overseas, grain will likely be blended even more after off-loading the vessel.

EXHIBIT 2: Grain Ocean Vessels Loaded, by Port Region; Graphic Source: CoBank

Digitizing even portions of the supply chain could create huge cost savings for grain handlers. The physical delivery of documents like bills of lading, letters of credit, contracts, letters of intent, and invoices is cumbersome. While costs of shipping documents are negligible and could be eliminated with a blockchain platform, the cost and risk of important documentation arriving late could be far greater. If documents to the receiver of the grain do not arrive on time, the shipper must pay the cost of demurrage for every day the barge, rail car, or vessel sits idle. Cost of demurrage per barge, for instance, can run about $300/day. Demurrage is a charge for failure to load or unload barges, rail cars, or ocean vessels within the time allowed.

A non-blockchain based digital solution currently is being evaluated by a consortium of agribusinesses for barge freight on the Mississippi River for the purpose of reducing paperwork and creating seamlessness in transactions between companies. Paperwork such as bills of lading and letters of credit have digital forms for ocean vessels, but are in paper form for barge traffic on the Mississippi River, which is an important logistical leg of the global agricultural commodity supply chain. Digitizing paperwork on the Mississippi River export route offers the greatest potential for blockchain solutions in global agricultural commodity trading. The majority of U.S. ocean-going vessels loaded with grain depart from the New Orleans region (Exhibit 2).Barge traffic for grain on the Mississippi River regularly exceeds 15,000 barges/year (Exhibit 3). The plethora of documents in the grain trade that must be digitized for seamlessness across the supply chain includes but is not limited to:

  • Letters of credit
  • Bills of lading
  • Trading slips
  • Certificates on weights, grades, phytosanitary
    specifications, fumigation, and origin.

Additionally, the industry would need agreement on where in the supply chain the data would be committed to the blockchain, such as at the barge or rail car loading facility, or at the farmer’s field. The data on a blockchain for grain traded on the inland river system would then also have to be integrated with systems for ocean-going vessels heading to international markets, thereby requiring international standards for data and governance.

EXHIBIT 3: Grain Barges Unloaded in New Orleans; Graphic Source: CoBank

Disillusionment

Previous attempts to digitalize trade finance were heralded as transformative but have yet to change the status quo in global trade. In recent years, the bank payment obligation (BPO) was created with significant investment and promised faster handling of goods, payment at due date, and faster receipt of trade documents. The lack of wide-spread adoption of BPO has raised doubts among market participants of new digitalization efforts like blockchain. A blockchain platform may not be adopted industry-wide despite significant investment and coordination, particularly in emerging markets where there is frequently a lack of consistency in technology. Or, if successfully adopted, a blockchain platform could itself be disrupted by yet another new technology. Questions about ownership of data on a distributed ledger have also raised concerns. Trading firms want information to be private. If chain of custody information is visible for anyone on the supply chain to see on a distributed ledger where each market participant or node would have access to all documentation, merchandisers will be reluctant to use
a blockchain platform. Who will gain access as a node in the blockchain will require governance and rules, thereby requiring a governing body trusted by all parties of the supply chain to host nodes and validate transactions. Blockchain would not reduce or eliminate the need for regulators. Maintaining the quality of information that is inputted into the blockchain would require a licensed inspector who might need access to the blockchain to see documents and integrate their certification information on grading. A regulator or third party would also still be needed to define responsibilities, rules, and regulations of supply chain participants despite blockchain widely thought of as a technology that would replace trusted intermediaries. With the huge volume of shipments moving outside of the U.S., cooperation from international buyers is required to create the protocols necessary for blockchain in agricultural commodity trading to flourish. However, the current geo-political climate – especially with the U.S. and important trading partners like China – raises doubts about achieving a globalized trading system on a blockchain.

Blockchain’s application in the ag commodity trade may also be limited to only portions of the supply chain. If farmers and country elevators are not incentivized either through cost savings or gain in value, adoption of blockchain will be limited to segments further down the supply chain.

Evolution

Despite major challenges impeding blockchain’s use in the global grain trade, the potential opportunities achieved through a distributed ledger system could be significant. Blockchain could potentially expedite borderless clearing, help facilitate digitally validated chains of custody through choke points like barge and train loading facilities, allow buyers and sellers to follow a shipment through various chains of custody, lower the cost for clearance of goods, eliminate duplicated inspections at ports, lower risk of demurrage, assist with payment, mitigate counter-party risk, and greatly reduce the risk of errors and fraud. Corn, which has the simplest trade specifications under the Federal Grain Inspections Service (FGIS) would be the easiest commodity to adopt into a distributed ledger platform, followed by soybeans and wheat. If provenance is important, sharing knowledge of the entire chain of custody will be necessary for commodities like non-GMO and certified organic. Through investment in grain storage and transportation for segregation, greater transparency in the supply chain to segregate other attributes, including but not limited to:

a. High-oleic oil content for soybeans
b. Protein content
c. Foreign matter
d. Moisture levels

Further investment in electronic sensors to trace, validate, and verify quality attributes, though, would be required to make transparency possible along the complex commodity trading route. With sensors in place, a blockchain platform could evolve to include payment systems within “smart contracts” that automatically execute transactions without human intervention as the product moves through the supply chain. However, a distributed ledger system that shares this information would also need to protect proprietary information held only between buyers and sellers.

