WHEAT YEARBOOK May 01, 2002 March 2002, ERS-WHS-2002 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- WHEAT YEARBOOK is published annually by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. This release contains only the text of the WHEAT YEARBOOK--tables and graphics are not included Printed copies of this Yearbook will be available from the USDA order desk. Call, toll-free, 1-800-999-6779 and ask for stock #ERS-WHS-2002, $21. ERS-NASS accepts MasterCard and Visa. ------------------------------------------------------------------------------ Contents Summary Ending Stocks Down, Prices Rise Outlook for 2002/03 Winter Wheat Acreage Seeded is the Lowest Since 1971/72 Wheat Supply and Ending Stocks Likely Down in 2002/03 Foreign Wheat Production Likely To Increase Significantly in 2002/03 Situation and Outlook for 2001/02 Prices Strengthen As Ending Stocks Decline in 2001/02 World Wheat Production and Stocks Drop in 2001/02, Trade Rebounds U.S. Wheat Exports Down in 2001/02, U.S. Share of Global Trade To Decline Wheat by Class, 2001/02 Wheat Quality Good in 2001/02 Special Articles Economic Analysis of Ending the Issuance of Karnal bunt Phytosanitary Wheat Export Certificates Wheat Production Costs Vary Across the United States International Wheat Breeding and Future Wheat Productivity in Developing Countries Situation Coordinator Gary Vocke (202) 694-5285 Principal Contributors Edward Allen (202) 694-5288 Gary Vocke (202) 694-5285 Production Assistance Beverly Payton (202) 694-5232 Editor Martha R. Evans (202) 694-5118 Layout & Text Design Wynnice Pointer-Napper (202) 694-5130 Summary Wheat Supplies Drop; Demand Weak The Wheat Yearbook presents preliminary projections for 2002/03 that were released at the 2002 Agricultural Outlook Forum on February 22, 2002. U.S. wheat supplies for 2001/02 are expected to drop 343 million bushels from a year ago to 2,929 million bushels. Total disappearance is forecast to drop 168 million bushels from 2000/01, the result of lower exports and feed and residual. Use will exceed production, and stocks are forecast down 175 million bushels from 2000/01. The season- average farm price is projected to range between $2.75 and $2.85 per bushel, up from $2.62 a year earlier. Winter wheat plantings for the 2002 crop are down slightly from a year earlier and the lowest since 1971. Durum prospects are somewhat better than most other classes of wheat as a result of a shortfall in 2001s production in Canada and the United States. This has increased prices of milling-quality durum and should promote increased plantings. Spring wheat acreage will continue to face strong competition from oilseeds in 2002 and greater competition from barley in some areas, given tight supplies of malting barley in the United States and Canada. The projected 2002 harvested area is increased by 900,000 acres from last year, assuming a 3-year average harvested-to-planted ratio by State. Total wheat production for 2002/03 (June/May) is projected to increase 92 million bushels from a year earlier, assuming an average yield of 41.3 bushels per acre, based on 1999- 2001 average yields by State. However, the higher production will be more than offset by reduced beginning stocks. Total use is projected down 90 million bushels as exports drop to their lowest level in 30 years. Prices are projected down from the midpoint of the 2001/02 price range to $2.75 per bushel. Winter wheat in the Northern Hemisphere has been planted, and area in several of the largest producing regions has increased. Moreover, the area increases are large enough so that unless yields drop dramatically, global wheat production will increase in 2002/03. To date, foreign producers have had generally favorable weather. However, in some countries that had excellent yields in 2001/02, yield declines in 2002/03 are likely. Global supplies will rise if production gains exceed the 10-million-ton drop in beginning stocks. World wheat use is likely to grow slowly, with most of the increase driven by population growth supporting human consumption. However, with increasing wheat supplies in the European Union, and possibly lower prices compared with other grains, increased wheat feeding can be expected in 2002/03. Outlook for 2002/03 Winter Wheat Acreage Seeded is the Lowest Since 1971/72 Winter wheat plantings declined slightly from a year earlier to their lowest level since 1971/72. Spring wheat (including durum) plantings are expected to be unchanged, with some decrease in other spring wheat planting offsetting a rise in durum plantings. The U.S. Department of Agriculture will release its first official forecast of the 2002 production on May 10, 2002. Winter Wheat Acreage Down Slightly from Last Year The Winter Wheat Seedings report released by the National Agricultural Statistics Service (NASS) on January 11, 2002, provides the first indication of wheat plantings for 2002/03 (fig. 1). Winter wheat planted area in 2002 is estimated at 41.0 million acres. This is down only slightly from 2001 and is the lowest level since 1971. Hard red winter (HRW) wheat seeded area is 29.3 million acres, up .3 million acres, or 1 percent from a year earlier. Texas and Oklahoma led the slight upswing in winter wheat plantings, up a total of .8 million acres and .2 million acres, respectively. Montana also showed a large increase. A notable exception to the increased plantings is Kansas, where growers planted .4 million fewer winter wheat acres than last year. Soft red winter (SRW) seeded area is down .355 million acres, or 4 percent, from last year to 8.3 million acres. Planted area is down in most of the principal SRW States. White winter wheat seeded area for 2002 is 3.4 million acres, down 36,000 acres, or 1 percent from 2001. Durum wheat seeded area in Arizona and California for the 2002 harvest are estimated at a combined .179 million acres, up 6,000 acres, or 3 percent, from a year earlier. Spring Wheat Acreage Prospects Even though global and U.S. stocks have been declining, wheat prices have risen only modestly. In most areas, returns for spring wheat relative to competing crops will not provide incentives to expand plantings (figs. 2 and 3), although there could be an expansion in some areas due to plantings on land where the winter wheat crop will be abandoned. Durum prospects are somewhat better than most other classes of wheat as a result of shortfall in 2001 production in Canada and the United States. This has increased prices of milling-quality durum and should promote increased plantings. Spring wheat will continue to face strong competition from oilseeds for acres in 2002, and greater competition from barley in some areas, given tight supplies of malting barley in the United States and Canada. NASS will release an estimate of farmers intentions to plant durum, other spring wheat, and row crops in the March 28 Prospective Plantings report. Weather in Plains is a Continuing Concern for 2002/03 Crop Adverse weather conditions are affecting the condition of the wheat crop on the Plains. In Kansas, 44 percent of the crop was rated poor to very poor on March 25, 2002, while twenty-three percent of the crop was rated good to excellent. A year earlier, 27 percent of the crop was rated poor to very poor and 33 percent was good to excellent. Conditions are also poor elsewhere. In Texas, 49 percent of the crop is rated poor to very poor and 17 percent is rated good to excellent. In Oklahoma, 48 percent of the crop is rated poor to very poor and 21 percent is good to excellent. The Nebraska situation is better, where 46 percent of the crop is rated good to excellent and 18 percent is poor to very poor as of March 4, 2002. Outlook for 2002/03 Wheat Supply and Ending Stocks Likely Down in 2002/03 Slightly higher production due to increased harvested acreage and higher yields in 2002/03, is more than offset by the smaller carryin stocks, resulting in an expected reduction in supplies from a year earlier. Total use of wheat is expected to weaken as exports will likely decline, as will prices. The following supply and use projections for 2002/03 were released at the 2002 Agricultural Outlook Forum on February 22, 2002. The first official U.S., world, and country- specific supply and use projections for 2002/03 will be in the May 10 World Agricultural Supply and Demand Estimates report. All Wheat Production Is Projected Up from 2001 While there remain many questions about the number of spring wheat acres, especially durum, there also is considerable uncertainty about harvested acres of winter wheat. The forecast harvested area of 49.6 million acres is up almost 1 million from the 2001 crop (fig. 4) when harvested acres were the lowest since 1972. The harvested area in 2002 is projected using a 3-year average harvested-to-planted ratio by State. It is likely that much of the 800,000-acre increase for Texas shown in the Winter Wheat Seedings reported will be hayed and grazed instead of harvested for grain. Dry areas in parts of the Plains States could result in reduced harvest to planted ratios. Assuming an average wheat yield of 41.3 bushels per acre (fig. 5), based on the average of 1999-2001 yields by State, results in production of 2,050 million bushels, up 92 million bushes from 2001. The higher production will be more than offset by reduced carryin stocks, leaving 2002/03 supplies well below a year earlier. Total Use Is Projected Down, Price To Decline Food use will likely increase about 1 percent (fig. 6). This change is commensurate with population growth and the average annual percentage change in food use since 1990. Feed and residual, at 225 million bushels, is unchanged from 2001/02. U.S. exports in 2002/03 are expected to fall to 900 million. This level of exports is slightly below the 909 million bushels in 