Wheat Letter January 7, 2010

3103 10th Street, North  Suite 300  Arlington, VA 22201 Tel: (202) 463-0999 Fax: (703) 524-4399 Wheat Letter January 7, 2010

U.S. Wheat Associates is the industry’s market development organization working in more than 100 countries on behalf of America's wheat producers. The activities of U.S. Wheat Associates are made possible by producer checkoff dollars managed by 19 state wheat commissions and through cost-share funding provided by USDA’s Foreign Agricultural Service. For more information, visit www.uswheat.org or contact your state wheat commission. Original articles from Wheat Letter may be reprinted without permission; source attribution is requested.

In This Issue: 1. TV Show Examines U.S. Farm Trade from Buyers Perspective 2. Wheat Market Factors to Watch in 2010 3. Comments on Russia's Possible Export Subsidies 4. Cooper to Direct California Wheat Commission 5. International Grains Program 2010 Short Courses 6. Public-Funded Wheat Research Unlocking the Power of Genetics 7. Wheat Industry News

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1. TV Show Examines U.S. Farm Trade from Buyers Perspective

America’s Heartland , a U.S. television program dedicated to connecting rural and urban America, traveled overseas along with U.S. Wheat Associates (USW) and the U.S. Grains Council last August to understand the vital role U.S. farmers play in feeding the world. The episode (#518) produced from this trip airs on satellite network RFD-TV on Jan. 10 and on PBS stations throughout the United States. Wheat Letter readers can also go online to see the episode or read a transcript at http://bit.ly/4XfuQ1.

Dave and Sue Roehm, farmers from Leesburg, Ohio, traveled with the film crew to Egypt and Morocco where they saw how investments in their producer checkoff programs are working to improve economic opportunity for producers like them and for people overseas who purchase U.S. farm products.

The Ohio Corn Marketing Program sponsored the Roehms’ trip. Several individuals and organizations that import, mill, or process U.S. wheat and corn graciously provided time and effort to make this production possible. 2

“Everyone we met and worked with made us feel very welcome and we appreciate that very much,” USW Director of Communications Steve Mercer said. “We believe creating personal connections between our customers and the farm families who produce U.S. wheat is an important part of our trade service work. It is also important that U.S. producers and the public have the chance to learn how U.S. agricultural products are making a difference for their trade partners.”

“This trip was a big revelation to me,” Sue Roehm said. “It was phenomenal the impact market development programs orchestrated by the Grains Council and U.S. Wheat are having overseas. When I look at our corn and wheat in Ohio, I will have a completely different perspective. My family’s harvest is truly helping improve lives thousands of miles away.”

The Roehms produce soft red winter (SRW) wheat, corn, and soybeans. Being from Ohio, they likely saw some of their crops in use in feedlots and bakeries across Morocco and Egypt.

“A lot of our harvest goes to the east coast or down the Ohio River to export markets,” Dave said. “I have been actively involved with the Council for a few years and was fully aware of the efforts my checkoff dollars were funding. However, it is still amazing to see it up close, one-on-one. The Grains Council and U.S. Wheat are truly providing opportunities for U.S. farmers and global end-users that really didn’t exist before.”

2. Wheat Market Factors to Watch in 2010 by Chad Weigand, USW Market Analyst

The new year marks an end to a lackluster 2009 as a combination of abundant supplies and a global recession changed the dynamics of global wheat trade. It also marks the beginning of new challenges to come. Here are some factors that deserve attention in 2010.

Wheat Production. Global production in 2009/10 reached an estimated 674 million metric tons (MMT), second only to 682 MMT in 2008/09. Two consecutive years of ample production fueled a rebound in the stocks-to-use ratio to 30 percent, its highest level since 2001/02. With the largest global supply in history, along with an 11 percent price drop on the year, world production will likely fall in 2010. Preliminary forecasts expect a three percent drop in total U.S. planted area, but SRW plantings are down by up to 15 percent and the global durum oversupply may lead to lower plantings. Soil moisture was generally favorable for U.S. winter wheat but the crop has a long way to go and concerns about winterkill are growing. While Argentina is still feeling the effects of drought and export taxes, the government has recently discussed tax rebates for wheat producers that could affect Argentine plantings this summer. Ukraine planted more winter wheat this winter, but is expecting lower yields from dry, cold conditions.

Convergence in CBOT Wheat Contracts. Despite actions by the Commodity Futures Trading Commission (CFTC) and the CME Group, convergence (the narrowing spread between cash and futures prices) in the Chicago Board of Trade wheat contracts remains problematic. Beginning with the July 2010 contract, CME will implement variable storage rates in an effort to encourage traders to release grain on the market. The problem demands solutions that will increase the 3

effectiveness of the futures market as a hedging tool and increase SRW competitiveness in the world market (see “Wheat Industry News” below for more information).

Economic Recovery and the Dollar. After a sharp appreciation in late 2008 and early 2009, the U.S. dollar value has declined five percent. A weaker dollar increases U.S. export competitiveness and the current consensus among analysts is that low interest rates and government budget deficits, both of which contribute to a weaker dollar, are likely to continue well into 2010. Wheat traders will have to monitor the recovery process and the impact it may have on the dollar and wheat prices closely.