Conclusion

The challenges of industry-wide adoption of blockchain technologies for agricultural commodity trading are ample, but so are the potential benefits. Greater visibility in the supply chain will create value for many, but standards will change. The winners in a hypertransparent environment will be those who have the ability to segregate and capture higher value in the commodity chain. Those who struggle to adapt will be those with limited ability to segregate. Experiences with prior efforts to digitize trade have raised the level of caution for blockchain. High investment into blockchain may not result in industry-wide adoption. If successfully adopted, a blockchain platform could crowd out small players. It could also be disrupted by yet another new technology.

To be successful, a blockchain platform bringing transparency to an entire supply chain would need to be private and secure from outside parties. Only invited parties or nodes would be allowed to view the data on transactions for traders to be confident that proprietary information is not made public. This would require a governing body to determine who is allowed to participate on the blockchain.

Global standards and protocols will also need to be established. Given the current geo-political and global trade environments, such an evolution in international cooperation will likely be years in the making.

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Renewing a Partnership of Affection and Action with Mexico’s Flour Millers

By Steve Mercer, USW Vice President of Communications

When U.S. Wheat Associates (USW) was planning to hold its 2019 Mexico Wheat Trade Conference June 2 to 4, 2019, no one anticipated that the threat of new tariffs on Mexican imports would come just two days before the meeting started.

“What we thought was an unfortunate coincidence turned out to be a fortunate opportunity to address the trade policy concerns face to face with our Mexican customers,” said USW President Vince Peterson. “Talking through the potential concerns that way allowed us to move on to talk about how we can work together to navigate the policy issues and increase the efficiency and value of Mexico’s U.S. wheat purchases. We found that our shared challenges bring us closer together.”

2019 Mexico Wheat Trade Conference Cancún

 

In the just ended marketing year 2018/19, Mexican flour millers imported more U.S. wheat than any other country. The flour millers that attended the conference in Cancún represented about 80% of the 3.3 million metric tons (MMT) total 2018/19 commercial sales to Mexico reported by USDA as of May 30. USW Chairman Chris Kolstad, a wheat farmer from Ledger, Mont., thanked the millers for this and past business, and assured them that “USW and the National Association of Wheat Growers will do everything in our power to ensure that the USMCA Agreement on Trade is approved.”

Kolstad said the North American Free Trade Agreement (NAFTA) served both countries well and the United States-Mexico-Canada Agreement (USMCA) will continue to benefit the three countries with increased trade and new economic opportunity. His focus set the stage for insight from other conference speakers into why approval of USMCA is so important. They all agreed that the agreement will be implemented — but they do not know when it will happen.

Interviewing conference attendee, Francisco Salas Romero, Harinas.

Interviewing conference attendee, Francisco Salas Romero, Harinas.

“NAFTA has integrated the U.S. and Mexican economies steadily over 30 years,” said speaker Juan Carlos Baker, who served on the Mexican government’s USMCA negotiating team and now is a private trade consultant in Mexico. “But recently, the negative voices about NAFTA and USMCA have been the loudest. We must tell the positive stories about our trade benefits and the USMCA. I believe we will have a new agreement and will be able to continue trade, but how open it will be is up to us to determine.”

José Luis Fuente, President of Camara Nacional de LA Industria Molinera de Trigo (CANIMOLT), offered an inspired appeal to work together to tell officials in both countries that export opportunities must be improved, not restricted.

José Luis Fuente, President of Camara Nacional de LA Industria Molinera de Trigo (CANIMOLT)

José Luis Fuente, President of Camara Nacional de LA Industria Molinera de Trigo (CANIMOLT)

“We know that U.S. wheat farmers and U.S. Wheat Associates have done many things to tell this story,” Mr. Fuente said. “We have a partnership based on affection that is backed by actions. But actions are more needed now in this unusual trade environment.”

A large portion of the conference focused on other actions that can help facilitate U.S. wheat trade between Mexico and the United States. Two speakers focused on how millers can manage price risk. Christopher Lawrence, Senior Market Strategist with Rabobank, covered how best to hedge exchange rate exposure between U.S. dollars and Mexican pesos. Austin Damiani, an independent wheat futures trader from Minneapolis, Minn., provided valuable insight into hedging price risk.

<em>Austin Damiani, independent trader, Minneapolis Grain Exchange</em>

Austin Damiani, independent trader, Minneapolis Grain Exchange

“It is very important to consider locking in prices with futures,” Damiani said. “I am a speculator who bets on how the market will move. That is a risky activity. But I believe that as wheat buyers, if you are not hedging you are speculating.”