1985/86. The United States will face increased competition from expanding production in the major foreign exporters, especially the European Union, and continued strong competition from exports from Russia, Ukraine, India, and Eastern Europe. Prices are projected down 5 cents from the midpoint of the March price range for 2001/02 to $2.75 per bushel, due to the expected increased international competition. Outlook for 2002/03 Foreign Wheat Production Likely To Increase Significantly in 2002/03 Winter wheat plantings in the Northern Hemisphere were up in several of the largest producing regions. Barring an unexpected dramatic drop in yields, global wheat production will increase in 2002/03. Global supplies will rise if production gains exceed the 10-million-tons drop in forecast beginning stocks. World wheat use is likely to grow slowly, with most of the increase driven by population growth supporting human consumption. However, with increasing wheat supplies in the European Union (EU), and possibly lower prices compared with other grains, increased wheat feeding can be expected in 2002/03. Global Wheat Production, Declining for the Last 4 Years, Likely To Increase in 2002/03 The U.S. Department of Agriculture will issue its first global and country-specific supply and use projections for 2002/03 on May 10. Winter wheat was planted in the Northern Hemisphere last fall, and area is reportedly up in more regions than have posted declines. However, yields will depend on the weather during coming months. Moreover, spring wheat in the Northern Hemisphere and all wheat in the Southern Hemisphere has not been planted. Global wheat production has declined for the last 4 years, as generally low prices discouraged plantings and unfavorable weather hurt yields in some regions. Wheat prices strengthened modestly in many countries in 2001/02, providing an incentive to increase area planted for 2002/03. World wheat production could post a large increase in 2002/03 if weather continues generally favorable. The 2002/03 wheat crop is harvested first in South Asia, beginning in India in March, and soon after in Pakistan. Area in India is reportedly up more than 5 percent, with high government support prices encouraging farmers to plant, even though dryness delayed plantings in some rainfed areas. Yields and production are expected to rebound from last year. Moreover, government wheat stocks are growing. In Pakistan, favorable February rains followed a very dry first half of the growing season. Production may not change much, but stocks are forecast down, so wheat supplies are likely to be less abundant in 2002/03. In China, the worlds largest wheat producer, the change in area is uncertain. A Ministry of Agriculture survey indicated winter wheat area is down almost 4 percent, while a National Bureau of Statistics (NBS) survey indicated area will be little changed from last year. Some producers are shifting to other crops because of higher returns. The NBS survey indicated a continued shift to quality wheat. Last years wheat yields were well below trend because of unfavorable weather. Rainfall has been limited since planting, and yields will hinge on spring rains. In addition, producers have increased plantings of lower yielding, higher quality varieties. Thus, production is unlikely to increase dramatically, if any. In the European Union (EU), COCERAL, the major grain trade lobby, has estimated wheat plantings up 14 percent (fig. 7). Durum plantings may be up only slightly from a year earlier. A year ago, excessive rains during planting reduced winter wheat area sharply in Portugal, Spain, France, and the U.K. Plantings for 2002/03 rebounded in those countries because of much more favorable planting conditions. Wheat prices were strong during planting last fall, boosting wheat area in other EU countries as well. Compensatory payments for oilseeds and grains were equalized, favoring wheat. Area shifted to wheat from oilseeds and coarse grains. The increase in area is large enough so that trend yields in 2002/03 would result in record or near-record production. Eastern Europes wheat production is expected to decline in 2002/03 if yields return to trend levels from the above- average results last year. Last years large crop led to increased stocks and depressed producers returns in several countries. Wheat area is reported lower in Hungary, Romania, and the former Yugoslavia. In Hungary, grains committee officials are predicting a 13-percent decline in production. Bulgarias Agricultural Ministry reports winter wheat planted area up 8 percent because of improved planting conditions. Poland, the regions largest producer, is expected to maintain the previous years near-record area, but there may be increased loss from some harsh winter weather. In the former Soviet Union winter wheat area has increased. Russias sown winter grain area is reported up more than 10 percent. Despite an intense cold outbreak during December, the Federal Weather Center in Russia estimated that the amount of winter wheat that will need to be replanted to a spring crop will be less than the average of the last 5 years. In Ukraine, winter grain area planted is reported up slightly, but winterkill has clearly increased, so area harvested is expected to decline. Yields last year for both Ukraine and Russia were above average, so a return to average yields in these countries would imply a decline in production. Spring wheat, which last year accounted for over 55 percent of wheat area in the former Soviet Union, but less than 40 percent of production, has not yet been planted. Production prospects are uncertain in North Africa. Planting conditions last fall were generally favorable and area planted stable, but severe dryness during January and February plagued most of the region. The critical reproduction period for Northwest Africa's winter wheat, the time in which it demands substantial moisture, occurs during March and April. Recent rains have helped in some areas, but given the current lack of sufficient soil moisture, timely spring rains will be critical for the continued development of the crop. Planting and winter growing conditions across the Middle East were generally favorable this year, except for some dryness in rainfed areas of eastern Iran. A return to average yields would imply a production decline in Syria, which posted record wheat yields last year, but would boost crops in Turkey and Iran where last years yields were below average. Much will hinge on timely rains, but an increase in production is expected for the region. Spring wheat producers in the Northern Hemisphere and Southern Hemisphere producers have not yet planted wheat for harvest in 2002/03. This includes major exporters such as Canada, Australia, Argentina, and Kazakstan. Because current prices are somewhat higher than a year ago, some of these exporters are expected to increase area. In Canada, total wheat area is expected to decline slightly, with area shifting to other crops, especially canola. Producers are expected to plant more durum and less bread wheats. Extremely dry subsoils caused by long-term drought across much of the Canadian prairie will make timely spring and summer rainfall crucial for crop prospects. However, since last years wheat crop was hurt by drought, a return to average yields would boost production. According to the Australian Bureau of Agriculture and Resource Economics, Australias wheat area and production are projected to increase slightly. Returns to sheep and cattle raising have improved, but large investments in increased crop area will limit movement out of wheat. Higher wheat plantings are expected in Argentina because the exchange rate changes make producing for export very attractive. Wheat is likely to be favored over other crops because the cost of inputs is lower for wheat than for most alternative crops, and much of the wheat crop is exported. Increased wheat production prospects in the EU, South Asia, and most other regions are expected to more than offset declines in Eastern Europe and the former Soviet Union. The declining trend in global production over the last 4 years is likely to be reversed in 2002/03, with a significant increase likely. Lower Beginning Stocks in 2002/03 To Limit Supplies Global wheat stocks at the start of 2002/03 are forecast down almost 10 million tons from the previous year. Combined stocks of the major exporters (the United States, Canada, EU, Australia, and Argentina) are expected to drop more than 10 million tons. Large, mostly offsetting shifts in wheat stockholding are occurring in other regions during 2001/02. Chinas wheat stocks are projected down 19 million tons. However, wheat stocks in the former Soviet Union are forecast up 14.5 million tons as production rebounded, but with animal numbers reduced, feed demand remained low. High support prices maintained production (despite reduced yields) in India larger than consumption, boosting already large stocks another 5.5 million tons despite increased subsidized exports. The quality of the wheat stocks in parts of the former Soviet Union and India are low enough so most of these stocks future use is likely to be animal feed. World wheat production in 2002/03 is expected to increase by at least 10 million tons, offsetting reduced stocks, so global wheat supplies are likely to increase some in 2002/03 compared with a year earlier. However, low stocks in the major-exporting countries mean that supplies of higher quality wheat will depend on 2002/03 production. Production shortfalls could generate strong price responses. Modest Global Wheat Consumption Growth Expected In 2002/03, world wheat consumption is expected to rebound some from the previous 2 years stagnation or decline. Most of the growth in wheat consumption