Supply and Demand for Durum Wheat: Current and Future Pressures

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Supply and Demand for Durum Wheat: Current and Future Pressures Dept of Agribusiness & Applied Economics North Dakota State University Fargo, USA TO: World Pasta

1 Supply and Demand for Durum Wheat: Current and Future Pressures Dept of Agribusiness & Applied Economics North Dakota State University Fargo, USA TO: World Pasta Day International Pasta Organization Mexico City, Mexico Oct 25, 2012 By Dr. William W. Wilson University Distinguished Professor

2 Topics Review of Supply in Durum Major Pressures Impacting Durum Apparent shifts in demand for stocks Productivity trends N. American dual market GM crop development Implications for durum buyers 2

3 MMT EU Durum Supply and Demand Production Imports Dom Use Exports End Stocks

4 MMT Canada Durum Supply and Demand Production Imports Dom Use Exports End Stocks

5 MMT US Durum Supply and Demand Production Imports Dom Use Exports End Stocks

6 MMT Canada/EU/US Durum Supply and Demand Production Imports Dom Use Exports End Stocks

7 Planted Acres (000) North Dakota Planted Acres by Crop HRS Durum Corn Soybeans Canola Battle for acres on-going Mbly, HRS and durum declining in acres Increases in GM crops: soybeans, corn, canola 7

8 Planted Acres (000) Canada Planted Acres by Crop deja-vue! Wheat Durum Corn Soybeans Canola Declines in wheat, durum Increases in Canola, soybean 8

9 Durum Cash Prices Durum Spread to MGEX Futures Cents/bu Figure 1.1 Mpls. No. 1 Cash Milling Durum Prices Spread No. 1 HAD-HRS Fut (cents/bu) Figure 1.2 Spread Mpls No. 1 Cash Milling Durum - HRS Wheat Futures Prices Longer Term Prices

10 Mpls No. 1 Durum Prices C e n t s Figure 1.1a Mpls. No. 1 Cash Milling Durum Prices MGEX Squeeze Record Low US and NA SU/Ratio Canada Quality Shortage 2010 US Prevented Planting

sensitivity when stocks are low, to threats to supply 2012 suggests a spread of about 140c/b

11 Spread U.S. HAD-Avg MGEX Futures [Based on North American Stocks/Use Ratio and Production 1+2] Conventional relationship used in most commodity analysis Outliers in , 2011 extreme sensitivity when stocks are low, to threats to supply 2012 suggests a spread of about 140c/b over MGEX Futures (950)=1090c/b Current market is somewhat less suggesting durum is favorably priced 11

8% in GM row crops) Durum is more risky: Price, quality, and quantity, in addition to severity of

12 Productivity Growth Rates Relevance: Durum losing acres to competing crops, in part due to Greater productivity growth in competing crops (1.2% in wheat, 1.8% in GM row crops) Durum is more risky: Price, quality, and quantity, in addition to severity of post-harvest discounts More ready risk reduction mechanisms for competing crops Results: % Change per year CWAD 0.3% HAD 0.0% CWRS 0.8% HRS 1.1% 12

13 Bu/a Bu/a Bu/a Saskatchewan Wheat Yield Trend Durum CWRS CWRS Linear (CWRS) y = x R 2 = Yields are risky No significance in productivity for CWRS or CWAD y = x R 2 = Durum Linear (Durum) 13

14 Bu/a Bu/a Bu/a North Dakota Wheat Yield Trend Durum HRS HRS Linear (HRS) y = x R 2 = Durum Linear (Durum) y = x R 2 = 2E

15 Supply Curves in Durum: Planted Acres vs. Planting Time Spread PlantingTimePriceSpread(Had-Hrs) Figure 3.15 Estimated ND & Acres (000) Actua Pred S p r e a d ( Figure 3.16 Estimated Canadian Durum Acres Acres (000) Actual Estimated *NASS, ERS *Ag Canada, CWB 15

16 Ratio of Durum to Spring Wheat Yields, ( ) Ratio Durum/Spring Wheat Yields Relative yields indicate relative profitability, at equal prices Results Most Canadian regions, and some ND, are about 1.0 Some ND regions are< 1.0 Implications: At equal prices, greater propensity to grow durum in Canada, and, SW ND; Lesser propensity to plant durum in elsewhere ND Concurrently: HRS vs. canola Canada would look to expand canola more than in ND; ND would tend to produce more HRS 16