Panel discussion speakers: Justin Gilpin, CEO, Kansas Wheat; and Luis Olivera, Executive Vice President Sales, Ferromex, Mexico City.

Panel discussion speakers: Justin Gilpin, CEO, Kansas Wheat; and Luis Olivera, Executive Vice President Sales, Ferromex, Mexico City.

With so many logistical options for delivering wheat to Mexico, USW Regional Vice President Mitch Skalicky and his colleagues based in Mexico City who planned the conference emphasized commercial rail issues and opportunities in the program. A panel discussion on optimizing rail shipments and minimizing additional expenses included the President of Kansas City Southern Railroad-Mexico, and the Executive Vice President of Sales for Ferromex (Mexico’s national rail system). These two private sector companies are the principal railroads who operate Mexico’s rail lines through long term concessions that they have with the Government of Mexico. Representatives from the Mexican government and U.S. wheat grower organizations were also included on the panel. Gabriel Letona of Advan Sea in Panama City, Panama, also discussed the comparative advantages of FOB and CIF ocean freight contracting.

Presentations on contracting to receive U.S. wheat of superior value and how the U.S. farmer co-operative system has evolved as a major source of efficiently delivered wheat and grain exports rounded out what participants deemed as a very welcome and successful conference.

Chuck Conner, CEO, National Council of Farmer Cooperatives

Chuck Conner, CEO, National Council of Farmer Cooperatives

“We have 14 farmers here from 13 different states and U.S. Wheat Associates staff from 3 offices to show you that we take your business seriously,” Chris Kolstad told the millers. Those farmers, state commission members and USW, he added, “are all united in our desire and goal to earn your full trust in the United States as your primary source of imported wheat.”

*Header Photo Caption: Panel on “Optimizing Rail Operations of U.S. Wheat Shipments and Minimizing Additional Expenses for Mexican Importers.

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Wheat food products to illustrate Wheat Industry News

State Wheat Commission Members Support Wheat Farmers and Engage with Consumers

U.S. Wheat Associates (USW) is supported by a highly successful public-private partnership that includes 17 state wheat commissions. Wheat producers contribute a portion of their wheat sales (either by bushel or by production value and known as a “checkoff” program) to their state wheat commission and contribute a portion of the checkoff to join USW. On average, U.S. wheat farmers contribute about one third of a penny per bushel ($0.0032) to USW. In return, USW’s works closely with its state wheat commission members to carry out its mission “to develop, maintain, and expand international markets to enhance the profitability of U.S. wheat producers and its value for their customers.”

On the state level, these commissions invest funds in various educational projects and ongoing communications efforts to support wheat farmers and engage with consumers, domestically and overseas. We thank USW state commission members’ commitment to building demand for U.S. wheat and highlight some of their activities and resources here.

  • Find more information about the Arizona Grain Research & Promotion Council’s news and activities here.

 

 

  • The Colorado Wheat Administrative Committee posts weekly crop progress reports on its website and other news and activities on Facebook and Twitter.

 

  • By using the registered tagline ‘Quality wheat simply grown’ and a new, more modern logo, Idaho wheat farmers are connecting on a more personal level with consumers who want to know their food is grown naturally on family farms. Visit the Idaho Wheat website here and follow its news and activities on Instagram, Facebook and Twitter.

 

 

 

 

 

 

 

 

  • The Oklahoma Wheat Commission recently partnered with the Oklahoma State University Food & Agricultural Products Center for a day-long event called All You Knead to Know – An Artisan and Grain Workshop. The new, annual event walked participants through the journey wheat goes on from field to fork. Read more about this event here and stay up to date with the commission’s other news and activities on Facebook.

 

  • The Oregon Wheat Commission is showcasing wheat growers and Oregon State University (OSU) researchers through videos to help connect consumers to agriculture. The first video features Dr. Hagerty from the Columbia Basin Agricultural Research Center (CBARC) in Pendleton, Ore. View the video here and follow along with the commission’s other new and activities on Facebook and Twitter.

 

 

 

  • The “Wheat All About It” weekly podcast, hosted by the Washington Grain Commission, features guests from all over the U.S. wheat industry discussing important current issues. Listen to the podcast here. The commission also shares its news and activities on Facebook and Twitter.

 

  • Find more information about the Wyoming Wheat Marketing Commission’s news and activities here.
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Wheat Industry News

Recent news and highlights from around the wheat industry.

Quote of the Week: “Storms are always very concerning for those of us in agriculture. It was very unfortunate, especially for our wheat producers here in Oklahoma, to have this much rain this close to harvest.” – Blayne Arthur, Oklahoma Secretary of Agriculture, on the effects of constant rain and severe flooding that may significantly reduce final wheat yield potential in Oklahoma and many other states this year.

