A Veteran Trader’s Perspective on the International Wheat Market over the Past 25 Years.

Rhyl Doyle Director of Export Trading Paterson Grain Winnipeg , Canada What have I seen over the last 25 years ? What does the future hold ? Diversification of Canada’s Wheat Markets • When I started in the grain trade China + USSR combined bought HALF our wheat. • 1990 China 16% + USSR 32% • 1991 China 32% + USSR 17% • Today : China 6% + Russia / FSU: None • In 1989/90 the USSR bought 33-39% of our CWAD exports . Today none.

Today Canadian wheat and sales are highly diversified to over 70 countries (2015/16 Crop Year). • Wheat Exports by • Durum Exports by Destination Destination • Western Europe: • Western Europe: 582,000 mt 1,510,000 mt • Africa: 2,125,000 mt • Africa: 1,903,000 mt • Asia: 7,742,000 mt • Asia: 492,000 mt • The Americas: • The Americas: 5,916,000 mt 457,000 mt

Evolution from Government Buyers / State Trading Entities to Private Buyers • Exportkleb (USSR) -GONE • Conasupo (Mexico)- GONE • IDEMA (Colombia) –GONE • ENCI (Peru) –GONE • Brazilian Wheat Board – GONE • CORDE (Dom. Rep. ) –GONE • Costa Rican Grain Import Agency- GONE Evolving State Trading Entities (continued) • Canadian Wheat Board (monopoly gone, now part of G3 Canada with SALIC & Bunge in control. • Australian Wheat Board (monopoly gone, now part of Cargill) . • European Commission (used to wield massive stick in subsidized wheat export wars) . Now less disruptive. • Junta de Granos (Argentina ) –GONE

Evolving State Trading Entities (continued) • Government Trading Corporation (Iran ) – still there but private imports are growing. • COFCO (China) –still dominant in China although significant private wheat import quota now granted. COFCO has become a multinational food and trading company buying Noble- Agri and Nidera.

Evolving State Trading Entities (continued) • OAIC (Algeria) –still there (private imports growing). • ODC (Tunisia) – still there . (Also small private importers). • ONIC (Morocco ) -still there . Most durum now privately imported. • Many more examples on both the buy and sell side.

Bucking the Trend away from STE’s

• CUBA : Alimport still in control of imports. • VENEZUELA : Under the socialist government it transitioned from private import system to state control . Many problems. • IRAQ: Iraqi Grain Board- still there…for now • GASC (Egypt) –still main importer, some private imports). Cheap fills bellies. • JAPAN: MAFF still controlling wheat imports.

GFSMO/SAGO (Saudi Arabia) from State Exporter (water exports…) to State Importer Wheat Remains a Strategic Commodity in many Countries. • “There are only nine meals between mankind and anarchy” Writer Alfred Henry Lewis (1855-1914). • The price shock of 2008 taught us that having money did not guarantee supply. • After droughts in Europe and Australia Argentina, Russia halted exports to avoid the richer buyers making their own wheat too expensive for their people.

What has the shift away from government buyers meant for Canada? • Greater market share in places such as Latin America . Millers can now decide their blends. • e.g. Brazil changed from two (“Common” and “Special) to hundreds of offerings from the mills. • Greater flexibility for the miller. Strong, mid- strength and soft can be blended to make a variety of flours. Instead of a government allocation of one type of wheat . What has the shift away from government buyers meant for Canada? • Private owners are more conscious of true value, quality. Not just price. • Private owners try to differentiate their products. Looking for an edge versus their competition. Higher margin products. • In Canada we love “Quality Wars” we hate “Price Wars”. Staggering growth in the world wheat trade • Following population growth and rapid urbanization of peoples, the world trade in wheat has been growing . • 1960 : 40 million tonnes • 1990 : 100 million tonnes • 2016 : 160 million tonnes • “ free Lifestyle” and other fads really don’t matter much in the global picture ! Wheat Exporters are changing

• Canadian wheat exports (in tonnes) have stayed in a similar range over my career. Same story in USA (acres shifted to other crops). • Growth in wheat export supply has come from Europe and the Black Sea. • Canada has diversified its exports into other crops like canola, pulses, soybeans. Less dependant of wheat , durum and barley.

Canadian Wheat Exports Last 30 years Evolution of Major Wheat Exporters

1977: USA + Canada = 70% 2016 : USA + Canada = 27% FSU + Europe= 12% FSU + Europe = 46% Growth in the world wheat trade

• Wheat trade up 60% since I started in the business. (From 100 million tonnes to 160 million tonnes) . • World population up 50% in same time. • Rising incomes. People are eating more . • U rbanized people eat more wheat products (less subsistence farming, wheat is easy to move, less perishable) . How we trade wheat has changed

When I started Today • Face to face negotiations lasting • Trading via phone, email, text. days and sometimes weeks . 24/7 contact. • Telex machine, faxes, “wires”. • Cargill’s internal wire system used • iPhone, Blackberry, Email, to be a huge competitive Skype, WhatsApp. advantage. • Information was more valuable • Instant flow of information and filtered out slower. (The via everyone’s smartphone. Great Russian Grain Robbery). Farmer, Trader, Buyer . The • Remember Cora Hind (1861- info playing field has been 1942) ? Read her book “Seeing leveled. for Myself”. • Crop tours “Tweeting” live reports. The Commodity Casino

• Risk Management is critical. • Farmer/Handler/Miller margins can disappear in minutes. • Increasing price volatility • Huge pools of speculative money driving futures markets. • Computers (“Algorithms”) trading wheat • Instant flow of price information and news. Consolidation of the Food Chain

• From hundreds of millers in a country to a handful of big millers. • Multinational flour millers (e.g. ADM, Ardent). • Multinational bakers (e.g. Grupo BIMBO) . • A boardroom decision by Nestle, Mondelez, BIMBO could have global market implications overnight. e.g. we only want “Glyphosate free wheat” or “we want Low Carbon /Sustainable wheat.”