is expected to be the result of population growth slowly boosting food use. There is evidence that per capita wheat food use is declining in some places as incomes increase and diets diversify. Increased wheat feed and residual use could occur in Eastern Europe and the former Soviet Union, as stocks are large and animal numbers growing in some countries. EU wheat feed use is also expected to rise, mostly because of bigger production and lower prices. Declining wheat prices in 2002/03, while feed grains prices increase modestly, will result in more wheat feeding in many member countries. Situation and Outlook for 2001/02 Prices Strengthen As Ending Stocks Decline in 2001/02 U.S. wheat production declined in 2001/02 from last year because of a reduction in planted harvested acres and yields. Lower yields and smaller harvested area reduced winter wheat production. Other spring wheat production was down due to lower yields, even though harvested area was up slightly. Durum harvested area was down sharply, resulting in a substantial decline in production. Supplies for 2001/02 are down more than total use, resulting in declining ending stocks and higher season average prices received by farmers. ******************************************************* 2001/02 Overview: U.S. Wheat Supplies Are Down, Prices Are Up U.S. wheat production is estimated at 1,958 million bushels in 2001/02, down 275 million bushels from 2000/01 (table 1). Beginning stocks are 74 million bushels less than a year earlier while imports are projected to be 5 million above last year. The net result is that the U.S. wheat supply in the 2001/02 (June-May) marketing year is forecast to drop 343 million bushels (fig. 9). The estimated average farm price for all wheat dropped to a monthly low of $2.63 per bushel during July 2001. A year earlier, the July low was $2.32. Prices rose to $2.89 in December. The gap between year-earlier prices narrowed to only 2 cents above December 2000. Prices have declined slightly in recent months, but remain slightly above a year earlier. Prices will remain sluggish in the coming months in the absence of fresh export demand or a serious weather-related change in crop conditions. The season-average farm price in 2001/02 is forecast at $2.75-$2.85 per bushel, substantially above the $2.62 season average price per bushel received last year. Current prices are significantly above the $2.48 received by farmers in 1999/2000, but still much below the record $4.55 in 1995/96 (fig. 10). U.S. ending stocks this marketing year are projected to total 701 million bushels, 175 million less than last year and less than each of the past 4 years, but still large enough to put continued pressure on cash and near-term futures prices. Lower Harvested Area and Yields Reduce Production All-wheat planted and harvested areas continued their trend decline this year from the recent highs in 1996/97. The planted and harvest areas for 2001/02 were 59.6 and 48.7 million acres, respectively. For comparison, planted and harvested areas were 62.6 and 53.1 million acres, respectively, a year earlier and 75.1 and 62.8 million acres, respectively in 1996/97. The 2001/02 harvested area is down because of both reduced plantings and a higher rate of abandonment in some wheat- producing States. The largest year-to-year declines in the ratio of harvest-to-planted acres among the major wheat- producing States were South Dakota, Montana, and Kansas. In contrast, the harvest-to-planted acre ratio for 2001/02 rose in Texas after the very adverse weather conditions of 2000/01. The national harvest-to-planted ratio for 2001/02 was 81.6 percent, down 3.2 percent from last year. In aggregate, winter wheat harvested area was down 3.8 million acres from last year to 31.3 million. The winter wheat harvest-to-planted ratio declined 4.6 percentage points year-to-year to 76.2 percent for 2001/02. Total spring wheat harvested area was down .7 million acres from last year to 17.36 million. The harvested area of other spring wheat was up .08 million acres while durum harvested was down .78 million acres. The spring wheat harvest-to- planted ratio declined .3 percentage points year-to-year to 93.6 percent for 2001/02. Because of adverse weather conditions, the all-wheat yield was 40.2 bushels per acre for 2001/02, down from last years 42.0 and the record high of 43.2 in 1998/99. Among the major-wheat producing States, the largest year-to-year declines in bushels per acre were led by Washington (-12.4), Minnesota (-5.1), Montana (-4.6), South Dakota (-2.1), and North Dakota (-1.5). Improved weather conditions raised wheat yields by 4 bushels per acre in both Texas and Colorado, and 3 bushels per acre in Kansas. In aggregate, winter wheat yield was down 1.2 bushels per acre from last year, to 43.5. Total spring wheat yield was down 2.6 bushels per acre from last year, to 34.3. Other spring yields were off from a year earlier by 3.2 bushels per acre, while durum yield was down only .8 bushels per acre. Total Use Increased in 2001/02 Total disappearance of U.S. wheat in 2001/02 is forecast to drop 168 million bushels from a year ago, to 2,228. Both domestic use and exports are down, 82 and 86 million bushels, respectively. Food use is projected at 945 million bushels in 2001/02, down 11 million from a year earlier. Last years food usage was unusually high because small hard-red-winter kernels resulted in a very low flour- extraction rate. Feed and residual use is projected to drop 74 million bushels year-to-year to 225 in 2001/02. Seed use is forecast up 3 million bushels year-to-year in 2001/02. Price Support For Wheat Farmers in 2001/02 The 1996 Farm Acts programs to assist farmers facing low market prices include the nonrecourse marketing assistance loans and loan deficiency payments (LDPs). Producers that entered into Production Flexibility Contracts with the U.S. Department of Agriculture (USDA) in 1996 are eligible to participate in these programs. The nonrecourse marketing assistance loans provide interim financing to eligible producers of wheat and other commodities covered by the program. Producers pledge their wheat as collateral and obtain a loan equivalent to the loan rate established in their county by the Farm Service Agency of USDA. The loan proceeds can cover short-term cash needs. As of March 4, 2002, wheat producers had outstanding loans on 182 million bushels of 2001-crop wheat valued at $469 million. In comparison, a total of $468 million was loaned on 181 million bushels for the 2000 crop. The loans may be forfeited to the Commodity Credit Corporation at maturity or repaid at the loan repayment rate at, or before, maturity. The loan repayment rate may actually be less than the loan rate if the posted county price (PCP), a proxy for the local price, falls below the local loan rate. The PCP--calculated each day the Federal Government is open--is based on terminal market prices and a fixed differential to each county, largely reflecting transportation and other marketing factors. When a farmer repays the loan at a lower PCP, the difference between the loan rate and the PCP is called a marketing loan gain. If the PCP is below the county loan rate, eligible producers may opt for a loan deficiency payment (LDP) on part or all of the crop in lieu of securing a loan. The LDP rate is the amount by which the county loan rate exceeds the PCP on the date the application is made. The wheat cannot be placed under loan once an LDP is paid. If producers take the LDPs and immediately sell their crop and if the PCP accurately reflects local prices, producers effectively receive a per- unit revenue equal to the loan rate, partly from the market and partly from the Government. After an LDP is accepted, the farmer can sell the crop and avoid storage expense or hold it in the expectation of a price rally later in the marketing season. As of March 4, 2002, eligible producers had collected $158 million in LDPs covering 668 million bushels of 2001-crop wheat or about 34 percent of the 2001 crop. The average payment rate was 24 cents per bushel. Eighty percent of the 2000 crop received an LDP, totaling $791 million. Situation and Outlook for 2001/02 World Wheat Production and Stocks Drop in 2001/02, Trade Rebounds Global production is estimated down 4 million tons in 2001/02. World consumption is forecast nearly unchanged from the previous year, but is 10 million tons larger than production, dropping stocks to the lowest level in 5 years. However, world wheat trade is expected to increase 4 million tons largely because of increased production and exports of feed-quality wheat from Russia, Ukraine, and Eastern Europe. Although facing a second consecutive year of low wheat production, China is forecast to reduce stocks while increasing imports to 1.5 million tons. 2001/02 World Wheat Production the Lowest in 6 Years World wheat production in 2001/02 is estimated at 579 million tons, down less than 1 percent from the previous year. Production dropped nearly 14 million tons in the European Union (EU) as area declined in response to flooding during planting and lower market prices. Wheat production fell 10 million tons in South Asia where India and Pakistan failed to match the previous years record yields. U.S. wheat production dropped more than 7 million tons, and Canada suffered from drought, reducing production nearly 6 million tons. Reduced area, and a second year of drought in some regions, reduced Chinas wheat production by almost 6 million tons. Drought in the central Anatolian Plateau reduced production in Turkey nearly 3 million tons. However, these production declines were mostly offset by increased production in the former Soviet Union and Eastern Europe. Wheat production in the former Soviet Union increased almost 28 million tons