17 CV of Durum Wheat Yields ( ) CV Durum Wheat Yields Risk: Major concern to industry Shifting acres to regions with greater risk in durum yields 17

18 North Dakota Crop Budgets Durum HRS Canola Corn Soybeans Market Yield Market Price + LDP: Market Revenue DIRECT COSTS -Seed Herbicides Fungicides Insecticides Fertilizer Crop Insurance Fuel & Lubrication Repairs Drying Miscellaneous Operating Interest SUM OF LISTED DIRECT COSTS INDIRECT (FIXED) COSTS -Misc. Overhead Machinery Depreciation Machinery Investment Land Charge SUM OF LISTED INDIRECT COSTS SUM OF ALL LISTED COSTS RETURN TO LABOR & MGMT LISTED COSTS PER BUDGET UNIT (bu) : (bu) : (lb) : (bu) : (bu) : -Direct Costs Indirect Costs Total Listed Costs

19 North American Dual Market Major change in grain marketing, and, durum in particular 19

20 20

21 Background: Imports of durum Imports of durum about 500,000 mt/year No. 1 and 2 s Comprise about 20% of use for domestic processing Mostly No. 1s and 2s 21

22 Major Functions: Monopoly buyer/seller of milling wheat (and malting barley) from the Canadian Prairies Sales made direct, and/or through accredited exporters Operates pool pricing system Including an initial price scheme Guarantees from the Gov of Canada All borrowings for buying/selling grains Borrowings for Initial prices to growers Margin calls on futures hedging Accredited exporters (crucial) and country buyers Ancillary Functions: Allocates rail cars to elevators Conducts tendering system for elevation services Sales made by CWB, assigns origination to individual elevators (firms) Committee member influencing: Grain quality regulations Variety Release Export promotion through CIGI End-use certificates CWB does not own assets, and hence, cannot borrow w/o Gov of Canada funding 22

23 Pre-Dual Market Changes Growth in Canola: to now exceed wheat plantings Changes that have occurred in recent years Rail Elimination of the WGTA rail rates, and related subsidy mechanism; Elimination of the provision in the rail rate regime that would discriminate against US grains; Adoption of a system of regulated (revenue cap rates) and non-regulated rates for grain shipping; Grain marketing Elimination of kernel visual distinguishability in grain marketing Replacement with a declaration upon delivery. Changes in CGC regulations to allow shipment of US grains in the Canadian grain marketing system; 23

24 Legislative Features Farmers can immediately forward contract wheat and barley sales for execution on or after August 1, 2012; Grain companies, end users, and the CWB can offer of wheat and barley contracts to farmers for execution on or after August 1, 2012; Producers will be able to deliver wheat and barley to any domestic or export buyer and transportation will be arranged between buyers and sellers; The CWB will continue to operate under a interim period Government will continue to provide CWB borrowing and initial payment guarantees; CWB will be able to buy wheat and barley as they choose, including pooling arrangements, in addition to the full range of other grains CWB will continue as an entity offering marketing options to farmers on a voluntary basis, Ancillary: Retain provisions for producer rail cars, check-offs, research funding etc.., and special provisions for the Port of Churchill. 24

25 Key Elements Following Change ICE Futures and related forward pricing mechanisms More (new) competitors to serve customers directly! Glencore acquisition of Viterra JRI, Cargill, P&H, Patterson, etc. Other buyers/new entrants (e.g., CHS, others) Alternative logistics to facilitate bilateral trade at lower costs Marketing costs: Competitive pressures to reduce handling and rail costs 25

26 Forward pricing and Transparency - Provisions facilitated providing CWB advantage in forward pricing Credit provisions Monopoly seller Non-transparency Intra-year (not-inter-year)! Advantage: Equivalent to GOC providing a long-put option Value: About 50c/b Future: Some features that provided CWB an advantage, are eliminated Expect Prices for deferred shipment will increase to more accurately reflect risks of selling in deferred positions Major challenge for inter-crop year forward sales need for contracting mechanisms 26

27 Rail and Rate comparison: Major Differences Canada 2 rail rate regimes Regulated rates for exports (non-us) from Pr. Provinces to/through Vcvr and Tbay Maximum rates, based on formula on a mileage basis, and revised/updated annually. Changed to allow US shipments under these rates Deregulated (similar to SRA) for Domestic and for shipments to US mills Subj to FSC US No distinction on domestic vs. exports Shuttle/DET incentive mechanisms Ancillary charges FSC Car Values 27

