Statement of the

Wheat Export Trade Education Committee

U.S. Wheat Associates

and

National Association of Wheat Growers

TO THE

SENATE SUBCOMMITTEE ON

PRODUCTION AND PRICE COMPETITIVENESS OF THE

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY ON

THE FUTURE OF U.S. AGRICULTURAL EXPORT PROGRAMS

Presented by

Mr. Bruce Hamnes, Chairman

Wheat Export Trade Education Committee and

U.S. Wheat Associates

July 18, 2000

Mr. Chairman and members of the Committee, thank you for the opportunity to provide the wheat industry's perspective on the benefits of the current export programs and the future of these programs. Let me begin by saying that the importance of the USDA export programs for U.S. wheat cannot be overstated. U.S. wheat growers export nearly 50 percent of their production making flexible, effective, and fully funded export programs critical to our long-term success.

I commend you on the timeliness of your review of export programs, their future and on their value in facilitating the market development and promotion process. We believe that these programs must be protected and allowed to expand under the rules of the World Trade Organization. As the negotiations of the next round are just beginning, it is appropriate to make it very clear to our trading partners that we believe these programs are not trade distorting and that the industry expects our negotiators to protect them and our government to employ them aggressively.

Market promotion and development are "green box," or non-trade distorting activities, under current WTO rules. The trend towards the reduction and elimination of trade distorting programs clearly puts added emphasis on market promotion and development activities. These activities should be utilized to their fullest extent as a significant element in the foundation of future agriculture policy.

Equally as important as the WTO negotiations, is the need to expand these programs to the maximum extent possible in the upcoming Farm Bill discussions. "Freedom to Farm" made great strides towards improving flexibility and opportunity for American farmers. However, as historical support was eliminated, use of agricultural export programs remained stagnate and in some cases decreased as U.S. farmers were sent out into the world market to survive without their traditional "tools" of support. Well-funded export programs, which are a necessary part of the equation, were not reinforced.

Now is the time to correct this oversight. As we embark on debates surrounding a new farm bill, export programs that give American farmers and ranchers the tools to survive in the "new economy" must not be overlooked or taken for granted.

America is the most powerful economy and the most important market in the world. And the agricultural community is proud of its contribution to our nation's economy. However, in today's economy the health and vitality of American agriculture is directly related to the industry's ability to access export markets, meet the challenge of post General Agreement on Tariffs and Trade (GATT) negotiations, and to maintain market opening programs as the WTO discussions move forward.

Unfortunately, however, power does not develop the wheat market. Market development is knowing who the customers are, what their needs are, and how to meet those needs. It is being sensitive and attuned to local cultures and regional differences. It is knowing that a mill is being planned in this port, or a mill is expanding their product line in that region, or a phytosanitary problem is developing in this market, or our competitors are targeting the buyers in that market. It is a full-time, year-round, long-term commitment.

Maintaining and increasing the export market for U.S. wheat is absolutely essential. What we don't use or export will sit in our bins and depress prices.

Over 100 million tons of wheat is traded globally, and the U.S. wheat has a global market share of 28%, making us the world's largest wheat exporter. But we face increasingly stiff competition from Canada, Australia, the European Union and Argentina.

People who are unfamiliar with global commodity trading are often surprised to find that exporting wheat is not a simple proposition.

Each wheat producing country has its own varieties, each with distinct qualities. These varieties and qualities must "fit" with importers product needs. For instance, a mill in the United Arab Emirates that makes flour to produce the local flatbread will need to be convinced that one of the U.S. varieties is better for their product than one of the Australian varieties.

Within the varieties, crops vary--from year to year and region to region--in moisture content and protein level which, for instance, will affect the bread or noodle or cake that is ultimately produced. The crop size and quality also affects market prices, which may aid or dissuade buyers, depending on their needs and finances.

On top of the pure "market" aspects, trade policies, barriers and disputes--of the U.S. and of importing countries--can and do affect U.S. wheat exports.