as the exchange rate and internal prices provided an incentive to increase area, and favorable growing conditions reduced abandonment and boosted yields well above average. Similar incentives and conditions in Eastern Europe increased the regions wheat production more than 7 million tons. In North Africa conditions were mixed, but drought was not as extensive as the previous year, boosting production more than 2 million tons. Relatively low wheat prices during planting reduced the incentive to plant wheat in some countries, like China and India, but for most countries, low prices for competing crops limited the shifts out of wheat. Foreign wheat area declined only 1 percent from the previous year, with some of the decline the result of drought, not low prices. In 2001/02, foreign area was nearly 5-percent less than the recent peak reached in 1996/97, following higher prices. The foreign 2001/02 average wheat yield matched the 1999/2000 record. World Wheat Consumption Expected To Stagnate in 2001/02 Global consumption is forecast at 589 million tons, virtually the same as the previous year. Food use is forecast to drop 6 million tons in India, as reported stocks continue to increase despite reduced production. The apparent reduction in consumption may be a result of reduced private stocks not included in the U.S. Department of Agricultures (USDA) stock estimate, but there are no data available to confirm this. Diets in India may be diversifying, becoming less dependent on wheat, but the increase in forecast rice consumption casts doubt on that hypotheses. Pakistans wheat food use is similarly also forecast down 1 million tons as supplies are large enough to sustain some exports despite reduced production. Less unofficial wheat and flour exports are probably the major reason for Pakistans apparent lower use. U.S. wheat feed and residual use is forecast down 2 million tons in 2001/02. EU wheat consumption is forecast down nearly 2 million tons because of reduced wheat feeding. EU coarse grain consumption is forecast up slightly, replacing some wheat. Abundant supplies of competitively priced, low quality wheat from India and the Black Sea area are encouraging wheat feed use in countries like South Korea. Wheat feeding in Eastern Europe and the former Soviet Union is expected to increase because of larger supplies, but reduced animal numbers will limit the growth. Global use of wheat for feeding is expected to increase 3 million tons in 2001/02. Population growth is expected to support some increase in human wheat consumption in most regions around the world. That growth, plus the increase in global feed consumption are enough to offset the apparent drop in wheat consumption in South Asia in 2001/02. Even though stagnating, 2001/02 world wheat consumption remains large, forecast down only 2 million tons from the 1999/2000 record. World wheat consumption in 2001/02 is up 8 percent compared with a decade earlier, significantly less than population growth. However, world feed wheat use has declined, masking the growth in food use. World wheat feed use peaked in 1990/91 at 129 million tons and dropped to 91 million in 1995/96 as wheat prices peaked. Much of the reduction in feed use occurred in the transition economies of Eastern Europe and the former Soviet Union. Global wheat feed use has recovered some since then, and is forecast to reach 104 million tons in 2001/02. World food use growth over the last decade has been large enough to more than offset the drop in feed use. Over the last decade, world non-feed consumption of wheat has increased 12 percent, nearly the same as population growth. World Wheat Stocks Forecast To Drop 10 Million Tons in 2001/02, Lowest Since 1996/97 China is expected to show the largest drop in ending stocks during 2001/02, down 19 million tons. The size of Chinas wheat stocks is considered a state secret, and USDAs estimate is an approximation, so the year-to-year change in stocks is likely more important than the forecast level. Grain stocks in China are large, and supplies are adequate, but such large stocks declines are tightening supplies and supporting market prices. The drop in Chinas ending stocks is partly offset by increased stocks in the former Soviet Union and Eastern Europe, following bumper crops. The major exporters ending stocks are forecast down over 10 million tons, with significant declines in the United States, EU, and Canada. Wheat prices are largely set by supply and demand in exporting countries, and exporters stocks, though declining, remain sufficient. While the reduction in major exporters stocks has supported wheat prices during 2001/02, increased net exports from the former Soviet Union and Eastern Europe have limited price increases. EU Imports Boost World Wheat Trade Expected in 2001/02 Global trade (excluding intra-EU trade) in 2001/02 is forecast at nearly 108 million tons, up more than 4 million from the previous year and higher than the 104 million averaged from 1995/96 to 1999/2000. Trade is up compared with a year earlier, mostly because of a nearly 4-million- ton increase in wheat imports by the EU. Reduced or zero import duties and relatively high internal prices encouraged imports of lower quality wheats for use as feed from origins like the Black Sea. The poor quality of the domestic crop also encouraged strong purchases of high quality wheat for blending. In 2001/02, the EU is forecast to emerge as the worlds largest importer of wheat, even excluding intra-EU trade. South Korea, Israel, and the Philippines are expected to increase wheat imports in 2001/02 because of the large supplies of competitively priced wheat for feed available from India, China, and the Black Sea region. Uzbekistan is expected to nearly double wheat imports to 1 million tons because of a combination of reduced production, ample supplies in neighboring Kazakstan, and increased food aid. China, entering the World Trade Organization, is expected to increase wheat imports modestly, forecast to reach 1.5 million tons, up from a record low of less than 0.2 million a year earlier. Turkey is expected to increase wheat imports because of reduced production in 2001/02. Partly offsetting the aforementioned increases in wheat trade are a drop in imports by Eastern Europe, the former Soviet Union, Algeria, Morocco, and Brazil because of increased production. Situation and Outlook for 2001/02 U.S. Wheat Exports Down in 2001/02, U.S. Share of Global Trade To Decline U.S. wheat exports are forecast to decline 8 percent in 2001/02 because of relatively tight domestic supplies and increased competition from Australia and several other exporters, including the former Soviet Union, Eastern Europe, India, and Syria. Reduced competition is expected from the EU, Canada, and Turkey because of lower production. The top markets for U.S. wheat exports are expected to be little changed, including Egypt, Japan, Mexico, and the Philippines. However, the EU and Nigeria have become larger buyers of U.S. wheat in 2001/02. U.S. Wheat Exports Forecast the Lowest Since 1985/86 U.S. 2001/02 wheat exports are forecast at 26.5 million tons, down 8 percent on a June/May local marketing year. Shipments during the first half of 2001/02 lagged year- earlier levels. Census data from June 2001 through January 2002 show U.S. wheat grain exports of 17.6 million tons, down 1.75 million tons from the previous years relatively slow pace. Also, grain inspections data for February and March 2002 indicate wheat exports are down from the 4.2 million tons that Census reported for a year earlier. Moreover, according to U.S. Export Sales, as of March 28, 2002, outstanding sales of 3.3 million tons were reported, down 8 percent from a year ago. Wheat sales and shipments during the final months of 2001/02 are expected to slightly exceed the year-ago pace in order to reach the export forecast. Competition from the Southern Hemisphere during the last months of 2001/02 is an important factor determining U.S. export prospects. Australias production is forecast up slightly in 2001/02, but the Australian Wheat Board is expected to market its crop aggressively, boosting 2001/02 exports almost 2 million tons. Despite a slightly reduced crop, Argentina is expected to sell wheat quickly because recent exchange rate changes make exporting lucrative. The EU and Nigeria Increasing Purchasers of U.S. Wheat Since 1993 the level of U.S. wheat exports has ranged between 27 and 33 million tons. Moreover, the major commercial markets for U.S. wheat have also remained largely unchanged. During recent years the top five purchasers of U.S. wheat have been Egypt, Japan, the Philippines, Mexico, and South Korea. According to U.S. Export Sales, as of March 28, 2002, commitments (the sum of shipments and outstanding sales) compared with a year ago were down 18 percent to Egypt at 3.7 million tons, up 4 percent to Japan at 3.1 million, down 25 percent to the Philippines at 1.5 million, up 13 percent to Mexico at 2.1 million, and down 11 percent to South Korea at 1.3 million tons. U.S. wheat shipments to Egypt are struggling because Egypt is reducing imports due to exchange rate constraints. Japans wheat imports tend to be stable, so steady purchases of U.S. wheat are expected. The Philippines is purchasing wheat for feeding from cheaper, non-U.S. sources such as India and China. Mexicos imports from the United States are up because of higher imports and reduced competition from Canada. South Korea is expected to increase wheat imports in 2000/01, but has also been purchasing wheat for use as a feed grain from other sources. In 2001/02, the EU and Nigeria have emerged as larger markets for U.S. wheat than South Korea and the Philippines. EU commitments increased 55 percent to 1.9 million tons, while Nigerias