Single Desk Selling: Key Aspects of the Cereals Grain Trade and Canada's Role

It is understating the situation to note that prairie grain farmers are heavily dependent on the international wheat and coarse grain markets. This section provides an overview of these markets, highlighting key characteristics that are relevant to the current single-desk debate in Canada. Total world trade in cereals is close to 200 million metric tons (mmt), and Canada accounts for about 12 percent of that trade (see Figure 1.1).



Wheat
World trade in wheat is greater than for any other single grain, totalling about 100 mmt-or 20 percent of total world production. The United States is the largest wheat exporter, followed by Canada, the European Union (EU), Australia, Argentina, and the Republic of Kazakhstan. Figure 1.2 shows that over the past twenty years, growth in global trade in wheat has been relatively slow. World wheat trade grew rapidly during the 1970s and then levelled off during the early 1980s and into the 1990s. The recent upsurge in global wheat prices is therefore largely supply induced and not strongly related to an increase in world demand. Export subsidies are not currently a factor in wheat, because the European Union (EU) has imposed export taxes on wheat (the opposite of an export subsidy) and no Export Enhancement Program (EEP) bonuses have been awarded by the U.S. government since July, 1995. The most likely scenario is that the EEP program is non-operational.
China and the former Soviet Union (FSU) together were large wheat importers during the early 1980s and they drove demand growth, at one point accounting for one-third of imports. The CWB has relied heavily on these two markets. However, their combined importance as importers has since declined because the FSU’s imports have dropped off sharply. China remains a significant importer but its impact varies substantially from year to year. Refer to Figure 1.3, which displays wheat imports into China and the FSU.






While import demand from the FSU and China fluctuated wildly, import demand in Southeast Asia, Latin America, and North Africa (all developing countries) continued to grow during the 1980s (Figure 1.4). Developing countries import about 80 percent of total wheat traded. Figure 1.4 also shows that wheat import growth by the developed countries has been flat. This is important for Canada, because developed countries tend to import higher quality wheat.



The map displayed as Figure 1.5 highlights in black those regions accounting for over 70 percent of global wheat imports. More importantly, those countries highlighted in figure 1.5 accounted for over 80 percent of import growth since the early 1970s. The Asian market (excluding China) is now the number one importing region and its imports have doubled in the last seven years, to around 26 mmt. Including China, Asia imported about 38 mmt of wheat in 1995.

Figure 1.5:

Wheat is the prominent grain used for human consumption around the globe. Humans consume about 70 percent of the world’s wheat directly, and another 20 percent indirectly in the form of animal products. This leaves 10 percent for seed and industrial use.

There are two broad types of wheat: "bread" wheat which accounts for 95 percent of world output, and "durum" wheat, which accounts for 5 percent of output. Higher quality bread wheat is used for bread flours; medium qualities for noodles, flat breads, chapatis, etc.; soft wheats for cakes and biscuits; and low quality grades for animal feed. Bread wheat is classified according to season of planting (winter/spring), color (red/white), and quality (kernel hardness/protein content).

Figure 1.6 shows the uses of major classes of wheat, including: hard red spring (HRS), hard red winter (HRW), soft red winter (SRW), and white (both soft and hard). About 85 percent of Canada’s wheat production is Hard Red Spring (HRS) wheat, which is high in protein content and baking strength, both desirable characteristics for bread flour. The dominant wheat in the United States is Hard Red Winter (HRW); in Australia it is white wheat. Red spring wheats are blended with softer, weaker wheats for bread flour. Figure 1.6 shows there is considerable substitutability between different types of wheat, especially between HRS and HRW. This substitutability means that Canada is largely a price taker in the global wheat market. If it does not price competitively it will not do business because there are many substitutes.


Canada is considered to be a supplier of high quality wheat, but the total world demand for high quality wheat is rather small. The wheat market is segmented into two broad categories-a small high quality and high-priced market (e.g., Japan and the United Kingdom) that demands precise specifications with regard to protein, hardness, moisture, color, etc.-and a large lower quality and lower priced market (e.g., China, Iran, Brazil, and Egypt) in which specifications are very loose. Canadian grades of No. 1 and 2 CWRS are considered high quality bread wheats, whereas No. 3 CWRS is a medium quality wheat. On average, about 65 percent of Canadian exports is either No. 1 or 2 and 18 percent is No. 3, CWRS. However, about 75-80 percent of world demand is for medium quality and it is the medium quality market where demand is growing, especially in Asia. Several studies have pointed out that Canada has missed market opportunities and given up revenue by focusing on high quality wheats and not adequately diversifying into medium and lower quality wheats (Canada Grains Council, 1982; Carter, Loyns, and Ahmadi-Esfahani, 1986; Ulrich, Furtan, and Schmitz, 1987; Henning, 1986; and Henning and Martin, 1989).

Coarse Grains
Global coarse grain production totals about 800 mmt, about 60 percent larger than wheat production. Total world trade in coarse grains is about 90 mmt. The United States accounts for approximately 60 percent of this trade, compared to Canada's 5 percent. Trade in coarse grains is shown in Figure 1.7. As in the world wheat market, total coarse grain trade has stalled at the levels reached during the early 1980s and recent coarse grain imports by the FSU have also dropped off sharply. In 1995, 37 percent of total coarse grain exports went to developed countries and 63 percent to developing countries. Again, Asia has been the dominant importer, accounting for about one-third of total coarse grain imports.



Conclusions
To conclude this section, the following market characteristics are relevant to the issue of a single-desk seller for prairie wheat and barley:

• Canada has relied heavily on grain purchases by China and the former Soviet Union (FSU).
• The FSU breakup has sharply reduced their imports and may lead to FSU exports.
• China is becoming the major "wild card" in the grain trade.
• No Export Enhancement Program (EEP) bonuses have been awarded by the U.S. government since July, 1995.
• There are no significant growth markets in high quality wheats such as No. 1 & 2 CWRS.
• About 75 percent of the world wheat trade demands medium quality wheat, such as No. 3 CWRS, and this is where demand is growing.
• Medium quality wheats are highly substitutable for one another.

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