WASHINGTON, D.C., U.S. — Over the past 20 years, roughly 10 million tonnes of U.S. wheat exports have shifted from price-sensitive markets to quality-driven markets, the U.S. Wheat Association (USW) reported on Feb. 26. Consumption in quality-driven markets in Southeast Asia and Latin America increased an average 2% annually over the past 10 years, according to the U.S. Department of Agriculture (USDA). However, the strength of the U.S. dollar continues to weigh on U.S. exports, transforming the relatively low prices U.S. farmers are receiving for their wheat domestically into prices that are equal to or greater than those paid in prior years by international buyers.
In 1995-96, the top 10 destinations for U.S. wheat included Egypt, Pakistan and Sri Lanka, whose respective governments purchased large quantities of wheat for subsidized food programs and strategic reserves. Thus, these markets were very price sensitive. While some liberalization has occurred in these markets, subsidized food programs and strategic reserves are still the primary uses for imported wheat.
Rounding out the top destinations in 1995-96 were markets that value quality: Japan, Mexico, the Philippines, South Korea, Taiwan, Nigeria and the E.U. These markets continue to be top 10 destinations for U.S. wheat. Over the past five years, U.S. wheat exports to these seven countries averaged 12.9 million tonnes compared to 9.78 million tonnes in 1995-96, an increase of 32%, while total consumption increased 26%, indicating increased usage and preference for U.S. wheat despite prices often higher than from other sources.
Since 1995-96, wheat consumption in other quality-driven markets has also grown. Southeast Asian markets, including Indonesia, Thailand, Vietnam and Malaysia, have grown an average 5% annually. U.S. exports to the region grew 27% to 1.47 million tonnes in 2014-15, according to Global Trade Atlas data. U.S. wheat exports also increased 44% to Latin and South America with 5-year average sales of 5.87 million tonnes compared to 4.07 million tonnes in 1995-96.
In 2014-15, countries from Southeast Asia and South America — Indonesia, Thailand and Brazil — became top ten destinations for U.S. wheat. In total, the top ten destinations represented 48% of U.S. wheat sales during that marketing year. Countries in Central America, including Colombia, Guatemala, Peru, Venezuela and the Dominican Republic, were in the top 20 destinations for U.S. wheat and accounted for another 11%. See the latest USW Commercial Sales report for the resulting increases in wheat exports to the increasingly quality-driven markets in Southeast Asia, Latin and South America.
Despite the value these markets place on quality, the strength of the U.S. dollar makes U.S. goods relatively more expensive for consumers in other countries. Japan is historically the number one buyer of soft white (SW) wheat. The average price for 9.5 max protein SW is down 1% from 2014-15 at $300 per tonne. However, the Japanese yen weakened against the U.S. dollar year over year resulting in Japanese importers paying an average 6% more for 9.5 max protein SW this year. Similarly, average 12 protein hard red winter (HRW) prices from the Gulf have fallen 18%, but U.S. HRW prices have increased an average 14% in Brazil due to the weakness of the Brazilian real.
The goal for any company selling a high-quality product is to make demand for that product inelastic — an increase in price does not have an equal decrease in quantity demanded. Put another way, consumers have such a strong preference for the good that increases in price result in very small decreases in quantity demanded. Creating inelastic demand takes a combination of the right consumers, the right product, hard work, and, in many cases, time.
U.S. farmers continue to work on product quality, investing an average $12 million annually on wheat research through their state checkoff programs, according to a study done by the National Wheat Improvement Committee in 2012. USW has also put more focus on its marketing efforts in markets that are traditionally quality conscious and experiencing growth, such as Japan, Mexico and the Philippines.