increased 48 percent to 1.8 million tons. This year the EU has purchased some soft red winter (likely used for feed) as well as a large amount of spring and durum. U.S. Share of Global Trade Down in 2001/02 The continued relatively strong U.S. currency and tight domestic supplies have left U.S. prices frequently less competitive than other exporters prices. The U.S. share of world exports in 2001/02 is expected to drop. The largest competitor in 2000/01 is expected to be Australia, exporting 18.5 million tons. Canadas production is down and exports are expected to only reach 16.5 million tons. EU wheat exports are forecast to drop 4 million tons to 11 million, as the reduced wheat production in 2001/02 led to higher internal prices. The EU Commission has not subsidized wheat exports because increased exports would have diverted supplies from the domestic market and resulted in even higher prices. Argentina, harvesting a large, but not record wheat crop, is expected to export 11 million tons of wheat in 2001/02, down slightly from last years record. Sales and shipments data indicate that much of the increase is to Iran, but Brazil will remain the dominant buyer. Increased wheat exports by Russia, Ukraine, India, and several East European countries are forecast in 2001/02. These minor wheat exporters are emerging as a major force in world wheat trade, offering wheat at very competitive prices for milling use, as well as for feeding. U.S. wheat exports are forecast to decline only a small amount, but increased competition and growing world trade will drop the U.S. share of world wheat trade to 25 percent (excluding intra-EU trade) in 2001/02, down from 27 percent a year ago. This is the lowest U.S. share of world wheat trade in more than 40 years. Wheat by Class in 2001/02 Wheat Quality Good in 2001/02 The quality of the 2001 crop is generally better than the 2000 crop. Production of each class of wheat in 2001 was below year-ago levels. Ending stocks of each class were also below last years ending stocks. HRW Production Lower Than a Year Ago Projected hard red winter (HRW) supplies in 2001 are reduced 125 million bushels from a year earlier because production dropped 80 million bushels and beginning stocks were 47 million bushels lower. Total projected use drops 45 million bushels compared with last year, with exports off 30 million bushels. Total projected domestic use is down 10 million because reduced feed and residual use more than offsets a slight increase in food use. Food use of HRW is projected up from a year ago because of improved quality of the HRW crop. The net result is to reduce HRW ending stocks by 80 million bushels compared with a year ago. The projected ending stocks-to-use ratio is 39.0 percent, compared with last years 46.0 percent. HRW wheat production was off sharply in the Plains States as harvested area dropped 2.72 million acres from last year to 20.87 million acres. The biggest decrease in production year-to-year was South Dakotas 41.9 million-bushel-drop where both harvested area and yields were down because of unfavorable weather. Montanas production was down 25.4 million bushels, where poor weather conditions also reduced both harvested area and yields. Production was also off sharply in Oklahoma and Kansas. In contrast, Texas production was up 42.8 million bushels because of higher harvested area and yields. The U.S. average yield for HRW was 36.7 bushels per acre, up .87 bushels from a year earliers crop. For the 2001 crop, weather patterns were favorable except for some dry conditions during the fall planting season that delayed germination and slowed growth before the winter dormancy. Dry conditions during harvest produced a good crop. The 2000 crop had better processing quality than last years crop by most characteristics according to the survey published by the U.S. Wheat Associates in their 2001 Crop Quality Report. Reportedly, millers are getting improved flour yields compared with a year ago because of larger, more vitreous kernels. The U.S. Wheat Associates survey found the overall protein percentage, at 12.1 (12 percent moisture basis), only slightly better than the 2000 crops 12.0, but substantially higher than the 5-year average of 11.8 percent. The overall test weight of 60.4 pounds per bushel was significantly higher than 2000s 59.2 and the 5-year average of 59.7. The average moisture percentage of the crop was 11.7, higher than the previous years 11.5, and equal to the 5-year average. The 2001 HRW crops average sampled falling number of 407 seconds was slightly better than the 393 the year before and much better than the 5-year average of 374. HRS Production Down Compared With a Year Ago Projected hard red spring (HRS) supplies in 2001 are reduced 39 million bushels from a year earlier. Production was off 27 million bushels and beginning stocks were 5 million less, while imports were down 10 million. Total projected use drops 26 million bushels compared with last year. Projected exports are down 6 million bushels. Total projected domestic use is down 21 million due to declines in both food use and feed and residual use. Food use of HRS is projected down because the improved quality of this years HRW crop reduced the substitution of HRS for HRW in bread making. The net result is to reduce HRS ending stocks by 13 million bushels compared with a year ago. The projected ending stocks-to-use ratio is 36.3 percent, slightly lower than last years 36.9 percent. The U.S. average yield for HRS was 34.6 bushels per acre, down 2.4 bushels from a year earlier. Harvested area was up .16 million acres from last year to 13.75 million. Three States accounted for most of the change in HRS production. Production dropped sharply in Idaho, Minnesota, and Montana because of both lower yields and fewer acres harvested due to unfavorable weather conditions. Protein levels were slightly higher than a year earlier and above the long-term average. The U.S. Wheat Associates HRS survey published in the 2001 Crop Quality Report for the four States of Minnesota, North and South Dakota, and Montana found the 2001 HRS crops protein percentage to average 14.5 (12 percent moisture basis), which was slightly higher than 2000s 14.4 and the 5-year average of 14.2 (U.S. Wheat Associates). The 2001 crop faced less fusarium head blight (scab) than in previous years. The 2001 crops average test weight of 59.9 pounds per bushel was lower than the year befores 60.4 and the 5-year average of 60.1. The average falling number of 391 seconds was much better than 2000s 379 and the 5-year average of 373. The average moisture percentage of 11.4 was lower than both last years 11.6 and the 5-year average of 12.0. White Winter Wheat Production Down Sharply White winter wheat production is down from a year ago, mostly because of sharply reduced yields because of unfavorable weather. Growing conditions in Oregon and Washington were very dry during grain filling which increased protein content in most dryland farming areas. However, higher protein levels are a disadvantage for certain types of soft wheat products. According to the Pacific Northwest harvest survey published by the U.S. Wheat Associates in its 2001 Crop Quality Report, protein percentages of the soft white and club crops at 9.7 and 9.6 (12 percent moisture basis), respectively, are higher than 2000s 9.2 and 8.3 percent. The 5-year averages for the soft white and the club wheat crops are 9.7 and 9.3 percent, respectively. The 2001 test weights for the soft white and club wheat are 61.4 and 62.0 pounds per bushel, respectively, compared with 61.5 and 61.2 in 2000. The 5-year averages for the soft white and club wheats are 60.8 and 61.4 pounds. The 2001 soft white and club wheats moisture percentages are 9.7 and 9.6, respectively. These moisture percentages are higher than the year before at 9.2 and 8.3, respectively, and the 5-year averages of 9.7 and 9.3 percent. The 2001 soft white wheat crops falling number of 353 seconds, is higher than 2000s 327 and the 5-year average of 333 seconds. The 2001 club wheat falling number of 360 is higher than the year befores 319 and the 5-year average of 336 seconds. The projected 2001/02 total white wheat supplies are 85 million bushels lower than a year ago because production is down 71 million bushels and beginning stocks are down 16 million bushels compared with a year earlier. Total projected use is down 83 million bushels compared with last year as exports are off by 54 million bushels and feed and residual use is down 29 million bushels. Thus, ending stocks are almost the same as a year earlier. The projected ending stocks-to-use ratio is 30.3 percent, higher than last years 23.2 percent. Soft Red Winter Production is Down While Exports Rise The projected 2001/02 soft red winter (SRW) supplies are 70 million bushels lower than a year ago because production is down 72 million bushels. Beginning stocks are 2 million bushels higher this year than last. Total projected use is down 9 million bushels compared with last year as a 29- million-bushel drop in feed and residual use more than offset an increase of 21 million in exports. Ending stocks are projected down 61 million bushels to 74 million. The projected ending stocks-to-use ratio is 16.0 percent, significantly lower than last years 28.8 percent. SRW is grown over a wide geographic region of the eastern United States. Because the growing region is so large, weather patterns are quite diverse, which results in substantial variation in SRW wheat quality. The 2001 SRW crop has similar moisture, higher average protein content and falling numbers, and much higher average test weight than the 2000 crop (U.S. Wheat Associates). There were exceptions in areas where unfavorable weather resulted in lower test weights and falling