28 Over time Canada rates have increased Formula driven rates (rev cap) Exchange rate (Regulated rates are in C$/mt) Non-regulated rates are greater 28

29 $US/car 47/50 $US/car Shuttle/100 Shipment: 47 & 50 car rates Shipment: Shuttle & 100 car rates BNSF Can BNSF Can Vulcan Shelby Swift Current Macon Estevan Berthold Killarney Bottineau Winnipeg Drayton/Crystal Vulcan Shelby Swift Current Macon Estevan Berthold Killarney Bottineau Winnipeg Drayton/Crystal Export Rates Canada and US--Comparable Geographically Located Stations to Duluth / Thunder Bay Canada< US Rates. 29

30 $US/car 47/25 $US/car DET/50 47 and 25 Car DET/50 Car BNSF 4000 BNSF 3000 Can 3000 Can Vulcan Shelby Swift Current Macon Estevan Berthold Killarney Bottineau Winnipeg Drayton/Crystal Vulcan Shelby Swift Current Macon Estevan Berthold Killarney Bottineau Winnipeg Drayton/Crystal Domestic Rates Canada and US--Comparable Geographically Located Stations to Chicago and beyond. US < Canada 30

31 GM Crops Major game changer in agriculture, impacting all crops! 31

32 U.S. Harvested Wheat Acres, , and Projections for million acres harvested Actual FAPRI Baseline USDA Baseline CARD Baseline CARD High Oil Price CARD Reduced CRP OECD-FAO Wilson Base Wilson High Ethanol Dept of Agribusiness & Applied Economics, NDSU, Fargo

33 Genetic Modification in Grain Crops Game Changer Changing geography on production and displacing other crops, notably small grains Changing technology growth rates Impacts First mover advantages to countries/regions/states targeted by agbiotech firms year advantage Greatest appreciation in land values those regions transforming from non-gm technology; to more GM technology. i.e., technology efficiency is partly capitalized into value of technology and value of land for which the technology is applied 33

34 Corn Planted 1995 Corn Planted 2011 Corn Corn

35 Soybean Planted Area 1995 Soybean Planted Area 2011 Soybeans Soybeans

36 HRS Wheat Planted Area 1995 HRS Wheat Planted Area 2011 HRS HRS HRS Area: Has retained area relative to rest of wheat sector due to demand growth, competitive pressures and niche market characteristics acres decline from peak <20% (vs. rest of wheat which has declined 40%)

37 Durum Wheat Planted Area 1995 Durum Wheat Planted Area 2011 Durum Durum Durum Area:

38 Durum Wheat Planted Area 1995 Durum Wheat Planted Area 2011 Durum Durum Durum Area:

39 Crop Improvement Technology: GM Tech and Seeds and Traits Competing crop technologies have embraced Marker-Assisted Breeding GM technology Emergence of Seeds and Traits as business Seeds & Traits Platform: combining novel genetic traits with elite germplasm to develop crops that thrive while expressing the desired trait. Discovering novel genes. Transforming them into the cells of plants. Optimizing the expression of the genetic trait in plants in the correct plant tissues, at the appropriate time and in sufficient levels. Incorporating, through breeding, the genetic trait into commercially viable varieties or hybrids. Business strategy e.g., From Dow Introduction of genetic traits via biotechnology does not reduce the importance of superior germplasm in the host plant, nor does it replace the need for plant science and plant breeding. Fundamental Paradigm Shift on Technology Distribution Dept of Agribusiness & Applied Economics, NDSU, Fargo

40 Research Expenditures: Seeds and Traits Expenditures ($ Mil) Bayer Dow Dupont Monsanto Syngenta Monsanto Is leading investment in R&D on Seeds and Traits. Others increased spending on seeds and traits but did not do so until about the early 2000s. By 2006 each of the agbiotechnology companies has further accelerated their spending on seeds and traits. Monsanto has a lead on its rivals by about 5-6 years

41 New GM Traits and Competition Results of these expenditures in research is for Emergence of new GM traits An escalation in yield growth rates Dept of Agribusiness & Applied Economics, NDSU, Fargo