Best Wishes to Ben Conner who is leaving his position as U.S. Wheat Associates (USW) Vice President of Policy on June 7, 2019, to become a partner at DTB Associates, Washington, D.C. Continuing the legacy of his predecessors at USW, Ben’s work the past five years has focused on reducing barriers to international trade for U.S. wheat farmers. Notable examples include Ben’s successful stewardship of USW’s positions on: WTO cases against China’s non-compliant domestic wheat support and its imported wheat tariff rate quota (TRQ); Brazil’s agreement to implement its WTO obligation to import 750,000 metric tons of wheat duty-free from non-Mercosur countries; potential long-term consequences from using a Section 232 national security exemption to implement tariffs on steel and aluminum imports; and unfair restrictions on U.S. farmers when selling their wheat across the border to nearby Canadian elevators compared to Canadian farmers who sell their wheat to U.S. elevators. We thank you, Ben, for all you’ve done for U.S. wheat producers, and for being such a dedicated and supportive colleague.

Spring Wheat Planting Progress. North Dakota Wheat Commission reported that farmers make some progress planting hard red spring (HRS) wheat since last week. Percent of the U.S. spring wheat crop planted has now reached 84 percent, compared to 91 percent on average. However, some acres will not get planted due to overly wet conditions in South Dakota and southern North Dakota. Read more here.

U.S.–Colombia FTA Pays Dividends. From USDA’s Foreign Agricultural Service, since the U.S.-Colombia Trade Promotion Agreement (CTPA) entered into force May 15, 2012, U.S. agricultural exports to Colombia nearly tripled to $2.9 billion in 2018. Colombia, the third-largest economy in South America, now purchases half its agricultural imports from the United States. Preferential access from CTPA and a strong and changing Colombian economy will keep demand for high-quality U.S. wheat and other products strong. Please click here to read more.

Borlaug Dialogue. Amb. Kenneth M. Quinn, president of the World Food Prize Foundation, recently announced the opening of registration for the 2019 Borlaug Dialogue International Symposium, Pax Agricultura: Peace Through Agriculture, Oct. 16 to18, 2019, in Des Moines, Iowa. Through the Borlaug Dialogue, the World Food Prize Foundation helps build alliances in the struggle against world hunger and malnutrition. Read the release here.

Sincere Sympathies to our colleague Joshua Tonsager​, Vice President of Policy and Communications with the National Association of Wheat Growers, and his family on the passing of his father Dallas Tonsager, chairman of the U.S. Farm Credit Administration since 2016, former Undersecretary for Rural Development at USDA and a South Dakota farmer. Read more here.

Baking with Whole Wheat and Whole Grains Course. The Northern Crops Institute is hosting a course focused on the utilization of whole wheat flour made from hard red spring (HRS) wheat and how to incorporate other whole grain ingredients into wheat-based products. The July 30 to Aug. 2, 2019 course will be at its facilities in Fargo, N.D. Click here to learn more and register by Monday, July 8.

IAOM-KSU Flour and Dough Analysis. The IAOM-KSU Flour and Dough Analysis short course will be held at the IGP Institute in Manhattan, Kan., Sept. 10 to 12, 2019. The course will focus on flour and dough analysis practices and methods and correct interpretation and understanding of the results. Click here to learn more and register.

Subscribe to USW Reports. USW publishes a variety of reports and content that are available to subscribe to, including a bi-weekly newsletter highlighting recent Wheat Letter blog posts, the weekly Price Report and the weekly Harvest Report (available May to October). Subscribe here.

Follow USW Online. Visit our page at https://www.facebook.com/uswheat for the latest updates, photos and discussions of what is going on in the world of wheat. Also, find breaking news on Twitter at www.twitter.com/uswheatassoc and video stories at https://www.youtube.com/uswheatassociates.

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Increasing U.S. Rail Costs Hurt the World’s Wheat Buyers

By Claire Hutchins, USW Market Analyst

Railroad rates and charges paid by customers who ship wheat and other grains make up a large portion of basis and have a direct effect on the price overseas buyers pay for U.S. wheat. Unfortunately, the cost of shipping wheat by domestic rail has been increasing at a rapid pace.

U.S. Wheat Associates (USW) and many of its state wheat commission members are spending more time investigating and commenting on the potentially adverse effects of increasing rail rates and separate charges on our overseas customers, shippers and even local farmers.

U.S. railroads are a crucial part of the most efficient grain supply system in the world. The rail system fulfills an essential logistical function that neither grain handlers nor farmers can perform on their own. Wheat must compete for limited rail capacity with other grains as well.

USW, however, has learned that since June 2014, the cost of wheat shipments has increased substantially, due at times to higher basic rates for shipping wheat and to added “demurrage” and “accessorial” (D&A) charges by Class 1 railroads (those with the largest systems). Demurrage charges occur when shippers do not receive, load or unload freight within a certain time period determined by the railroads. Accessorial charges are added to base transportation charges and can include demurrage, as well as costs to weigh rail cars, diversions from normal routes and other costs.