Increased Russian Investment. Russia formed the state-controlled United Grain Company in 2009 with the intention of increasing grain production and infrastructure. Russia, currently the world’s fifth largest grain producer, has significant upside production potential but lacks the logistical capacity to accommodate a larger crop. The overall economic climate is likely to make it difficult to accomplish such a goal in the near future, and there is a gap between the high prices at which the government purchased wheat and current market prices (See “Comments on Russia’s Possible Export Subsidies” below).

Energy Policy. The U.S. Environmental Protection Agency will decide in mid-2010 whether it will increase ethanol blend mandates in gasoline. Such an increase could once again spark demand for ethanol and support corn prices as it did in 2008. During 2009, the spread between wheat and corn prices fell to a low of $1.27, the lowest point in over a year. Increased demand for ethanol could bring this spread even closer in 2010.

3. Comments on Russia's Possible Export Subsidies by Alan Tracy, USW President

Last March, the Russian government formed the United Grain Company (UGC) with the laudable goal of fostering investment in grain handling and export facilities. More recently, the new CEO of the UGC announced a goal of controlling 40 percent of Russian grain exports and exporting from government intervention stocks this coming year. Such government support for grain exports is a remarkable turnaround from 2008, when Russia imposed a prohibitive export tax on grains in order to protect domestic users from the high international prices at the time.

We are troubled, however, by Russian plans to sell grain from government intervention stocks at what amounts to prices below their acquisition cost. That amounts to a direct export subsidy from whoever picks up the tab for the difference, presumably the Russian government. Direct export subsidies are the most trade distorting of all subsidies and most players have abandoned them. They are forbidden to World Trade Organization (WTO) members for industrial goods, and the draft language of the Doha Round of trade negotiations would ban them for agriculture as well. Russia is not a WTO member but has expressed considerable interest in joining. If the government sets up export subsidy mechanisms and funding, it will likely have to unravel them soon after. That would send some very confusing signals to both the world market and to its own rural economy. 4

The path to establishing a strong market economy is not through government intervention and it certainly is not through buying high and selling low. As Australia, the European Union, and the United States have increasingly moved away from direct government involvement in mechanisms that determine the market price, Russia seems to be moving in the wrong direction, back toward the failed command economy of their past.

(The Canadian Wheat Board, however, remains a relic of a collectivist past, but … that is another story. It, too, will lose its often capriciously applied price-setting ability if the Doha Round succeeds.)

4. Cooper to Direct California Wheat Commission

The California Wheat Commission (CWC) named Janice Cooper as its new Executive Director as of Jan. 1, 2010, replacing Bob Falconer who resigned to devote more time to his farm interests.

Cooper had her own international consulting firm for the past nine years, and is a past Executive Director of the California Association of Wheat Growers. Prior to forming her own firm, Cooper held positions with such organizations as the California State Assembly, the California State World Trade Commission, National Semiconductor, Bank of America, and the U.S. Senate.

“We are very pleased to welcome Janice back to the California wheat industry,” CWC Chairman Larry Hunn said. “With her broad knowledge and international experience, we are looking forward to strong leadership for the wheat industry with emphasis on market development and research into new and improved varieties.”

Cooper is a native Californian with a strong commitment to preserving California agriculture. She is a partner in Salisbury & Cooper, a diversified family farming company in the Sacramento Delta. She is a member of the California Farm Bureau Federation, the Council for International Trade of the California Chamber of Commerce, and the Northern California District Export Council.

“The California Wheat Commission provides significant value to California’s wheat producers,” Cooper said. “I am excited to return to help the Commission meet the many challenges facing the wheat industry, our state, and our country.”

5. International Grains Program 2010 Short Courses

The Kansas State University International Grains Program (IGP) is a respected partner organization with USW and U.S. wheat producers. Its expert staff works to educate international business leaders and government officials about U.S. grains and oilseeds through technical training and assistance programs in storage and handling, milling, marketing, and processing.

IGP recently announced information about Short Courses for 2010. The IGP Grain Purchasing 5

course includes two sections April 12-23, 2010. Part I, from April 12-16, is “Principals of Grain Purchasing.” Part II, from April 19-23, is “Grain Pricing/Hedging and Ocean Transportation.” The full two-week program includes a field visit to a New Orleans export facility. The IGP Risk Management course also runs in two sections from Aug. 23-27. Part I covers “Introduction to Hedging and Futures” and Part II covers “Advanced Hedging Strategies and Options.”

For more information, contact IGP by phone at 1-703-532-7040 or by email at [email protected], or visit the IGP Web site at http://grains.k-state.edu/igp/DesktopDefault.aspx.

6. Public-Funded Wheat Research Unlocking the Power of Genetics

The tried-and-true methods of traditional plant breeding have created hundreds of improved wheat varieties for wheat producers and buyers over the years.

New developments in plant breeding, however, have scientists at Kansas State University and USDA's Agricultural Research Service (ARS) excited about new transgenic lines that help solve some of wheat’s toughest production challenges.

Kansas State Plant Pathologist Harold Trick has teamed up with ARS researcher John Fellers, for example, to "silence" genes as a method of controlling Wheat Streak Mosaic Virus. This work is part of a larger project partially funded by the Kansas Wheat Commission in 2009. Essentially, Trick, Fellers and their colleagues have dissected the Wheat Streak Mosaic Virus genome, isolating several proteins within, and are attempting to engineer wheat plants to shut off the genes.