Changing global attitudes on wheat quality
August 01, 1997
by Teresa Acklin
In a recent survey, wheat importers make known their priorities amid privatization of grain marketing systems.
By Dennis G. Stephens
Editor's note: This article is adapted from a presentation given at the International Wheat Quality Conference held in May in Manhattan, Kansas, U.S. The conference brought together 330 scientists, economists, grain handlers, traders, flour millers and bakers from 31 countries to analyze all aspects of wheat quality, from biochemical components and breeding to storage, testing, grading and marketing issues. In addition, 95 technical posters on related topics were on display.
Conference organizers were Kansas State University, the American Institute of Baking and the Grain Marketing and Production Research Center of the U.S. Department of Agriculture's Agricultural Research Service. Endorsers of the conference were the American Association of Cereal Chemists, the International Association for Cereal Science and Technology and the American Society of Agricultural Engineers.
Rapidly changing global marketing systems are having a profound impact on the world wheat market. Over the past decade, the world's grains and oilseeds marketing systems have been in a period of dramatic change that probably will not conclude until countries respond to the results of the next round of World Trade Organization negotiations early in the next century.
Countries rapidly are dismantling monopoly import marketing systems and allowing secondary processors to import according to their own requirements. Farm support programs are being decoupled from market prices to allow farmers' production decisions to be based on market signals, not government programs.
Two key factors are driving change: fiscal restraint forced by high government deficits and trade liberalization created by international trade agreements. Most governments are withdrawing from agriculture. In nearly all cases, the trend line is toward privatization and deregulation. The only questions appear to be how far and how fast.
Increasingly, market forces, not government policies, will drive production, handling, transportation, marketing and processing decisions. These changes are altering trade patterns and increasing demand for specific wheat qualities.
Until recently, most wheat importing countries outside the United States and Europe had state buying agencies or flour millers associations endowed by governments with import monopoly powers. The marketing systems were characterized by little competition among companies as all mills received the same quality of wheat at the same price under quota systems. Usually the flour price was also fixed.
These systems fostered many small companies, the number dependent upon whether or not the country produced wheat. In Korea, for example, where little wheat is produced, the milling industry peaked in 1971 at 24 mills. In Brazil, where considerable wheat is produced, there were 400 mills in 1967. In Japan, still operating under a state buying system, there are about 200 milling companies today.
Most importing countries have either deregulated or are in the process of deregulating their wheat import systems to allow mills to import wheat according to their own requirements. Different countries are at different stages in the change process, but the trend clearly indicates the demise of government import agencies or trade association import monopolies protected by governments.
Countries such as Korea began the change a decade or more ago. Other countries such as Brazil and Mexico have changed within the past five years, while others, like Taiwan, are in the process of change. A few countries, such as Japan and China, have made little or no change in their wheat import monopoly systems. But for most wheat importers, deregulation of the wheat marketing system has been extensive.
Insights into the effects on wheat importers have come from research conducted in 1996 by The Exchange Consulting Group of Winnipeg, Manitoba, Canada. The study was made on behalf of the Western Grain Marketing Panel, which was created to advise the Canadian government on possible modifications to western Canada's wheat marketing system. An eight-page questionnaire on grain marketing issues was created by the consultants and was distributed to buyers in 17 countries. In addition, the questionnaire formed the template for detailed interviews with importers in Korea, Japan, Thailand, Taiwan, China, Mexico, Brazil and Colombia.Three Evolutionary Stages
In nearly all countries in which deregulation has occurred, a three-stage evolutionary response can be identified.
During stage one immediately following deregulation, competition among mills increases dramatically. Individual mills, free of quota systems determining market shares, attempt to increase sales by placing greater emphasis on quality to meet specific customers' end use requirements. In Korea for example, after deregulation some mills increased the number of different flours produced from about 12 to more than 70.
To achieve specific flour qualities demanded by their customers, mills often begin to source wheat from different origins. Most mills import through multinational trading companies. But many small and medium sized companies soon have difficulties operating in a deregulated market characterized by increased competition.
During stage two, companies search for more efficient ways to do business. They attempt to reduce import costs and manage risks more effectively. Competition among mills decreases. Mills become more willing to work together.
Import groups form to purchase wheat in larger quantities to spread risks among member companies and allow larger, lower cost vessels to be booked. Usually import groups are formed by ports of discharge, and therefore companies with mills sourced by different ports may be in more than one buying group. Each group normally is headed by one of the larger mills.
