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Finding the Wheat in the Trade Chaff

By: Dalton Henry, Vice President of Policy, U.S. Wheat Associates
Posted: Feb 06 2020

Anyone in agriculture following trade policy under the current administration should by now be getting pretty good at picking out kernels of good news from the chaff of the bad. 

Fortunately, when you take a step back today, there is a significant harvest of trade policy wins that certainly deserve recognition. So let’s spend some time looking for those kernels of good news. 

U.S., Mexico, Canada Agreement (USMCA). President Trump signed the agreement on January 29, although the agreement had not yet been ratified in Canada. Necessary changes in domestic regulations across all three countries are still needed, but final implementation of USMCA (the new NAFTA) was looking more and more like a formality. We’re past the bold threats of withdrawal from NAFTA, with a new agreement that protects duty-free access to the huge Mexican wheat market (nearly 100 million bushels on average), modernizes sanitary and phytosanitary (SPS) provisions and removes the largest remaining barrier (eligibility for grades) for U.S. producers who want to sell wheat to Canadian elevators. 

USMCA assures that U.S. wheat sold in Canada is not automatically graded as feed, which is one of the more positive accomplishments. Farmers here and in other states interested in taking wheat across the border will still have to plant varieties registered in Canada, but the opportunity for additional local outlets for grain, potential market arbitrage opportunities and reaching a basic fairness between growers on either side of the border is certainly worth celebrating. The deal also takes Canada away from the threat of non-compliance with the WTO’s “national treatment” standard and forces legislative changes that the Canadian government had promised to make for the better part of a decade (but never actually put into place). 

China. U.S. hard red spring (HRS) producers understand the “chaff” here all too well. When the U.S. piled Section 301 tariffs on China over intellectual property and state subsidy concerns, China retaliated with tariffs on U.S. agricultural goods, bringing what had been an annual 60 million bushel market for U.S. wheat to nearly nothing. U.S. growers saw the first light at the end of the tunnel this January, though, with the signing of the “Phase One” agreement. While much of the news coverage of the agreement has been rightfully focused on purchase commitments made by China to buy more agricultural commodities, the agreement did contain substantial new provisions on how China imports wheat under their tariff rate quotas (TRQs). The agreement contains eight new commitments that build on the recently improved rules China issues as a result of the Unites States’ winning WTO dispute case that China had not administered its reduced duty TRQ in a way that was predictable, fair or transparent. 

The new rules now include an explicit goal of TRQ utilization, will allow for additional state-owned organizations to apply for quota wheat, and provide for non-discrimination between state trading entities such as COFCO, and non-state entities like private flour millers. The devil will be in the details. Yet the size of China’s wheat market, combined with strong demand for HRS and soft white (SW) U.S. classes, should provide strong incentive for the TRQ to function. What is the bottom-line impact to the “good” column? If the TRQ fills, China becomes the world’s third largest wheat importer at 350 million bushels and a likely top market for U.S. wheat. 

Japan is second largest customer of U.S. wheat in the world, and uses U.S. HRS, hard red winter (HRW) and SW for about 50 percent of its supplies each year. The “chaff” threat to that market arrived with the new multilateral CPTPP agreement that did not include the United States. It gave Canadian and Australian producers an effective tariff advantage over U.S. wheat worth about $20 per MT (or about $0.55 per bushel) in 2019. Our disadvantage was set to grow to $30 per MT in 2020, and each year after and force Japan to significantly cut its U.S. wheat imports. Fortunately, the United States concluded a mini-agreement with Japan that took effect Jan. 1, 2020, that, to the credit of U.S. and Japanese negotiators, was concluded in near record time. It puts us back on equal footing with Canadian and Australian wheat and will preserve one of our most important wheat markets.

Aggressive trade enforcement and vigilant attention to other market access issues will continue to be very important for all U.S. wheat farmers. U.S. Wheat Associates (USW) can assure you that our organization is actively engaged in these efforts. For example, the on-going U.S. dispute with the EU over aircraft production subsidies has the potential to result in retaliation against Italy and the United Kingdom’s HRS imports. China must be closely monitored for compliance with the Phase One agreement, and India’s always-increasing wheat subsidies have them on the verge of being an exporter of heavily subsidized wheat. USW will continue working with our state wheat commissions, grower organizations and government negotiators to keep the U.S. wheat store open. 

Even with all of that on the horizon, perhaps we can rest just a little easier, knowing that in just the last six months, we’ve seen major developments in three of the largest markets for U.S. wheat producers – all of which add substantially to the “good” kernels of world wheat trade.   

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