numbers. According to the midwestern harvest survey published by the U.S. Wheat Associates in its 2001 Crop Quality Report, the average protein percentage in 2001 for SRW is nearly the same as 2000, 10.5 and 10.2 (12 percent moisture basis), respectively. The moisture percentages of the 2001 and 2000 crops are also almost the same at 13.3 and 13.2, respectively. Test weights are higher, at 59.1 pounds per bushel for 2001 than the 58 pounds for 2000. The average 2001 falling number of 356 seconds is better than the 2000 crops 317 seconds. Durum Production Down Compared With Last Year The projected 2001/02 durum supplies are 24 million bushels lower than a year ago because production and beginning stocks are down 26 and 5 million bushels, respectively. Projected imports are 7 million bushels higher than last year. Total projected use is down 5 million from last year as exports decline 17 million bushels. Partially offsetting the lower exports is a higher feed and residual. Ending stocks are projected down 19 million bushels to 26 million. The projected ending stocks-to-use ratio is 19.4 percent, significantly lower than last years 32.2 percent. The Northern Great Plains produced about 80 percent of the total estimated U.S. durum production of 84 million bushels. The 2001 production season had near-normal development and a rapid, dry harvest that produced a crop that is improved over 2000. Last year, widespread rains in late August and early September led to significant sprout damage and low falling numbers. The protein percentage of the durum crop grown on the Plains averaged 14.4 (12 percent moisture basis), nearly the same as the 14.3 reported for the previous years crop according to the U.S. Wheat Associates in their 2001 Crop Quality Report. The moisture percentages of the 2001 and 2000 crops are also almost the same at 11.0 and 11.5, respectively. Test weights are the same as last year, 58.8 pounds per bushel. However, the average 2001 falling number of 355 seconds is significantly better than the 2000 crops 216 seconds. The Southwestern States of California and Arizona accounted for 20 percent of the countrys durum production. Desert durum is grown primarily in Californias Imperial Valley and adjoining areas in Arizona and is usually delivered identity preserved to buyers because of its unique qualities. The U.S. Wheat Associates in their 2001 Crop Quality Report reported the 2001 crops falling number of 651 seconds, compared with the 2000 crops 699 seconds. The 1999 crops falling number was 1,156. The 2001 crops test weight at 63.8 pounds per bushel is above the 2000 crops 62.3 pounds. The moisture percentage of the 2001 crop was also above the 1999 crop, 7.2 and 6.7, respectively. Reference U.S. Wheat Associates. 2001 Crop Quality Report. 2001 Economic Analysis of Ending the Issuance of Karnal Bunt Phytosanitary Wheat Export Certificates Gary Vocke, Edward W. Allen, J. Michael Price 1/ ----- 1/ The authors are Agricultural Economists with the Economic Research Service, Market & Trade Economics Division. ----- Abstract: Karnal bunt is a wheat disease that is subject to regulation in the United States through quarantining of affected counties to limit its spread. Currently, the Karnal bunt regulatory program allows the U.S. Department of Agriculture (USDA) to issue phytosanitary export certificates stating that wheat in a given shipment is from an area where Karnal bunt is not known to occur. Ending this certifiation program would jeopardize U.S. exports to some countries. A model developed by the Economic Research Service was used to analyze a scenario of ending the certification. The loss of export markets for U.S. wheat producers would be only partially offset by increased domestic feeding of lower-priced wheat. Wheat prices would remain below baseline levels. Reduced wheat production and lower prices for wheat combine to reduce the total value of the wheat produced in the country, as well as the net income in U.S. agriculture. The cumulative reduction of national net farm income from 2003 to 2007 relative to the baseline is $5.3 billion. However, this includes cumulative marketing loan payments associated with all crops of $2.0 billion above the baseline over the 2003-07 period. Keywords: Wheat, Karnal bunt. Introduction Karnal bunt (sometimes called partial bunt), caused by the fungus Tilletia indica Mitra, seldom results in significant yield losses to wheat in the field. The fungus does not produce any toxic compounds in leaf, stem tissue, or seed that pose health risks when consumed (Bonde). Because the fungus poses no risk to human health, the U.S. Government does not have any food safety regulations concerning Karnal bunt. However, Karnal bunt affects flour quality if more than 3 percent of the grains are bunted because it produces trimethylamine, which gives off a fishy odor. Pasta products made with flour contaminated with Karnal bunt can have an unacceptable color. Many U.S. trading partners will not accept U.S. wheat exports unless the wheat is certified to be from areas where Karnal bunt is not known to occur. USDAs Animal and Plant Health Inspection Service (APHIS) imposes quarantines in an attempt to contain the spread of Karnal bunt in the United States and conducts an annual voluntary survey of grain delivered to elevators to check for Karnal bunt across the country. The use of quarantines and the survey are the basis upon which APHIS is able to issue a certificate that is accepted by countries importing U.S. wheat. Some have proposed that the Karnal bunt quarantine regulations and surveys be ended, suggesting that USDA should consider contaminated wheat a quality issue and establish tolerances for contamination (Combs). This paper analyzes the market effects of abruptly ending the issuance of certificates stating that U.S. wheat is from areas where Karnal bunt is not known to occur in the face of continuing barriers in many overseas markets. The Incidence of Karnal Bunt Karnal bunt is geographically isolated, limited to the Indian subcontinent, a small area of Mexico, and the southwestern United States (Murray and Brennan). Karnal bunt is so named because it was discovered in 1931 on wheat grown near Karnal, India. The disease was first confirmed outside of Asia in 1972 in the State of Sonora, in northwest Mexico (Dept. for Environment, Food & Rural Affairs). The disease was first found in the United States in 1996, in Arizona, Texas, and California, and again in Texas in 1998. The latest outbreak was in north Texas in 2001. It is not known how the disease spread to the southwestern United States and then to north Texas. Because the early outbreaks were isolated from the major wheat-producing areas, the possibility of the diseases spreading to principal wheat- growing areas was thought to be minimal. However, the 2001 outbreak of Karnal bunt in north Texas was at the edge of the major wheat area of the Southern Plains (see fig. A-1). This raised the prospect that the disease could spread as far north as the spores can tolerate winter weather conditions. Karnal bunt spores may rapidly decay under extreme cold, suggesting that significant portions of the northern United States would not be conducive to long-term survival (and therefore permanent establishment) of Karnal bunt (Dobesberger, Jimenez, and Sequreira). The occurrence of bunted kernels in areas infested with Karnal bunt spores is typically low. The ideal conditions for infection are temperatures in the range of 59-72 degrees F. and accompanied by rainfall, overhead irrigation, or high humidity. These conditions must occur during heading and for a few weeks afterward for bunted kernels to develop (Forster and Blair). These strict environmental conditions make it possible for problems with Karnal bunt to be only intermittent even if soil spore concentrations are high. Spreading Karnal Bunt Karnal bunt spores can be carried in soil and on a variety of surfaces, including seeds and other plant parts, farm equipment, tools, and vehicles. They can also be windborne. Karnal bunt spores are resistant to dry conditions, sunlight, a wide range of temperatures, and most fungicides. Wheat that is not infected can become contaminated with spores by passing through spore-contaminated equipment, transport vessels, or facilities. Other grains can also be contaminated with spores in the same way. While Karnal bunt is not harmful to animals, it is suspected that spores in contaminated or infected feed (grain or bran from milled wheat) can survive ingestion by animals. Since the manure of livestock fed such feed is potentially a source of inoculum, bunted wheat in quarantined counties must be heat-treated if used for animal feed. The American Phytopathological Society states that the experience from countries where Karnal bunt occurs suggests that Karnal bunt is a minor disease and the little risk that does exist for grain quality can be effectively managed with resistant varieties without the use of quarantines (American Phytopathological Society). The Society also suggests that although quarantines may delay the introduction of Karnal bunt into new areas, they are unlikely to prevent such introductions and subsequent establishment. This conclusion has been confirmed repeatedly, most recently by the occurrence of Karnal bunt in the United Sates despite quarantines imposed on wheat from countries where the disease has been known to occur. Quarantines may be ineffective where wheat-growing areas are contiguous, as between Mexico and the United States. However, where longer distances apply, as between continents or where deserts or mountains intervene, quarantines may help to protect countries that do not have Karnal bunt (Murray and Brennan). Yield Losses to Karnal Bunt Karnal bunt spores usually replace only a portion of the developing kernel and only a few of the kernels in a head. Complete conversion of kernels to spores is rare. Thus, yield reductions are generally minimal. For example, surveys in India during years of heavy disease infestations revealed a general, area-wide yield loss of less than 0.5 percent (Davila). However, in a few fields with highly susceptible varieties, as much as 89 percent of the kernels were infected, with yield losses ranging from 20 to 40 percent. Options for Karnal Bunt Control Wheat breeders in areas with Karnal bunt recognize the importance of avoiding the release of highly susceptible varieties. 