Global Mega Brewers (ABInBev +SAB Miller).

Consolidation of the Food Chain Source : The Visual Capitalist Negative Dietary Fads and Trends

• Bread/ sales decline in fad conscious wealthy countries. • Atkins Diet • South Beach Diet • Wheat Belly • Gluten Free Lifestyle Although annoying for the wheat food industry in rich countries , really not important in the global picture.

Positive trends for Canadian Hard Red Spring Wheat (CWRS) • Whole Grain ,Multigrains, Pulse . Need good protein /gluten structure . • “Clean Label”. Less reliance on enzymes / chemicals . Just Flour , Water , Salt, Yeast. No magic powders to do what good wheat used to do. • Selecting specific varieties for blending with cheaper wheats.

Positive trends for Canadian wheat (continued) • Bread/pasta/noodle consumption rising in developing world (population growth & urbanization). • Rising incomes , demand for better products. • More industrial baking plants demanding higher quality , consistent flour. • CWRS carries other wheats. Core part of grist for industrial bakery flours.

Grupo BIMBO: The Global Baker Influences types of wheat milled (When I started they were only in Mexico) Varietal programs to add value

• Nearly 20 years selecting certain wheat varieties to • Looking for stronger CWRS ensure consistency and the varieties for certain best flour quality flour for products and flour their bakeries. improvement. • “Manitoba” still means strong flour in Italy

“Manitoba” Flour

What the ? …Mamma Mia ! Declining CWRS , increasing DNS Our grain handling system has changed . Massive consolidation • When I started . We still loaded box cars to Churchill. Lots of wooden elevators loading less than 10 cars. Trains stopped in each town. • Hundreds of elevators have been closed. • Today most elevators load 100-112 car unit trains . 10,000 tonnes each. • Newly segmented wheat pipeline (post CWB) wants efficiency and more volume/ less product segregations. Handling system consolidation

• 2-5 trains /origins can make one vessel. • Less blending than when trains came from 50 different origins to make up one vessel. • This leads to more variation between cargoes. • Warburton’s is an example of an end user who has found a solution to this.

Consistency is getting more important

• Artisan bakers are being replaced by industrial baking plants. • Artisan bakers can stick fingers in dough add water , mix longer, to cope with variation. • Industrial plants rely more on automated machines with “Operators” pushing buttons for timed processes. • Variations can cause big headaches. • The handling system and baking system are moving in opposite directions… Help is on the way

• The strength problem was initially thought to be due to environmental anomalies. • Weaker CWRS varieties being culled. • New varieties must be stronger to get registered. • Will help us regain market share and premiums in certain markets.

High Yield vs High Quality

• CWRS versus CNHR and CPSR.

• Q: Will the market pay the premium to offset yield disadvantage for farmers ? • A: It depends on the year and the customer. • Scarcity of protein = higher premiums.

The impact of plunging ocean freight rates • Plunge on ocean freight brings every type of wheat to the buyer’s door, new competition. • Mexico now imports Canadian , American, French, Russian, Baltic, Argentine and Black Sea wheats (used to mill only North American origins (NAFTA helped). • Italy uses durum from 20 different origins !

CWRS as an “Insurance” Wheat

• Privatization of the wheat import decision making means more multi origin blending as mills try to remain competitive.

• CWRS blended with Black Sea, Argentine, and weaker local and other “exotic”wheats .

Bangladesh : great example of CWRS for blending/improvement • Bangladesh (very poor country) bought 1,455,500 mt of CWRS this past crop year . ( out of 4 million total wheat imports). • Blended with cheap wheat from other origins. • That’s almost as much CWRS as we sell to Western Europe and the U.S.A. combined (1.5 million). • Almost as much CWRS as Japan buys (1.6 million). The Impact of Trade Agreements

• We used to sell more than a million tonnes a year to Brazil. (Last year 82,000 mt) • Mercosul Agreement slapped 10% tax on the CIF price of Canadian wheat and 25% tax on the freight. • Created a $25.00-$40.00/ mt advantage for Argentina , Uruguay and Paraguay) . • Now most Mercosul wheat stays “at home”.

The future ?

• The high throughput grain handling system creates a niche for specialty “IP”products (from those willing to pay for the “hassle”). • Endemic fusarium ? If warmer wetter climate means chronic vomitoxin problems we have a looming crisis . (Durum disaster this year ). • More accessible testing technology, more tests, more demands. Some unreasonable. (Non-tariff barriers). The future ? (continued)

• The socially wired consumer. Rapid spread of trends . • The highly consolidated food industry can respond with scale very quickly. (Just looks at all the gluten free offerings that appeared overnight ). The future ? (continued)

• Increasing price volatility. Today’s daily price ranges would seem insane 25-30 years ago. • Changes in food security policies . The older policy makers who witnessed the horror of famine in India, China, etc. are retiring. • Further consolidation and integration of the wheat supply chain. The future? (continued)

• Branded wheats ? “Manitoba D.O.C.” • The impact of “terrior” on quality. e.g. beta- Glucan levels in Manitoba Oats vs. Saskatchewan oats.

Parting words

• Let’s make sure we Canadians continue to sell the solutions to millers and bakers , not the problems. • Thank you to the many researchers in the audience whose work has helped us all to feed the world. You are the unsung heroes of humanity.

Thank You