Recently, USW observed how agriculture is not the only industry negatively affected by these additional charges. USW joined more than 100 representatives across many sectors May 22 to 23, 2019, at a hearing held by the U.S. Surface Transportation Board (STB) to assess the fairness, reciprocity and efficiency of railroad D&A charges. The STB is a federal regulatory board that has broad economic oversight of U.S. railroads, trucking companies, water carriers and other transportation groups.

At the hearing, diverse stakeholder voices united under two common themes: D&A charges heavily favor Class 1 railroads and do little to improve overall service provided by railroad companies to shippers, receivers and intermediaries. Many shippers at the hearing said circumstances often prevent them from meeting what they consider strict railroad loading and unloading schedules, thus incurring the D&A charges. In some cases, stakeholders said they had to invest tens of millions of dollars in new infrastructure to accommodate railroad scheduling to avoid further demurrage costs.

In the case of wheat, as rail costs increase, the grain handlers may try to recover these costs by offering higher grain prices to terminal or export elevators and, some in the industry believe, by offering lower prices to farmers. As basis increases, overseas buyers must pay more for all classes of wheat out of the Gulf and the Pacific Northwest and that affects demand.

As rail costs increase, the grain handlers may try to recover these costs by offering higher grain prices to terminal or export elevators and, some in the industry believe, by offering lower prices to farmers.

Representatives from Class 1 railroads also attended the STB hearing and made the point that efficiency is good for all parties in the supply chain. They unilaterally agreed that D&A charges incentivize shippers to make more efficient loading and unloading decisions, which improves overall efficiency.

USW hopes the STB will carefully consider industry perspectives when assessing the fairness and efficiency of D&A charges because wheat producers and customers alike are adversely affected by increasingly high rail costs. USW believes lower rail costs could help U.S. wheat be even more competitive in a global marketing environment where only a small change in cost can make a big difference for farmers and their customers.

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New Crop HRW Demand is Up Significantly

By Claire Hutchins, USW Market Analyst

As of May 16, total U.S. hard red winter (HRW) commercial sales for delivery in new marketing year 2019/20 reached a record 1.08 million metric tons (MMT). Weekly commercial sales of HRW for delivery in 2019/20 since early March 2019 are, on average, more than four times higher than new marketing year sales in 2017/18 for delivery in 2018/19 and are double each week’s 5-year average. Significant increases in new marketing year HRW exports to Algeria, Iraq, Nigeria, Saudi Arabia and Thailand contribute to the boost in 2019/20 sales.

Analysts attribute higher demand volume to ample exportable supplies and competitive global pricing.

U.S. Wheat Associates (USW) publishes a weekly commercial sales report every Thursday on Facebook, Twitter and here on its website.

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A Trade Policy Win for the U.S.-China Wheat Chain

By Ben Conner, USW Vice President of Policy

It has been my pleasure these past four years to contribute content to this newsletter but, unfortunately, all good things must come to an end, as this will be my last Wheat Letter article as a U.S. Wheat Associates (USW) colleague. I am grateful especially to the half dozen (or so) regular readers of my articles. You may not like agricultural trade policy as much as I do, but it is a critically important part of this industry so thank you for working to understand it.

There are several issues I could have chosen to write about for this final article, but during my tenure at USW there has been no market as affected by trade policy issues as China. One of the first trips I took for USW was to Geneva, Switzerland, and the World Trade Organization (WTO) in 2015. I was there to discuss the market distortions caused by China’s domestic support policies, an issue first identified and pursued by my predecessors at USW. Coupled with those policies was an approach to tariff rate quota (TRQ) administration that had — to that point — dashed our hopes of China becoming the world’s largest importer of high-quality wheat (the TRQ quantity is for 9.636 million metric tons).

More recently, the trade friction between the United States and China has stopped virtually all imports of U.S. wheat in China. The additional 25 percent tariff on U.S. wheat imposed in response to U.S. tariffs has proven to be prohibitive. A market that could now be among our top import markets with steady demand of more than a million metric tons per year was reduced to practically nothing. As I noted before, trade policy matters to farmers and importers alike.

However, USW has always taken a long-term view and our trade policy goals with China are no exception. We encouraged the U.S. government to launch the domestic support and TRQ trade cases not due to any animus towards China, but because we want to be closer trading partners. What was holding us back were policies that are not consistent with WTO rules, a fact confirmed again in the TRQ case by the WTO dispute panel.

