GRAIN QUALITY AND NORTH AMERICAN HARD WHEAT EXPORTS

Past debate on competition and quality in international wheat markets has focused on class and country of origin as the salient source of differentiation. This study analyzes changes in demand for both wheat classes and grades. Comparisons are made between Canadian and U.S. hard wheats, principal competitors in the hard wheat market. Both countries are dominant producers of Hard Red Spring Wheat (HRS in the United States and Canadian Western Red Spring [CWRS] in Canada); the United States is the dominant producer of Hard Red Winter (HRW); and both countries are large producers of durum (Hard Amber Durum [HAD] in the United States and Canadian Western Amber Durum [CWAD] in Canada). Due to the indigenous similarities among these wheats, the competitive environment between these two countries is particularly acute. The study documents the composition of exports by class and grade, evaluates changes through time, and identifies segments of countries with similarities in grade specifications. Results identify important differences in composition of exports. Whereas Canada exports largely No.1, the United States exports largely No. 2 OB (or better). Further, there have been changes in the composition of exports by class and grade toward HRS, CWAD, CWRS and toward higher grades within classes. Results indicate the following: * Composition of Exports: Canada exports a substantially larger portion of its exports as No. 1 than does the United States. This is true for each class. The average shares of exports of grade No 1. for each class from 1986-1991 were HRW, 3 percent; HRS, 7 percent; CWRS, 60 percent; HAD, 5 percent; and CWAD, 25 percent. * Changes in the Composition of Exports: There have been some dramatic changes in the distribution among exports by grade and class that have important implications. Generally, results from this study indicate the following: By class. From the early 1980s to the mid-1990s, wheat classes whose exports increased the fastest were HRS, Canadian Other, CWRS, and CWAD (from greatest to least). Those classes experiencing negative growth included HAD, soft, and HRW (listed from least to greatest negative growth). By grade. There have also been some notable changes in the composition of exports among grades from each country. From 1986-87 to 1993-94, export volumes of HRW, HRS, and HAD have shifted from lesser amounts of lower-grade wheat to greater proportions of higher-grade wheat. Most notable (in percent net shift) has been the growth in exports of No. 1 from the United States. The change represents a shift from lower grades. * Market Segments. Cluster analysis is used to identify countries importing similar qualities of hard wheats from the United States (comparable data did not exist for Canadian exports). Countries importing wheat with similar characteristics are referred to as segments, and their behavior and composition has important marketing implications. Results from this analysis indicate the following: Changes in segment numbers over time. There were notable changes in the definition and composition of segments over the time period of the study. The number of segments existing in durum exports increased from three to four, HRS increased from two to five segments, and HRW increased from two to four segments. In general, these were distinguished by the levels of dockage, test weight, defects, and protein level. Segment composition. Countries included in what would be defined as the higher quality segments varied, and in some cases, they jumped in and out of a segment. Those countries that were in the higher-quality HAD segment more than 50 percent of the time in more recent years include Italy, Costa Rica, Japan, and Kuwait. Those in the higher-quality HRS segment more than 50 percent of the time were Taiwan, South Korea, Malaysia, New Zealand, and Singapore. Those in the higher-quality HRW segment more than 50 percent of the time included Japan, South Korea, Taiwan, Thailand, Bangladesh, Hong Kong, Malaysia, and Norway. A number of implications can be discerned from these results that are important for both the public and private sectors. First, it is notable that the fastest growth market has been HRS, whereas HRW has fallen sharply, suggesting a significant shift in the composition of trade over the past decade. Second, in the United States, there has been debate about whether to attempt to regulate the quality level of wheat exports through factor limits, as opposed to relying upon contractual specifications between buyers and sellers. These results suggest that over time, the quality (level and specificity) of wheat exported from the United States has increased. This is likely a result of competition among suppliers and of importers' contractual specifications to obtain higher-quality wheats. Finally, comparisons between U.S. and Canadian exports and prices must take into account the important differences in the distribution of their respective exports among classes. It is notable that a large proportion of Canadian exports are No. 1 in contrast to those from the United States which are predominately No. 2. This is important because routinely quoted prices are for No. 1 from both Canada and the United States. Thus, direct comparisons of these prices should be treated with caution. A number of implications for the private sector can also be identified from these results. First, the shift in U.S. exports toward greater specificity and generally toward higher-quality wheats has implications for the domestic processing sector. Traditionally, the processing sector dominated the consumption of higher-quality hard wheats, leaving the remainder for the export market. The shifts identified in this analysis suggest that in the future, the domestic market will have less dominance over the higher-quality wheat supply, thus having the effect of raising premiums. A second implication relates to the apparent increase in differentiation and number of segments in the international wheat market. These results demonstrate the extent to which the private trading and handling sector has responded to market conditions by increasing specificity. It also should be viewed positively by traders and others in the supply chain in that the trend allows them to compete in segments less characteristic of "commoditization." However, doing so may very well require the ability to create segregations that are maintained throughout the supply chain through the use of increasingly more sophisticated premium/discount schedules and/or through other vertical coordination mechanisms