Dueling over gluten
October 01, 1995
by Teresa Acklin
U.S.: E.U. policies threaten wheat gluten industry outside Europe, U.S. manufacturers assert.
Facing increasingly grim long-term prospects as a result of growing competition from the European Union, U.S. vital wheat gluten manufacturers have joined forces to seek changes in E.U. farm policy. The manufacturers have launched a multi-faceted campaign to prevent what they believe could be the rapid elimination of a wheat gluten industry in the U.S. as well as in other non-E.U. nations.
“We're not asking for an import quota,” said John T. Stout Jr., president of Manildra Milling Corp., Shawnee Mission, Kansas, U.S. “We are looking to compete company versus company, not company versus government.”
In a report titled “Unfair European Union Trade Practices: Wheat Starch and Wheat Gluten,” the U.S. manufacturers paint a bleak outlook for their industry in the face of European policies.
“If artificial incentives are not removed, the consequences will be the closure of wheat starch/gluten plants worldwide outside the E.U. and a tremendous distortion of wheat values and protein values worldwide,” the report states.
In their efforts to effect change in E.U. trading practices, manufacturers from the United States, Australia and Argentina have devised a broad-based strategy. Manufacturers earlier this year traveled to Europe to meet with E.U. officials to bring the situation to their attention and were politely received, according to Mr. Stout.
“They didn't promise to change anything,” he said.
While E.U. pricing practices have been of concern to U.S. manufacturers for several years, recent policy changes have led to sharp increases in E.U. wheat gluten production, a trend that could lead to a more than doubling of capacity by the year 1999.
In the U.S. manufacturers' report, European industry data are cited projecting that wheat gluten production will jump to 460,000 tonnes in 1999, nearly triple 1993 production of 168,000 tonnes. E.U. production in 1993 exceeded domestic consumption by 37,000 tonnes, and by 1999, the surplus is projected to grow to 292,000 tonnes, a jump of more than 500%.
The development of the United States as an export market for E.U. gluten is a fairly recent phenomenon. As recently as 1981, no E.U. gluten was imported, and in 1986, only 2,500 tonnes were imported. By 1990, imports had climbed to 15,000 tonnes and in 1994 to a record 22,700 tonnes.
With nearly 70% of the E.U. surplus exported to the United States in recent years, U.S. manufacturers view the prospect of 292,000 tonnes of exports from the E.U. with consternation. Total U.S. consumption of gluten in 1995 is projected at only 122,000 tonnes, meaning that the E.U. would easily have the capacity to fully supply the U.S. market.
A variety of E.U. policies have combined to create what U.S. gluten makers say are artificial incentives to dramatically increase gluten production. Among the most recent of these policies has been the imposition of severe restrictions on potato starch production in Europe.
Trying to combat a persistent surplus of potato production in the Netherlands, the E.U. took dramatic steps to cut supplies, sharply curtailing competition in the starch market. As a result, starch prices in Europe have surged to U.S.$0.11 a kilogram, compared with U.S.$0.04 in the United States. The higher prices have created strong incentives to increase production of wheat starch, the U.S. manufacturers said.
Underpinning the U.S. industry's complaint is a series of E.U. tariffs, production credits and quotas that boost domestic prices of wheat starch in Europe, creating incentives for increasing production of starch and its co-product gluten, according to the U.S. manufacturers' report.
The report also objects to the E.U.'s “high tariff barriers, production refunds and quotas.” These prevent all non-E.U. manufacturers of wheat starch and gluten from selling their products in the E.U., while E.U. manufacturers of wheat starch and gluten can sell their products to the world at prices below the world market, the report states.
According to the report, the E.U. variable levy on gluten totaled U.S.$633.72 per tonne on Dec. 1, 1994; the levy on starch was U.S.$232.14. Those levies compared with U.S. duties of U.S.$123.44 and U.S.$12, respectively.
European manufacturers of wheat starch and gluten are encouraged by E.U. export promotion in the form of direct restitution payments for wheat starch and glucose syrups derived from wheat starch. An extremely generous formula for calculating the restitutions is key to allowing E.U. gluten manufacturers to undercut U.S. gluten prices, the report says.