2/----- ----- 2/ International Maize and Wheat Institute (CIMMYT) has identified 98 resistant lines of bread wheat, and Punjab Agricultural University, India, has 68 resistant lines (Davila). ----- This control measure has proven effective for reducing the level of Karnal bunt sufficiently that quality of the harvested grain is not severely affected. However, resistant varieties do not eradicate the disease, and Karnal bunt epidemics have recurred in India as soon as susceptible varieties were again grown (Murray and Brennan). Apparently, cultural practices are of little practical value in reducing the probability of an outbreak (Murray and Brennan). Seed treatments can reduce the number of viable spores on seed, and, therefore, the probability that Karnal bunt will be introduced to new areas. Foliar application of fungicides can reduce the level of disease, but more than one application is usually required, making this an expensive control option. Fungicides are likely to be cost effective only if other important diseases, such as rusts or Septoria blotches, are also present. Fumigation of soil with chemicals, such as methyl bromide, metham-sodium, and formaldehyde, has been partially successful in killing the spores. Exporting Under Deregulation Exporting Under Deregulation Is Problematic Not all countries that have restrictions against Karnal bunt would, in practice, strictly prohibit wheat imports from the United States if USDA stopped issuing certificates. Each country has regulations that are often idiosyncratic in how they are written and enforced. For example, Italy and Germany currently import wheat from countries where Karnal bunt is known to occur, after testing to ensure the wheat is free of Karnal bunt, despite European Union regulations against such a practice. In addition, while some markets would be captured by wheat- exporting countries that are free of Karnal bunt, U.S. wheat exports to countries that have no restrictions against Karnal bunt would likely increase. The longrun effects would likely depend on the extent that world wheat markets treat Karnal bunt as a quality issue. There is also an issue of what procedure would be used by other countries for Karnal bunt testing if the United States should stop issuing certificates. Currently, there is no accurate Karnal bunt test available that is rapid enough to use during ship loading. Even the microscopic examination for spores with the wash test can lead to false positives because of bunt on ryegrass Tilletia walkeri. Annual ryegrass is a significant weed problem in wheat fields in the southeastern United States. The wash test is currently used for seed wheat to ensure that there is no disease present. For non-seed wheat, USDA uses a bunted kernel test which involves visual inspection for bunt on the grain kernel. Spore-contaminated grain can pass the bunted kernel test. Currently, most importing countries, even with phytosanitary regulations against Karnal bunt, accept APHIS certificate that the wheat comes from an area not known to have Karnal bunt, and do not routinely test for Karnal bunt spores or check for bunted kernels. If even a few important wheat-importing countries maintain prohibitions, shipping companies may have concerns about shipping wheat from a deregulated U.S. wheat sector. Ship owners wishing to protect their interests may insist on a certificate from an authoritative U.S. source that unequivocally confirms that the cargo is free from Karnal bunt spores. Further, shipping vessels that carried contaminated wheat to countries without prohibitions would have to be sanitized to ensure that later cargoes from other sources going to countries that continue to have prohibitions will not be contaminated. Under U.S. deregulation, spores could spread through the storage and transport equipment to other products like corn and soybeans. The cost of testing and sanitizing to ensure freedom from the disease would likely be considerable. There may also be issues with transshipment through the St. Lawrence Seaway if the United States deregulates Karnal bunt. Currently, Canada prohibits the entry of wheat from States with Karnal bunt. Any wheat that crosses the Canadian border needs a declaration that the grain originated in an area free of Karnal bunt on the basis of official surveys. The future importance of these issues will likely depend on whether Karnal bunt becomes widespread across the U.S. wheat sector. However, there is no certainty about how far and how rapidly the disease might spread if the quarantine system is eliminated. The USDA Regulated Areas An area that is regulated by USDA for Karnal bunt is a definable commercial wheat-production area that includes at least one field that tested positive for Karnal bunted kernels. USDA restricts movement of wheat grain, straw, hay and farm equipment within and out of these regulated areas. USDA tests wheat grown in regulated areas each year for Karnal bunted kernels. Currently, in a regulated area, a grain sample must be drawn by an APHIS inspector or State cooperator at the time of harvest, or if already harvested, from the storage bins, and examined for bunted kernels. If the sample is taken from the field as it is being harvested and no bunted kernels are found, a certificate will be issued and the grain allowed to be transported to any market. If the grain sample came from grain already in storage and no bunted kernels are found, then a permit will be issued for the grain to be transported to any market. If one or more bunted kernels are found in the sample, then a notice will be issued and the grain sealed in the storage facility prior to approved treatment or disposal. In a regulated area, wheat grown to produce seed can be planted only within the regulated area and only if the seed tests spore negative through the wash test. Seed wheat cannot be moved outside the regulated area. Any seed grown in a regulated area that tests spore positive (based on the wash test), but is bunt negative (based on visual inspection) cannot leave the area for seeding purposes, but it can leave the area for export as grain to a country that does not require an APHIS Karnal bunt certificate or for domestic use for livestock feed or milling. Wheat grain, straw, or wheat hay that tests bunt positive cannot be moved outside the regulated area without APHIS approval. If needed, a permit is issued to allow the transport of these products to an approved facility outside the regulated area for treatment or disposal. Karnal bunt quarantines have been controversial since they were initiated in 1996. To increase cooperation, USDA compensates producers, grain handlers, and other affected parties for losses suffered due to the Federal quarantine action. Compensation payments have totaled about $35 million since 1996 (U.S. Department of Agriculture). Estimating the Effects of Karnal Bunt Deregulation Even though Karnal bunt poses no health risk, many U.S. wheat export markets have a precautionary stance against the acceptance of wheat without a certificate indicating the wheat is from an area where Karnal bunt is not known to occur. Thus, if the United States were to stop its certification, U.S. wheat would not meet those importing countries phytosanitary requirements. It is uncertain how the wheat-importing countries of the world would react if the United States were to end its Karnal bunt quarantine regulation. The reaction of many countries would likely depend upon how frequent and how widespread Karnal bunt outbreaks occurred in the United States and the availability of wheat from other sources. However, it is possible to anticipate the likely reactions of governments and industry to deregulation not accompanied by a severe outbreak. This study does not attempt to forecast future incidence of Karnal bunt in U.S. wheat fields. The scenario analyzed assumes a unilateral end to U.S. karnal bunt certification, without significant success in getting importing countries to accept something other than a zero tolerance level for karnal bunt spores. If ongoing scientific research and diplomatic efforts cause a significant number of wheat importers to accept a more relaxed standard than a zero tolerance, then trade effects would likely be smaller. However, such efforts would undoubtedly take time. With unilateral deregulation, we assumed that most of the adverse reactions of U.S. wheat customers would fall on hard red winter wheat (HRW) producers in the Central and Southern Plains and soft red winter wheat (SRW) producers (these two classes averaged 62 percent of U.S. wheat production between 1996 and 2000). The combination of weather conditions and stage of plant growth needed to result in Karnal bunt infection are most likely in areas where these two classes of wheat are grown (Dobeseberger, Jimenez, and Sequeira). Because U.S. wheat is blended, we also assumed that HRW and SRW from northern States that might not be susceptible to karnal bunt cannot be certified as free of spores. However, the harsh winters in the northern United States where the other classes of wheat are principally grown are expected to prevent the spread of the disease