42 Industry Corn Portfolio* A Steady Pipeline of Events VT Triple Pro (Monsanto) Broad Lep - MIR 162 (Syngenta) Drought Tolerance (Monsanto/ BASF) Drought Tolerance (Syngenta) Improved Feed (Pioneer/DuPont) Higher Yield (Monsanto/ BASF) RW dual Mode of action (Syngenta) Nitrogen Utilization (Monsanto/BASF) Nitrogen Utilization (Pioneer/DuPont) Improved Feed (BASF) Agronomic Trait Quality Trait Novel Insect Traits (Syngenta) X Corn Amylase (Syngenta) SmartStax (Monsanto/Dow) Optimum Herb. Tol. (Pioneer/ DuPont) Increased Yield (Pioneer/ DuPont) Herbicide Tol. (Dow) Triple-mode Herb. Tol. (Pioneer/ DuPont) Increased Ethanol (Syngenta) Drought Tolerance (Pioneer/ DuPont) Increased Ethanol (Pioneer/DuPont) Nitrogen Utilization (Syngenta) *Estimated commercialization pipeline of corn biotech events prepared by the U.S. Grains Council Commercialization dependent on many factors, including successful conclusion of regulatory process

43 Industry Soybean Portfolio* A Steady Pipeline of New Biotech Events Nearly Every Year RR2Y Monsanto 2009 High Stearate (Monsa nto; Pioneer/DuPont ) Omega-3 (Monsanto ; Steandon ic Acid) High Beta- Conglycinin (Monsanto ; Pioneer/ DuPont) Low- Phytate Pioneer/DuPont Bt/RR2Y (Monsan Low to) Sat (Monsanto) Dicamba Tolerant (Monsanto) Feed: High Protein Soybean (Monsanto; Pioneer/DuPo nt) Omega-3 (EPA/DHA) Pioneer/DuPont Yield Rust (Monsanto; Pioneer/DuPont (Monsanto; Pioneer/DuPont) Agronomic Quality/Food Nematode Resistance (Syngenta) Antibody - containing (against E. coli 0157:H) 201X High Oleic (Pioneer/DuPont) Liberty Link (Bayer) GAT/Glyphosate-ALS (Pioneer/DuPo nt) Glyphosate & isoxazole tol. (Bayer)* Modified 7S Protein FF (Pioneer/DuPont) High Oleic, Stearate (Pioneer/DuPo nt) Processing: High Oil Soy (Monsanto) HPPD Tolerant (Syngenta) *Estimated commercialization pipeline of soybean biotech events prepared by the American Soybean Association, Disease (Monsan to; Pioneer/DuPont) Disease Resistance (Syngenta) Soybean Cyst Nematode Monsanto; Pioneer/DuPont Herbicide tol.: 2,4-D (Dow) and aryloxyphenoxy propionate

Yield Trends in Corn: USDA View (embodies tremendous technological innovation) 12000 Transgenic (Bt) insect resistance GRAIN YIELD (kg ha-1) 10000 8000 6000 4000 Double-X to single-x hybrids

44 Yield Trends in Corn: USDA View (embodies tremendous technological innovation) Transgenic (Bt) insect resistance GRAIN YIELD (kg ha-1) Double-X to single-x hybrids Expansion of irrigated area, increased N fertilizer rates Soil testing, balanced NPK fertilization, conservation tillage Integrated pest management Reduced N fertilizer & irrigation? y = kg/ha-yr [1.79 bu/ac-yr] R 2 = 0.80? YEAR K.G. Cassman, CAST Renewable Energy Agriculture, In Press. 44

Corn trait efficiency: Drought Resistance Potentially improve yields by 8-22% (15% average) under drought stress that reduces yields by 50% Monsanto (2008) indicated yield improvements of 6-10% in

45 Corn trait efficiency: Drought Resistance Potentially improve yields by 8-22% (15% average) under drought stress that reduces yields by 50% Monsanto (2008) indicated yield improvements of 6-10% in water stressed environments. Testing of first and second generation DT corn varieties ranges from 7 to 13% for first generation tests 9-15% for second generation 9-10% yield advantages were reported in low drought seasons and 15% in a high drought. Syngenta: 15% less yield loss during dry years. 45

NUE Corn 5 companies working on NUE 5-10

46 NUE Corn 5 companies working on NUE 5-10 years out 2 technologies GM MAS (does not need dereg) Trait efficiency Produce same yield with 30% less fertilizer Or, Produce greater yield w/same fertilizer Value: $700 million (US), $1.5 bill. worldwide 46

47 Projected Yields: Double by 2030 Monsanto released the following figure to illustrate the change in prospective growth rates. These translate to growth rates in the area of 3.2 to 3.4% per year. Other companies have released similar goals

Wheat Technology Landscape Company Acquisitions or Partners (Year, Country) GM trait targets 1 Athenix (2009, US) CSIRO (2009, AU) Evogene (2010, IL) NARDI (2011, RO) RAGT (2011, FR) SORT,

(2010, US) they own a small share Acquired Trident seed.. Biogemma (FR) U of idaho CSIRO (2006.