The WTO panel determined that China administered its wheat TRQ in a way that was not “transparent, predictable, and fair” using “clearly specified administrative procedures.” The panel sided with the United States on most of its arguments, and came to the following conclusions:

  • Basic eligibility criteria – It is not clear from China’s regulations what would qualify an entity to receive quota allocation for wheat. China admitted to the panel that it relies on the entity not being placed on the Credit China blacklist, rather than the published eligibility criteria, but this is not made clear to applicants.
  • Allocation principles – In determining how China allocates the TRQ, the panel found a disparity between its written principles and practice. TRQ quantities are allocated based on actual import performance, which supersedes all other factors, though China does not make this practice clear to applicants.
  • Reallocation procedures – China has two conflicting measure on reallocation, with one document setting out a first-come, first-serve method for reallocation, but a separate document referencing other allocation principles.
  • Public comment process – China accepts public comments on the TRQ allocation process, but it is not clear at all how these comments are used, and so China fails to meet its obligations to administer TRQs transparently and through clearly specified procedures.
  • Administration of STE and non-STE portions – 90 percent of China’s wheat TRQ allocation goes to state trading enterprises (STEs), i.e. COFCO. If a private entity does not use its TRQ allocation, it must return it to NDRC, but if COFCO doesn’t import 90 percent of the TRQ (it never has) there is no requirement to return unused quota. The panel found that COFCO’s unused quota should be returned and reallocated – so in 2018 COFCO should have returned 6.8 million metric tons (MMT) that could have been reallocated to non-STE end users.
  • Usage requirements – China also inhibits the filling of TRQs by requiring recipients to process in the mill specified in the application or be subject to penalty if the wheat was moved to another mill or sold to another company irrespective of commercial conditions. The panel’s view is that this would cause users to be overly cautious in their applications and import less than they would otherwise.

Bringing these and other policies discussed by the panel policies into compliance and removing retaliatory tariffs should allow China to grow into one of the largest and most consistent markets for U.S. wheat, increasing the availability of high-quality products provided by China’s food processing sector. This is the objective that USW will continue working towards long after I have handed the organization’s policy responsibilities to someone else and, more importantly, long after the trade tensions between our countries subside.

[Editor’s Note: Ben Conner is leaving USW to join DTB Associates, a Washington, D.C., firm providing consulting, legal and business services in trade, agricultural policy and legislation.]

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Managing the New U.S. Wheat Crop: A Natural Ingredient That Changes Each Year

By Mark Fowler, USW Vice President of Global Technical Services

[Editor’s Note: This is the first in a series of articles to help flour millers transition efficiently and effectively from old to new crop wheat.]

As U.S. wheat farmers finally start harvesting their 2019 winter wheat crop, flour millers around the world turn their focus toward the quality characteristics of the new crop. Each year, millers must remember that wheat is a natural product, so its “millability” (how efficiently wheat can be turned into wheat flour) and quality are affected not only by the predominant and new varieties, but also the growing conditions for the wheat you are buying.

As a former commercial flour miller and milling instructor, I considered this as an ideal time to think about what impact the potential changes in the crop may have on the techniques required to transition new crop wheat on to the mill.

Mark Fowler (right), USW Vice President of Global Technical Services, is a former commercial flour miller and milling instructor at Kansas State University’s IGP Institute, here with millers in Taiwan.

To minimize changes to key quality characteristics their end users need to make a variety of bread and other products from wheat flour, millers will face the challenge of blending new crop with old crop wheat during the initial transition period. Blending wheat to maintain protein percentage and flour functionality characteristics gets the most attention as a matter of course. However, millability is affected by several quality characteristics. Moisture, test weight, kernel size and kernel hardness are just a few of the factors that millers must evaluate during this time of transition to optimize the quantity (extraction rate) and quality of the flour they will produce.

As U.S. Wheat Associates (USW) reports on the progress and quality of the 2019 U.S. wheat harvest over the next several weeks, our team of technical experts will provide a series of insights to help our flour miller customers prepare for integrating new crop wheat along with some interpretation of the potential impact of wheat quality results for the millers and end users. We will review such topics as wheat and flour blending, cleaning, tempering and conditioning and end use functionality.

Understanding the impact of the new wheat supply and preparing to make the necessary changes is the key to a successful crop transition. As always, USW technical experts are available to answer any question our customers may have by contacting their local USW office, or by sharing a question in our new “Ask the Expert” section of our website at https://www.uswheat.org/market-and-crop-information/ask-the-expert/.

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Oregon Farmer Gives U.S. Wheat Customers Lasting Memories of Their Visit

By Amanda J. Spoo, USW Director of Communications

“How’s the weather up there?” That was Ric Pinca’s first question to Darren Padget when they met. At a height of six feet, eight inches (203 cm), Darren towers over Pinca’s five-foot, six-inch (168 cm) frame and most people that he meets. Pinca, the executive director of the Philippine Association of Flour Millers, recalls, “I couldn’t help but ask. But what has impressed me the most since then about this gentle giant is his passion for farming, commitment to his customers and a willingness to go the extra mile to resolve issues that affect the buyers of the grains he and fellow U.S. wheat farmers grow.”