The preliminary year end sales figures for marketing year 1999/2000 show that 79 countries purchased wheat, on a commercial basis, from the U.S. Another 14 countries received U.S. wheat solely as a result of food aid and 21 countries that received wheat donations also purchased U.S. wheat on a commercial basis.

No wheat customer is the same. Each has specific needs, whether it is assistance in specifications and purchasing; education on milling, storage and handling; information on markets, wheat quality and trait characteristics; or assistance with U.S. government programs. But, for simplicity's sake, we can generalize that there are three basic types of customers: the mature and loyal customers who are accustomed to buying U.S. wheat; the "changing" customer in areas where government buyers are being replaced by inexperienced private buyers; and the customers from countries that have been closed to U.S. wheat because of sanctions or trade barriers.

The challenge is to defend the loyal market from sustained forays by our "trading partners," educate the changing buyers about the advantages of using U.S. wheat, and convince the buyers from previously sanctioned countries that we will now be a good and reliable supplier and that they want to switch to us from their current supplier. It is having access to a variety of export programs that helps provide flexibility in reaching these divergent customers.

Let me expand on the specific export programs as they are used to move U.S. wheat in the world market.

Government funds for export market development are awarded to commodity organizations under various formulas and, in the case of U.S. Wheat Associates (USW), the industry's market promotion and development organization, about a third of the total $14 million budget comes from producers and two-thirds from U.S. government export programs.

Foreign Market Development (FMD)

The largest source of funding, and the most important single tool, for U.S. Wheat Associates activities is the Foreign Market Development (FMD) Program. USW is a major user of this program, as it provides for office space, overseas salaries and activity budgets for 15 offices servicing over 100 countries.

In recent years, in spite of rising costs, total funding for FMD has remained static at about $30 million. This program provides funding for several cooperators in addition to USW, and it should be increased to no less than $42 million.

Market Access Program (MAP)

The second most important federal program providing funds to USW is the Market Access Program, which has been an invaluable tool for building markets. MAP funds, though accounting for less than 10% of the budget, are essential as USW develops consumer promotion and educational programs. For instance, MAP funds assist in the continuing development of the Korean Baking School, which has provided instruction to over 45,000 bakers; helping to develop a baking industry as sophisticated as any in the world.

Funding for MAP has been reduced over recent years despite increased promotion activity by our competitors. The wheat industry urges Congress to increase the budget for MAP to no less than $200 million.

The Korean Example, The Korean Baking School leads to an illustrative example of how effective USDA export market development programs can be when the various programs come together to work for U.S. wheat. Korea was the impetus for the Agricultural Trade Development and Assistance Act of 1954, also known as P.L. 480 or the Food for Peace program. Korea's four flour mills were completely destroyed during the Korean War, and after the armistice was signed in 1953, they started rebuilding and the U.S. was there to help.

According to the Korean Flour Mills Industrial Association, "the wheat import in 1956 was recognized as very important, as it was the first shipment of wheat from the United States under the Public Law 480 program. All previous shipments had been in the form of flour." The aid program helped to develop their milling and wheat foods industry, which led to a healthy commercial export market once the country was ready to graduate to the next step.

As their domestic wheat foods industry blossomed, with the assistance of the U.S., Korea became a major wheat market. As their economy strengthened, Korea didn't need wheat donations anymore, but they still needed some help. So they became a client of the GSM 102 export credit guarantee program, where the U.S. provides backing for commercial loans.

By FY 1996, the Korean Ministry of Finance & Economy phased out requests for the GSM 102 program in order to reduce the amount of long-term credit being used by Korea. However, when financial difficulties arose during the Asian financial crisis, GSM-102 credit was once again requested on a temporary basis.

Today, Korea now imports up to, and sometimes over, 4 million metric tons of wheat annually. Year after year, the U.S. is the largest wheat supplier and, in 1999, had over 50% market share. With only 46 and a half million inhabitants, Korea is the fifth largest export market for U.S. wheat.