By purchasing only one or two holds of a larger vessel, mills tailor purchases to immediate requirements, thereby maintaining inventories at minimum levels to reduce storage and financing costs. Group buying also reduces port costs, particularly in rapidly developing Asian economies.
Korea's average 25.1% annual export growth rate since 1964, for example, has placed tremendous pressure on the country's ports, and therefore port unloading and storage facilities are costly. Buying groups purchase directly or through trading companies. Usually individual mill transactions are kept separate and individual letters of credit are issued.
Stage three is characterized by industry rationalization. Small and medium sized companies merge, get bigger or disappear. The Brazilian milling industry, for example, has gone from a peak of 400 mills to 175 today, with industry forecasting consolidation to continue rapidly for the next five years when 80% of the business is expected to be done by six companies. Korea has dropped from 24 to nine companies and further reductions are anticipated.
At the same time, often new, large diversified domestic and multinational companies enter the industry. Buying groups change as competition re-emerges and friction develops among mills.
In several countries such as Brazil and Colombia, new domestic trading companies develop to provide import services to small to medium sized companies, which decide they do not want to be attached and therefore dependent upon the largest mill in the buying group.Effects on Export Shares
What has been the impact of this dramatic deregulation on the world's major wheat exporters? First, deregulation has appeared to work to the advantage of smaller exporters like Canada and Australia and to the disadvantage of larger exporters like the United States.
In Mexico, for example, the United States prior to deregulation was the dominant supplier, often in excess of 80% market share. Since deregulation, Canada has increased it share from an intermittent supplier to average 47.7% market share, while the United States has fallen to 49.4%.
A similar pattern occurred in both Colombia where Canada's market share increased significantly while the United States share fell and in Brazil. In the latter country, Canada regained market share despite preferential tariffs to Argentina, while the United States did not re-enter the market significantly until 1996 when available supplies were low in both Argentina and Canada.
Prior to deregulation, the United States had 100% of the Korean market. Today, its market share has dropped to about 70%, Australia's share has climbed to 25% and Canada's to 5%.
Why has this occurred? It is difficult to identify a single reason. Some importers suggest when governments were involved in import decisions, balance of trade and foreign policy considerations may have impacted buying decisions. With deregulation, mills focus only on quality, price and delivery.
Thus, deregulation actually places greater emphasis on quality. In expanding their domestic market share, individual mills secure specific wheat required for specific end uses, regardless of origin. Korean millers say Australia's increase in their country's market share, for example, came as the result of noodle manufacturers preferring flour from Australian white wheat.
At the other end of the quality spectrum, deregulation has also had a profound impact on feed wheat imports. Under a regulated system, flour milling companies pressure governments to restrict feed wheat imports to prevent cheaper wheat entering food wheat markets and upsetting assigned market share under the quota system. Deregulation removes flour millers' concerns as they are now allowed to import any quantity of any quality of wheat desired.
With feed wheat restrictions removed, feed companies import feed wheat whenever wheat-maize price ratios dictate wheat into rations. In 1994, Korea imported about 4 million tonnes of feed wheat, nearly double its food wheat imports. Taiwan currently is importing more than 6 million tonnes of maize. As the country's wheat import system is deregulated, Taiwan may follow Korea's lead with feed wheat replacing maize in some rations when feed wheat prices are competitive.
It should be noted that not all countries are deregulating their wheat import systems quickly. In Japan, a 1995 law, passed in accordance with international trade commitments, allows any individual to import wheat and barley, provided certain tariff equivalents are paid.
But a 350% tariff, even declining at 6% annually under W.T.O. agreements, makes imports by organizations impractical. Thus, the Japanese Food Agency will retain its wheat import monopoly throughout the current W.T.O. agreement period.
Japanese millers say current W.T.O. commitments decreasing wheat product import tariffs already are hurting Japanese industry. They have asked the Food Agency to cut the spread between international and domestic prices from the current 50% to 20% to enable millers to compete with imported products by providing low cost domestic flour to food manufacturers.
If current trends continue, the next W.T.O. agricultural agreement probably will cause import tariffs to be reduced to levels where mills will secure their own supplies. Mills are currently restructuring to prepare for deregulation.
Although Japan is one of the most quality conscious wheat markets in the world today, future deregulation of its wheat import system probably will generate changes in the country's wheat import patterns as decisions by individual mills may not be the same as those taken by the Japanese Food Agency.
China is another major importer where deregulation is proceeding at a slow rate. The China National Cereals Oils & Foodstuffs Import & Export Company (COFCO) has monopoly control over wheat imports. Although deregulation has occurred on occasion in other commodities, there is no evidence of significant deregulation in the country's wheat import system.