In starch, the government policies have protected the European market from overseas competition and have allowed manufacturers to sell starch abroad at prices less than half of those prevailing within Europe, the report says. About one-fifth of E.U. starch production is exported.
Further encouraging production of wheat gluten have been grain pricing policies that put maize and wheat costs at parity in the E.U. As a result, maize starch plants are set to be converted to wheat, according to the report, which projects a drop in maize starch production to 3.5 million tonnes in 1998 from a peak of 5.5 million in 1993.
Wheat starch production will climb to 5.6 million tonnes by 1998 from 2.4 million tonnes in 1992, the report says. With total starch production growing only slightly, starch prices could remain strong.
The impact on the world gluten market of encouraging increased production of wheat starch in the E.U. has been completely ignored, Mr. Stout said.
“Roughly five to six times as much starch as gluten is produced in the process, but they are co-products; gluten is not a byproduct,” he said. “More revenue is derived from gluten than from starch. It's analogous to a gold mine. You dig a lot more gravel than gold, but don't let anyone fool you. You are not digging for gravel.”
Looking to the future, the report cites European estimates that wheat gluten exports from the E.U. will increase an additional 265,000 tonnes per year, accompanied by increases in wheat starch production of about 1.5 million tonnes. The majority of that production will also need to be exported because European studies have also disclosed that E.U. starch demand is expected to grow by about 1.5% to 2% annually.
The report says the production increases make no sense from a supply-demand perspective and could only be fueled if “protectionist policies and subsidies of the E.U. continue.” It also noted that E.U. starch producers were asking for further starch export subsidies in conjunction with the production increases.
As part of their strategy, the manufacturers spoke with users of wheat starch while in Europe, pointing out that their global competitiveness had been undermined by the export subsidies. The group has also called on U.S. officials, encouraging them to meet with E.U. officials, and has has targeted U.S. legislators.
Finally, if all other avenues fail, the U.S. gluten manufacturers have said they would file a complaint with the Office of the U.S. Trade Representative, seeking anti-dumping countervailing duties.E.U.: E.U. starch group rejects complaints by U.S. gluten producers.
European starch industry executives have rejected complaints by U.S. wheat gluten producers that European Union agricultural policies have created artificial incentives for export of wheat gluten to the United States.
They contend that the increase in E.U. exports of gluten to the United States reflects a growing demand for the product by baking and other food companies and that the E.U.'s share of imports has increased only marginally.
“Our position is that the wheat gluten market is becoming more and more a world market, where supply and demand on the world market basis determines the level of prices,” said Silvio Kluzer, chairman, Association des Ami-donneries de Cereales de l'U.E., the Brussels-based European starch producer association. “Production has been increasing to meet growing demand in Europe, the United States and Asia. The number of producers is increasing everywhere in the world.”
Mr. Kluzer, president and managing director of Cerestar, part of the Eridania Beghin-Say Group, defended the European position in wheat gluten trade along with C.J. Veerman, vice-chairman of the starch association and general manager of the milling department for Cargill BV in Bergen op Zoom, the Netherlands.
Mr. Kluzer said European companies were as concerned as the U.S. industry about weakness in wheat gluten prices in recent months.
“We don't like it either, but it's a factor of supply and demand,” he said. “Wheat gluten capacity has increased everywhere in the world, including the United States. Demand growth has not matched the increase in new capacity. Prices have weakened considerably. We do not welcome that situation, and I am sure we have not created that situation.”
Mr. Kluzer said that although the demand for wheat gluten had been increasing in both the United States and Europe, the rate of increase was subject to changes in wheat quality from one crop harvest to the next.
The three principal sectors of the world wheat gluten market, according to Mr. Kluzer, are Europe, North America and Asia, with consumption ranking in that order.
“Europe tends to be a net exporter; the United States has always been a net importer,” he said. “There have been allegations from part of the U.S. gluten industry that we are invading the U.S. market. But the U.S. has always been an important part of the total world consumption.”
In 1986, he said, total U.S. consumption was 60,000 tonnes, of which 30,000 tonnes were supplied by U.S. producers and 30,000 tonnes were imported. In 1994, total consumption was about 144,000 tonnes, with 72,000 tonnes supplied by domestic producers and 72,000 tonnes imported.
