World Grain - April 2006 - 6

from the editor-in-chief

Global market no longer
has 'residual supplier'

ardly any declaration could better define how the global grain, and especially wheat, situation has changed in
recent years than that made by a U.S. Department of Agriculture grain analyst at the 2006
Outlook Forum in Washington, D.C., U.S.
Edward Allen, the analyst, told the forum
audience that the U.S. no longer was the "residual supplier" to the world's wheat market.
Except for a journalist or two, this comment
attracted little or no attention. Allen himself
acknowledged that he was surprised, since
what he said had great implications not just
for the U.S. grain economy, but even more
important, for the entire supply-demand
structure of the world wheat market.
In seeking to appraise the meaning of Allen's assertion, it is important to realize that
historically agreement has been lacking as
to what being "residual supplier" of wheat
to the world actually meant, even when everyone agreed that this was the U.S.'s position. To some analysts, being the "residual
supplier" said that buyers on global markets
looked to U.S. supplies only after purchases
had been made from other, usually considered more desirable, origins. In other words,
being the "residual supplier" was not a role
to be envied or pursued. For some others,
this designation took on a more positive aspect, meaning that U.S. supplies were always
perceived as large enough to serve as a safe-

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Morton I. Sosland
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ty valve for the market, that running out of
wheat or other grains was almost inconceivable as long as U.S. stocks, often financed by
the government, were as large as they were at
one time in the distant past.
While advocates of U.S. grain exporting
looked on the "residual supplier" designation as mainly a black mark, that role also
had its positive aspects for the domestic flour
milling industry and their flour customers. It
implied a lack of aggressive foreign competition for the most desirable domestic qualities of wheat, leaving that cash market free of
competition from merchants seeking to supply the needs of foreign buyers more intent
on quantity than on quality. Indeed, domestic
wheat prices often experienced weakness in
the face of disappointing foreign demand as
buyers shunned U.S. supplies, if for no other
reason than their "residual" designation.
It is necessary to look no further than current world price relationships to realize how
far the U.S. has moved away from being a "residual supplier" as defined by these descriptions. Hardly anything symbolizes that transformation more starkly than the way prices for
U.S. wheat in recent months have often been
above competitive global prices, driven by
shortages of desired protein levels and quality
characteristics, as well as by expanded supplier competition that have seen new sellers
like Ukraine and even Russia pursue export

opportunities. At the same time, U.S. carryovers have been sharply reduced, relative to
both domestic and aggregate demand, from
the high levels that once prevailed and exerted pressure on markets. Most importantly,
the domestic grain-based foods industry has
found itself competing aggressively to obtain
urgently needed qualities in a marketplace
that has experienced intensified demand.
While the end of the "residual supplier"
role reflects much that has happened on the
supply side, it is on the demand side that truly
amazing changes have occurred. Instead of
the buying entities of the former Soviet Union
and China that sought to gain advantage from
their monopoly power while tending to look
on the U.S. as insurance for both supplies and
prices, the demand side is now made up of
multiple buyers that are operating in an environment heightening their need to obtain the
most desirable qualities at attractive prices.
Dealing with many importing flour millers
seeking wheat to meet their specific needs is
totally different from what ruled previously.
It is these buyers against which U.S. flour
millers and bakers find themselves competing, and it is this transformation that may be
credited with ending the U.S. role as "residual
supplier."

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WORLD GRAIN (ISSN 0745-8991), volume 24, issue 4,

Morton I. Sosland
Editor-in-Chief

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World Grain - April 2006

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