48 Wheat Technology Landscape Company Acquisitions or Partners (Year, Country) GM trait targets 1 Athenix (2009, US) CSIRO (2009, AU) Evogene (2010, IL) NARDI (2011, RO) RAGT (2011, FR) SORT, EUROSORT (2010, UA) South Dakota State University (2011, US) Texas A&M (2011, US) University of Nebraska-Lincoln (2010, US) HRZ Wheat (2011, US) Northwest Plant Breeding (2011, US) Arcadia (2010, US) they own a small share Acquired Trident seed.. Biogemma (FR) U of idaho CSIRO (2006. AU) BASF (2010, US) Intergrain (2010, AU) Kansas State University (2010, US) Westbred (2009, US) Virginia Tech (2010, US) NDSU (2012) CIMMYT (2010, MX) Drought NUE Yield Disease Drought Quality Drought stress (incl of drought Herbicide tolerance Yield hybrid Most of the traits are complex in nature

49 Wheat Yield Under Alternative Technology Assumptions 55 Wheat technology Marker assisted selection +1-2%/yr GM technology +20% Australia GM lines had yield 20 percent higher than conventional wheat varieties under conditions of drought stress Value of DR Wheat in N. America About $350 million Bu/a Cumulative Probability MAS GM Yield (bu/a) CT DT =.20 DT =.25 NDConv Private 1 GM/Mrk 49

50 GM Wheat Issues/Impacts Issues Massive acceleration of funding for research Partnerships being created with Public Universities for Germplasm Numerous common traits (DR, NUE, Yield) will force immense competition regarding trait efficiency, consolidation and expanding into other traits (quality, consumer) 10 years out Other crops will have up to 20 more traits commercialized during this period. Impacts Reduce cost of wheat production by $10-20/acre Tendency for yield risk to be reduced under GM Increase in competitiveness relative to other GM crops (corn and soybeans) Increased attention to other traits in wheat Concentrated in N. America, and Australia 50

51 Status of GM Traits and Durum Biotechnology in Durum: Issues Acres small acres inhibits novel R&D Food use and export market: acceptance more important than other crops, and wheat Requirement of potential separate deregulation package ($30m), vs. durum being bundled in all wheat for de-regulation! Biotechnology in Durum: Status/Outlook >1 biotech companies have indicated interest in exploring durum (not affirmed) >1 has indicated interest in developing nonbiotech traits for durum 51

52 Summary I: Supply/demand 2012 Adequate supplies and durum is favorably priced Escalation in prices due to fundamentals of other crops, impacting durum Overall growth in, China soybeans, ethanol demands, droughts (more frequent abnormal crop years), etc. Looking forward, major changes include Industry needing to operate with lesser national stocks Durum yields are lagging others Shift in durum plantings to more risky regions Industry needing to operate with lesser national stocks Greater risk in price levels and differentials 52

53 Summary II: Liberalization in Canada Marketing Massive changes w/in N. America But, a continuum toward greater decentralization of marketing world-wide Fewer remaining STEs Protections afforded by CWB will be lessened substantially Deferred pricing (intra-year) Credit Quality over-runs Stock-holding CWB tended to carry greater inter-year stocks Shift to industry to carry more stocks Forward pricing/contract Pressures will emerge for more commercially acceptable preplanting contracts (in both countries) Premiums/discounts w/in Canada will provide greater market incentives w.r.t. quality, timing, etc. 53

54 Summary III: GM Crops Game changer impacting all of agriculture Change geography of production Change opportunity cost of producing crops Impacts on wheat Lost acres to corn, soybean and canola Shift more wheat to Black Sea and other regions GM in Wheat At least 10 years out Reduced costs of production Impacts on durum, highly uncertain 54

55 Implications for Buyers Near Term Durum values for 2012 favorably priced with sufficient supplies 2013 Longer-term Lower stocks Durum prices increase to competing crops to induce plantings Strategic Implications Fewer stocks.more volatility (risk) Competing crops are eroding durum production in traditional regions More contracting (pre-planting) reduce impacts of post-harvest price adjustments risks. Stock-holding will become more important. Demands for more healthful-traits for all wheat products durum has role to play.thought this is yet to be defined 55

56 Thank you.. Q&A 56

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