Mr. Veerman noted that on a relative basis, the E.U. had not changed its proportion of imports. “The market has grown, and yes, we have grown with it,” Mr. Veerman said. “But no, we haven't stolen more of the market share.”
According to Mr. Kluzer, U.S. wheat gluten imports from Europe in 1991 were 29% of total U.S. imports. In 1994, imports from Europe represented 32% of total imports. In that same period, the share of imports for Australia fell from 60% to 31%, while imports from the rest of the world, of which the main source is Canada, represented 10% in 1991 and 37% in 1994.
Mr. Kluzer also cited starch association statistics showing that the price of gluten imported from the E.U., excluding transportation, had been largely equal to the U.S. price since June 1993.
Asked to address complaints by some U.S. wheat gluten producers of unfair competition from the E.U., Mr. Kluzer said, “Let's talk about sheer economics. The price of wheat in Europe as a cereal is lower than the price of maize, because production of wheat is much more efficient than the production of maize.
“As a consequence, the usage of wheat as raw material to produce starchy products in Europe has been increasing because it tends to be more competitive than maize for the production of certain products.” Mr. Kluzer said arguments about gluten or starch being the principal product or byproduct were irrelevant.
“When one produces a tonne of wheat gluten, he is bound to produce 6 or 7 tonnes of starch, and you need to be able to sell both products,” he said. “Maybe the real problem for the U.S. is that after buying wheat at a price that is 30% more than a competitor pays for maize, it is difficult to sell the starch.”
In stating that E.U. producers of wheat gluten or maize gluten do not receive any type of production or export restitution, Mr. Veerman acknowledged that starchy products qualified for one of two restitutions. “When starch is sold outside the E.U.,” he said, “the difference between the E.U. price and the world market price for cereals is compensated for by a so-called export restitution. In reality the refund does not fully compensate for this difference because the method of calculation used by the E.U. Commission varies according to circumstances.”
The second restitution scheme is for E.U. producers of certain non-food industrial products that are not protected from imports from third countries. “The subsidy,” Mr. Kluzer said, “is again meant to compensate the difference between the price of cereals in the E.U. and the world market price. But again, it compensates only a part of the difference.”
Mr. Kluzer agreed with U.S. statements that E.U. companies using European starch were paying more than the Union's export customers. The subsidies or restitutions on starch are declining as the gap between E.U. cereal prices and world market prices narrows, according to Mr. Kluzer.
The European starch representatives also challenged statements by some U.S. gluten producers that by 1996, E.U. production of wheat starch would exceed production of maize starch. “The absolute figures are wrong,” Mr. Veerman said. “The production figures they have been citing are for utilization of raw material, not production of finished product.”
They also disagreed with statements by U.S. companies that a conversion of starch plants from maize to wheat would further encourage E.U. wheat gluten production. In only one specific case is a new wheat-based plant planned to replace a maize plant for reasons specific to the situation, Mr. Kluzer said.
“We have made the economic calculation several times,” he said. “If you need new capacity, a new plant, you have a better return on your investment if you use wheat rather than maize. But ... you could never justify tearing out or idling an existing maize wet milling plant and replacing it with a wheat wet milling plant. The technology and machinery are completely different.”
Mr. Kluzer, Mr. Veerman and other industry representatives have made several trips to the United States in recent months to meet with government officials as well as baking and other food industry executives on the wheat gluten import dispute.
“We are trying to calm things down because we think there is no problem,” Mr. Kluzer said. “If a problem exists, it is not from us exporting wheat gluten to the U.S. Maybe the U.S. industry has problems. So we are busy trying to make people understand the other side.” In meeting with bakers and other users, Mr. Veerman said, the E.U. representatives have learned that customer interest is to have access to reliable product, with the quality they want, at a justifiable price.
“Their main concern is that if, as a result of the U.S. companies' actions, there would be a restriction on imports through a quota or a countervailing duty, that would raise the price of gluten,” he said.
“Our mission ... is to inform the millers and bakers that, whether they like it or not, they may be drawn into a tight and expensive situation.” Mr. Veerman said. “And if gluten becomes expensive, it will not be to the benefit of the European producers. We will not reap the benefit of that price increase, because access to the U.S. market will be cut off.”