Pinca is just one of several U.S. wheat overseas customers that have visited Padget’s farm in Oregon’s Sherman County. Every year, U.S. Wheat Associates (USW) sponsors several trade delegations of overseas buyers, millers, bakers and government officials to visit the United States to learn about the U.S. grain marketing system and see how the wheat moves from the farm to the ports. Conveniently located two hours east of Portland, where many of the delegations visit because of its proximity to many stops along the supply chain, Padget’s farm has become a common destination. Over the past decade, he and his wife Brenda have hosted an estimated 25 groups, mostly from Asia and Latin America, including a large group from the 2016 Latin American and Caribbean Buyers Conference.

“Customers enjoy making a direct connection with the farmer because they really want to know where their food comes from and value learning about the personal commitment to high quality, safety and sustainability that U.S. farmers work toward,” said Steve Wirsching, USW Vice President and West Coast Office Director. “The support and involvement of our state wheat commissions with these delegations is a vital part of creating an eye-opening experience for them.”

A Day on the Farm

On the way out to the farm, trade delegations often visit an export facility in Portland before heading up the Columbia River to a barge loading terminal in The Dalles, Ore. During harvest, the delegations can see how soft white wheat from local farms is unloaded, separated by protein class and other quality characteristics, and loaded on barges for shipment to Portland. Next, they stop at the local cooperative seed plant where they are shown how the certified seed system works and how it helps maintain the high wheat quality that customers expect. Once they reach Padget Ranches, where their son Logan is the fifth generation, Darren shows them the equipment, the shop and repair facilities and eventually the wheat fields. He makes it a point to emphasize the role farm practices play in producing quality wheat.

“When we first started hosting groups, I didn’t know what they wanted to see, so it’s been a learning curve for us to see what makes the biggest impact during their visit,” said Padget. “One way we have made a connection is through our GPS technology. Everyone has a smartphone, so even if you live in downtown Tokyo you understand that technology. So, we invite them up into the combine, turn on the autosteer and show them how we use that same technology for precision agriculture.”

Padget explains that some of the biggest “aha” moments are found in things that he takes for granted such as drinking water out of the yard hose, which comes from a well on the edge of the wheat field or taking in a view without buildings in the skyline.

“I was so surprised and impressed when I visited his farm,” said SW Yong, a purchasing manager with Daehan Flour Mills in Korea. “First by the farm size and second by his work. He tries hard to get better results for both yield and quality. We had an unforgettable experience when he let us operate his tractor and showed us how farm machinery has developed in the United States.”

Joe Sowers, USW’s Regional Vice President for the Philippines and Korea, was one of the first USW staff members that Padget met with nearly 15 years ago to learn more about USW’s mission and the importance of developing relationships with overseas customers.

“Darren consistently goes well above and beyond the call of duty with trade delegations, generously offering his time and resources to host overseas guests at his farm on the Columbia Plateau above the John Day river,” said Sowers. “They get an up-close view of the spectacular Pacific Northwest terrain where the wheat they purchase is grown. Darren’s investment builds trust and respect with buyers while at the same time travellers are enjoying a once in a lifetime, magical experience in the beautiful surroundings of U.S. soft white wheat country.”

Bridging the Gap

Padget started his involvement in wheat leadership with the Oregon Wheat Grower’s League and the National Association of Wheat Growers, before eventually joining the Oregon Wheat Commission. Currently, he serves on the USW Board of Directors as Secretary-Treasurer and is slated to serve as Chairman in 2020/21.

When he hosts trade delegations on his farm, Padget invites friends and neighboring farmers over for a barbeque, to bridge the gap between the farmer and the end-user. Padget says the involvement of his neighbors – who are always quick to lend a helping hand in preparing the meal – really makes the day unique.

“My goal is to show as many of my neighbors as I can what USW does for the farmer to build support for its activities,” said Padget. “They have really embraced the experience and do an excellent job of interacting with our guests. People take time away from busy days on the farm to be here.”

“My visit was an afternoon of fun and new friendships made as some of Darren’s neighbors joined in and brought more food than my tummy could hold,” said Pinca. “In Darren’s world, a neighbor is a fellow farmer who lives about 10 miles or more down the road. It was really nice of them to take time off from their farm chores just to meet us.”

Last summer, Padget and his neighbors started taking some of the visiting groups out on their boats on the Columbia River — a fun past time for their own families.

“When you are out on the water, we find that the conversations are different, even compared to when we are standing in the field,” said Padget. “When a barge goes by and you also have a railway on both sides of the river, the wheat is moving right past them and odds are some of that grain is destined for them. One guest from Singapore told us that she never imagined herself dangling her feet in the water off the side of a boat. That was an eye-opening comment for us on the value of our natural resources. These boat rides have created an intimate setting where you learn a lot more from each other.”

For Padget, it has been interesting to watch his guests and neighbors grasp the experience with both hands and start to put faces and names together and understand the value of USW.