Export Credit Guarantee Programs

The Commodity Credit Corporation (CCC) administers credit guarantee programs for commercial financing of U.S. agricultural exports. The commercial credit guarantee programs made it possible for U.S. commodities to maintain a market presence in many Asian countries during the economic crisis in that region. They are important tools in helping maintain markets in many countries where it is necessary to sustain or increase U.S. sales. Without the CCC guarantees, financing in these markets would not be possible

USDA General Sales Manager Dick Fritz is heading to the OECD in Paris this week for the next step in reforming agricultural export credits -- not just for the U.S., but for other countries, including the European Union and Canada. Our GSM programs are under attack as trade subsidies. As part of the Uruguay Round agreement member countries agreed to work toward disciplines on the use of government sponsored export credit programs in agriculture. We hope that this process can be concluded is a meaningful way in Paris.

This is an important program for wheat. Wheat sales accounted for 16.5 percent of the program last year, third after soybeans and cotton.

International Monetary Fund (IMF)

The CCC must qualify importers as credit worthy for the GSM programs and for many countries this requires the endorsement of creditworthiness by the International Monetary Fund, particularly in times of economic crisis. Thus the debate on funding the IMF is extremely important to American agriculture. Although not considered an export program, the IMF is a critical link in the big picture of maintaining market presence and being able to finance sales to countries in need.

Food Aid

The USDA programs, used in a smart and comprehensive fashion, are important foreign aid tools. And while the wheat industry applauds the basic reasons for these programs -- to help countries that are not as fortunate as the U.S. -- we also look to them with a practical eye. Last year, the federal government, with food aid programs, was the largest single purchaser of U.S. wheat.

While the U.S. wheat industry does not want to rely on government purchases, they are important to us, especially when markets shrink as they did during the Asian financial crisis of 1997-98. And even though the P.L. 480 program has been reduced - it has shrunk tremendously from the late 1950's when it accounted for 4 out 5 dollars' worth of wheat exports - the USDA stepped in these last two years with a greatly expanded use of the Section 416(b) program. This program provides for donations of surplus commodities to developing countries. In addition to helping to reduce burdensome supplies that drive down prices this program also can lend itself to market development: donating the appropriate wheat can serve to introduce a struggling country to a product that can be purchased later when their private markets emerge.

Export Enhancement Program (EEP)

Another program that has helped to facilitate sales is the Export Enhancement Program (EEP), which helps products produced by U.S. farmers meet competition from subsidizing countries, especially the European Union. Under EEP, the U.S. Department of Agriculture pays cash to exporters as bonuses, allowing them to sell U.S. agricultural products in targeted countries at prices below the exporter's costs of acquiring them. The program is used to expand U.S. agricultural exports and to challenge unfair trade practices. By 1996 the U.S. voluntarily stopped administering the EEP for wheat sales, despite the fact that EU subsidies for wheat and wheat flour exports are still used. We disagree with the Administration's refusal to use this program, especially in the face of greatly increased EU exports of subsidized flour.

Sanctions Reform

The U.S. recently made a positive step towards (re-)developing markets in previously sanctioned countries. For several years, FAS has issued program notices listing countries in which market development activities under MAP and FMD were forbidden due to economic sanctions. Recent policy and regulatory changes now allow licensed commercial sales of agricultural commodities and products to Iran, Libya, Sudan, and Cuba. This is a new opportunity, and we expect to make the most out of it. (Thus far, market activities in previously sanctioned countries have been financed by state wheat organizations.)

Unfortunately, even though prohibitions of agricultural sales to Cuba are supposedly lifted, the facts are that we still can't sell there. But we are hopeful that this Congress will act and will give U.S. wheat farmers a Cuban market to develop.