Because of the sensitivity of wheat as a basic foodstuff to 20% of the world's population, it is unlikely that wheat will be deregulated in the foreseeable future. However, even under a monopoly import system, greater emphasis on quality exists. Many foreign companies are investing in China's flour milling and food processing industry. These companies increasingly are asking COFCO to import a specific wheat quality.Importer Priorities/Exporter Rankings
During interviews and on questionnaires, importers were asked to indicate their preferences concerning a number of factors affecting their decisions to import commodities. Importers were asked to rate the factors they take into account when deciding to import grain on a priority scale of 1 to 5, with 5 being highest. Table 1 shows the average scores.
The rating system provides a good overview of the relative importance more than 100 importers placed on various factors affecting decisions to import. It is interesting to note that consistency of quality from shipment to shipment is the most important factor, more important than price.
During interviews, this was even more evident as importers often said they rated price high “provided the quality is good.” The three quality factors, namely intrinsic quality of commodity, cleanliness and consistency of quality from shipment to shipment accounted for three of the top five priorities.
For some items, however, considerable differences exist between markets and commodities. For example, credit scored as the lowest priority in China because the government prevents its use in grains and oilseeds contracts. In Mexico, credit scored at the top for oilseeds but at the bottom for malting barley because Mexican brewers pay cash but crushers need credit.
Quality factors scored high across commodities, although quality was most important in wheat and least important in feed ingredients.
Importers also were asked to rate the performance of major exporters in meeting their priorities on a scale of 1 to 5, with 1 being lowest and 5 highest. The average results from all countries and all commodities are shown in Table 2.
The responses tend to confirm the 1995 Booz, Allen and Hamilton Ltd. Milling Wheat Project commissioned by the Grains Council of Australia, which reported that importers considered Canada and Australia as quality suppliers and Argentina, European Union and the United States to be price suppliers.
The world's wheat import marketing systems have been in a period of dramatic change over the past decade and are expected to continue to change following the next World Trade Organization agreement early in the next century. The deregulation trend line is firmly established, the consolidation of secondary processing facilities will continue at a fast pace, and international trade in further processed agricultural products will continue to increase significantly.
But possibly the most significant impact of changing global marketing systems is the resulting increased emphasis on quality by the world's wheat importers. Consistency of quality from cargo to cargo is the single most important factor in importers' decisions on source of wheat, more important than price.
Today, increasingly, wheat is selected globally based on its suitability for specific end products. As individual mills replace government buying agencies, wheat quality, price and delivery capability replace such factors as balance of trade and foreign policy considerations in the import decision making process.
What does this mean for the future? Mills increasingly will demand more detailed contract quality specifications. There will be increased pressure on regulatory agencies to license new varieties possessing limited specific end use qualities. And at the same time, there will be increased pressure on bulk handling systems to provide additional quality separations at minimal additional cost.
But the most successful wheat exporter will be the exporter that can best meet on a consistent basis increasingly detailed quality specifications brought on by the dramatically changing global marketing systems.
Dennis G. Stephens is a consultant with Meadowood Consultants, Duqald, Manitoba, Canada.Table 1 Wheat importers' priorities
Table 2 Wheat exporter rankings by factor
|5 highest priority 1 low priority|
|Consistency of quality from shipment to shipment||4.9|
|Intrinsic quality of commodity||4.7|
|Efficiency of contract execution||4.5|
|Cleanliness of commodity||4.3|
|Long term dependability of supply||3.8|
|Customer service policies||3.8|
|Diversification of source of supply||3.3|
|Forward pricing opportunities||3.0|
|Availability/terms of government credit||1.9|
|Availability of exporter subsidies||1.8|
|Forward pricing opportunities||3.60||3.33||4.13||3.57||4.46|
|Intrinsic quality of commodity||3.21||4.32||4.51||3.29||3.57|
|Cleanliness of commodity||3.00||4.44||4.46||3.63||3.24|
|Consistency among shipments||2.79||4.36||4.60||3.52||4.08|
|Long term dependability of supply||2.89||3.52||3.94||3.00||3.56|
|Efficiency of contract execution||3.43||4.31||4.27||3.75||3.99|
|Customer service policies||2.36||4.13||4.22||3.29||3.73|
Source: (Both tables) Procurement Systems of International Buyers and Changing Marketing Systems and Policies of International Competitors, Western Grain Marketing Panel, Agriculture and Agri-Food Canada, 1996