“When these buyers get a shipment of wheat they might say, ‘hey, maybe this came from Ryan Thompson’s place, I remember being there,’ because it really is about forming relationships. I mean you have to have a good quality product and economics always dictates things in the end, but people wanting to feel good about what they are buying and doing is a big part of doing business, whether its buying a latte from your local barista or buying a cargo of wheat out of Portland,” said Padget. “USW is a worldwide organization that focuses on very localized grass roots efforts, so it is sometimes hard to put those together in words. But USW is there for technical and trade service and really helps facilitate those relationships. Sharing what the USW staff does for U.S. wheat farmers and the places they go on our behalf is really rewarding to me.”

Making Memories

When Padget travels overseas and reconnects with the people he has hosted on his farm — often by sharing another meal where products made from U.S. wheat are served — it makes what he does come full circle.

“When someone says, ‘I was on your farm, it was the best part of my trip, thank you,” that is so rewarding,” said Padget. “That is why I do it. When you are half a world away and someone remembers standing on your dirt, that is pretty neat. Those experiences are what they are still talking about. So, you know it is not time wasted, but time well spent.”

“I have met a lot of U.S. wheat farmers in my three decades in the flour milling industry,” said Pinca. “They share the same ardor, industry and a common desire to reach out to their customers and processors of the grains they produce. That is what makes partnerships last.”

“We’ve had visitors from a lot of different countries, and I hope that we continue to host people from other parts of the world,” said Padget. “Without the support of family, friends and neighbors, it would be just another visit; but because the service USW provides sets the U.S. wheat industry above our competitors, you want to help them make unforgettable memories while they are here. Making memories makes it worth it.”

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Wheat Industry News

Recent news and highlights from around the wheat industry.

Quote of the Week: “U.S. wheat growers are facing tough times right now, and these additional tariffs will continue to put a strain on our export markets and threaten many decades worth of market development. Further, members from both sides of the aisle and chambers have reservations about the Section 232 tariffs in the U.S.-Mexico-Canada Agreement. Today’s announcement adds another political barrier, which may hinder Congressional consideration of the agreement.” – Ben Scholz, National Association of Wheat Growers President and Texas Wheat Grower, commenting on the latest actions in the U.S. trade conflict with China in a news release.

IGP Institute Names Associate Director. Grain Processing and Flour Milling Manager Shawn Thiele is promoted to Associate Director after having served as the Interim Associate Director since 2018. A Kansas State University milling science graduate, Thiele first joined IGP as the operations manager for the Hal Ross Flour Mill. In this new administrative role, Thiele will serve as the liaison with IGP’s stakeholder partners. Read the full announcement here.

Agricultural Export Expansion Act. On Tuesday, May 14, U.S. Senators Michael Bennet (D-CO) and John Boozman (R-AR) introduced the Agricultural Export Expansion Act (S.1447), legislation that would make it easier for American farmers to sell their goods to Cuba by removing restrictions on private financing for U.S. agricultural exports to the island nation. Read the full release here.

Borlaug Dialogue. Registration is Now Open for the World Food Prize 2019 Borlaug Dialogue International Symposium, Oct. 16 to 18, 2019, in Des Moines, Iowa. Known informally as the “Borlaug Dialogue,” each year brings together over 1,200 people from more than 65 countries to address cutting-edge issues related to global food security and nutrition. The three-day conference convenes a wide array of scientific experts, policy leaders, business executives and farmers and has been called “the premier conference in the world on global agriculture.” Through the Borlaug Dialogue, the World Food Prize Foundation helps build alliances in the struggle against world hunger and malnutrition. Click here to learn more.

Flour & Ingredient Quality Webinar. Dr. Jayne Bock, Wheat Marketing Center Technical Director, and Dr. Lin Carson are hosting a live, online-seminar focused on flour and other key ingredients to improve products and processes. Click here for more information and to register. To prepare for the webinar, listen to Dr. Lin and Dr. Jayne’s podcast that cover wheat breading and classes, milling flour, flour composition and functional ingredients. Listen here.

Baking with Whole Wheat and Whole Grains Course. The Northern Crops Institute is hosting a course focused on the utilization of whole wheat flour made from hard red spring (HRS) wheat and how to incorporate other whole grain ingredients into wheat-based products. The July 30 to Aug. 2, 2019 course will be at its facilities in Fargo, N.D. Click here to learn more and register by Monday, July 8.

IAOM-KSU Flour and Dough Analysis. The IAOM-KSU Flour and Dough Analysis short course will be held at the IGP Institute in Manhattan, Kan., Sept. 10 to 12, 2019. The course will focus on flour and dough analysis practices and methods and correct interpretation and understanding of the results. Click here to learn more and register.

Subscribe to USW Reports. USW publishes a variety of reports and content that are available to subscribe to, including a bi-weekly newsletter highlighting recent Wheat Letter blog posts, the weekly Price Report and the weekly Harvest Report (available May to October). Subscribe here.

Follow USW Online. Visit our page at https://www.facebook.com/uswheat for the latest updates, photos and discussions of what is going on in the world of wheat. Also, find breaking news on Twitter at www.twitter.com/uswheatassoc and video stories at https://www.youtube.com/uswheatassociates.

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