USDA

The export of American agricultural products is possible because of a large group of dedicated people in USDA who depend on you for their funding and to whom the industry is indebted. They make the export programs work.

These are the people of the Foreign Agricultural Service, who fight for market access and against political trade barriers as they arise. These people are critical to the success of export programs. The Animal Plant Health Inspection Service staff around the world who, along with FAS and the industry resolve some very vexing sanitary and phytosanitary issues that sometimes become almost immovable trade barriers. The Federal Grain Inspection Service provides a credible and critically important inspection system that overseas buyers can rely on and trust.

What is in the future of agriculture export marketing?

Every nation has in place a set of policies and programs that are designed to help meet its citizen's food and fiber needs as well as capitalize on potential trade opportunities. The Uruguay Round of the GATT and the WTO have not changed this. The playing field is not level. The global market place is and will continue to be characterized by heavily subsidized and protected competition.

In the real world of global competition, America's farmers are the world's most competitive. We have the production capacity, technology, infrastructure, management and marketing expertise. These are not enough. Our national policies and programs must be equally competitive. American agriculture cannot compete against foreign governments.

The U.S. must develop a comprehensive trade strategy for American agriculture that reflects the dynamics of the global market place and world competition.

I urge you to work closely with the industry and the administration to ensure that everything possible is in place to achieve the absolute best for America's farmers and ranchers. This includes passing Fast Track negotiating authority, responsible oversight of the WTO negotiating process, meaningful unilateral sanctions reform, the granting of Permanent Normal Trade Relations for China, and an unshakable commitment to provide American agriculture with the proper tools to develop markets and promote agricultural goods.

We must tell the world we are serious about negotiating and Fast Track is an important part of that message. With out this authority U.S. negotiating efforts are hampered as our competitors will have no reason to take our negotiators seriously.

The paper tabled last month by the U.S. Trade Representative's office in Geneva before the WTO is a positive start towards efforts to promote free and fair trade in agriculture. However, this is just the beginning of a long negotiating process. A watchful eye must be kept on our competitors during this process so that they do not drive the negotiating agenda down a path that would ultimately be harmful to American agriculture.

Current sanctions policies unduly burden U.S. agriculture and present a difficult market development project once sanctions have been lifted. Meaningful unilateral sanctions reform must be implemented to ensure that the U.S. is considered a reliable supplier of agricultural products to the world.

If Congress fails to grant China Permanent Normal Trade Relations in a timely and honorable manner we can expect to see very few, if any, sales in the future. There is no issue more important to the future of the industry than finalizing this process.

An over all trade strategy must also ensure that U.S. policies are competitive with those of other trading countries. This includes maintaining maximum funding and aggressively implementing programs such as all legal green box programs, including food assistance, export credit, market development and promotion and the Export Enhancement Program.

We believe that the Market Access Program should be funded at no less than the $200 million and the Foreign Market Development program should be no less than $42 million. While the EEP program must be maintained to counter unfair trade practices, we support congressional direction to the Secretary to use the unexpended funds in market promotion and development programs. The Foreign Agricultural Service and APHIS must be funded at levels that allow for adequate personnel and programs to meet the demands of opening and expanding world markets.

In 1995 USDA set a goal of increasing U.S. agricultural exports 50 percent by the year 2000. Such an increase would have added nearly $45 billion to the U.S. export total and would have created as many as 500,000 new jobs. However, this goal did not foresee the Asian economic crisis and the devastation that would engulf agricultural trade. We believe with fulfillment of the market opening commitments of "Freedom to Farm", fully funded export programs and a solid commitment to being a world leader for free and fair trade, American agriculture can continue to the lead world trade and meet the goal set by USDA in the near future.

In a dynamic, competitive world market, we need to strengthen the programs that will enable agriculture market development organizations to continue this partnership between Congress, USDA and the industry to maintain a growing market share in an extremely competitive world market.

Thank you for the opportunity to discuss export programs and their importance to the future of our industry.