into those regions. U.S. domestic and international customers for the three classes of wheat: hard red spring (HRS), durum in the Northern Plains, and white wheat (from the traditional Pacific Northwest and Northeastern white wheat areas, not Kansas) are assumed to be unconcerned about Karnal bunt contamination, even with decertification. This lack of concern assumes that some alternative government or private certification is found acceptable for importers of spring and white wheat and is a major reason why this scenario does not have a larger U.S. trade loss. Moreover, Canada is also assumed to accept alternative certification, allowing transshipments through the Saint Lawrence. For many common uses, HRS and HRW are readily substituted, as are SRW and soft white wheat. A world wheat trade model that appropriately estimates trade flows by class and country was not available to analyze the issue, so a scenario was developed based on expert judgment of USDA analysts. A set of assumptions about prices and trade impacts by country was developed using the February 2002 trade matrix of 2001/02 world wheat trade. The percent changes in U.S. wheat exports were then applied, beginning in 2003, relative to the USDA Agricultural Baseline Projections to 2011, in a U.S. agricultural sector model to calculate the impacts on the domestic farm sector. As a first step, countries were classified by their antipathy to Karnal bunt and their presumed response to U.S. deregulation (table A-1). For this analysis, each significant market for U.S. wheat exports was put into one of three categories. Group A, accounting for 25 percent of forecast U.S. exports, includes countries that: (1) have strict requirements on Karnal bunt as reported by APHIS, (2) have a history of strict observance of phytosanitary regulations, (3) normally import hard red winter (HRW) or soft red winter wheat (SRW), and (4) could be expected to remain intransigent about only importing wheat that is certified as coming from a Karnal bunt-free zone. Important markets in this group include EU- 15, Eastern Europe, China, Egypt, Algeria, Morocco, Libya, Tunisia, and Brazil. Group B, accounting for 35 percent of forecast U.S. exports, includes countries that: (1) have strict requirements on Karnal bunt, as reported by APHIS, (2) may be somewhat more flexible in implementation of phytosanitary regulations, (3) normally import only a portion of U.S. wheat from regions potentially at risk, and (4) although decertification would disrupt HRW and SRW shipments in the first year, over the next 2 years these countries would be expected to relax Karnal bunt standards to tolerance levels that would permit trade and a resumption of imports from the United States. Important markets in this group include the former Soviet Union, Yemen, South Korea, Indonesia, Taiwan, Sri Lanka, Mexico, Venezuela, Colombia, and other Western Hemisphere countries. Group C, about 40 percent of forecast U.S. exports, consists of countries: (1) without strict requirements on Karnal bunt, as reported by APHIS, (2) that import only U.S. spring or white wheat, and (3) without significant wheat production, and (4) could be expected to demand that less than 3 percent of bunted kernels be allowed according to milling standards, but would not test for spores. Important countries in this group include Israel, Japan, Pakistan, Philippines, Malaysia, Bangladesh, and Nigeria. U.S. wheat exports were examined to evaluate the effect of reducing U.S. HRW and SRW exports to zero for Groups 1 and 2 during the first year (see table A-1). This means that about 60 percent of U.S. customers would find about 55 percent of U.S. exports unacceptable. Some switching to other U.S. wheat classes is assumed, but switching would be limited by supplies and by limited substitutability for some uses. The world wheat market is segmented: some countries have inelastic demand, are willing to pay high premiums, and are expected to be concerned about Karnal bunt; other countries like discounted, cheap wheat and are not concerned about Karnal bunt. Assumptions about responsiveness in each country drives the analysis of changes in world wheat trade and U.S. exports. In the first year, U.S. exports of HRW and SRW are calculated to increase to those markets still accepting them, while overall U.S. wheat exports are calculated to drop nearly 7 million tons, or 25 percent below baseline levels. Most of the drop in U.S. exports is expected to be gained by competitors exports and reduced ending stocks (boosting prices in those countries). Importers also draw down stocks some, but the decline in world wheat trade is small because some importers actually increase imports of cheaper U.S. HRW and SRW. While the U.S. average farm price for wheat drops significantly (45 cents per bushel in 2003) under this scenario, the premium for spring wheat (relative to the all- wheat average farm price) is assumed to be about 50 cents per bushel greater than normal, while the discount for HRW and SRW would be at least 50 cents greater than normal. The market impacts of by-class premiums and discounts are larger than the change in the average U.S. price received by farmers for wheat. The assumed relative international price changes (about $1.00 per bushel) are thus similar enough in magnitude to price changes in 1995/96 (when the average farm price increased $1.10) so that the 1994 to 1998 reaction of U.S. competitors to high prices can provide insight into their likely reaction in this scenario. In 1994/95, the major competitors (Canada, Australia, EU, and Argentina) reduced wheat stocks more than 11 million tons, while in the Karnal bunt scenario, a 6-million-ton reduction is anticipated. These countries increased wheat production by over 30 million tons in 1996/97, but a smaller increase, about 15 million tons, is assumed in the Karnal bunt scenario because their price increases would be less than occurred in 1995/96. Moreover, competitors are currently planting more wheat than in 1994/95, so it will be more difficult for them to expand from this higher base. In the second year of the scenario (2004), some of the importing countries in Group B (see table A-1) are assumed to adopt less restrictive Karnal bunt standards, opening imports to U.S. HRW and SRW, thereby reducing the direct effect of Karnal bunt trade barriers. However, in that second year, foreign competitors production (and U.S. HRS and White wheat) is expected to increase strongly in response to the first years higher prices. Although a portion of competitors increased production is used to replenish stocks, much is expected to move into export channels, further reducing U.S. market share. In the second year of the scenario, U.S. wheat exports are estimated down 9.5 million tons, 35 percent below the baseline level (without Karnal bunt). In the third year after deregulation, the rest of Group B countries further relax Karnal bunt import standards, and competitors response is muted, as wheat prices and premiums in those countries decline. However, in the third year, U.S. wheat exports are 20 percent below baseline levels. In subsequent years, the U.S. recaptures some lost market share as price premiums in competing countries become small. However, the exclusion of U.S. HRW and SRW from group A markets results in a small premium for U.S. competitors that are free of Karnal bunt and reduces long-term U.S. wheat exports by 15 percent below baseline levels. This long-term decline represents a loss in market share despite the development of alternative regulatory mechanisms in markets accounting for 80 percent of U.S. wheat exports. No model is available that includes the effects of wheat classes on world trade or U.S. regional and class differences with appropriate substitution elasticities. Therefore, a more general model was used to quantify price changes and address the effects on U.S. agriculture. Model Simulation Results The U.S. domestic impacts of terminating certificates for Karnal bunt were estimated with the Food and Agricultural Policy Simulator (FAPSIM). FAPSIM is a large-scale econometric model of the U.S. agricultural sector maintained by the Economic Research Service (ERS). The model contains submodels for 24 agricultural commodities, including wheat.- ----3/ ----- 3/ The wheat submodel in FAPSIM is an aggregate model. It does not distinguish between the different classes of wheat. ----- The model also includes submodels to estimate the value of exports, net farm income, and Government outlays on farm programs for the United States. These submodels are linked together through the variables that they share in common. The model computes the set of market prices that equilibrate supply and demand in all of the commodity markets simultaneously, given any set of exogenous conditions. The estimated trade impacts were introduced into the model by exogenously reducing wheat exports from their baseline levels over the 2003-07 period by the percentages already mentioned. The initial export levels used in the analysis were obtained from the February 2002 USDA baseline (USDA, Office of the Chief Economist). All of the model simulation results from the scenario are compared against the USDA baseline projections in the discussion that follows. Figure A-2 shows the assumed reduction in wheat exports under the scenario compared with the baseline. In 2003/04 and 2004/05, exports under the scenario decline relative to the baseline by 25 and 35 percent, or by 244 million and 359 million bushels, respectively. Exports partly recover in the succeeding years of the analysis, averaging 15 percent less than the baseline. The decline in exports under the scenario reduces the farmgate price of wheat (fig. A-3). Prices decline from the baseline by 17 and 19 percent, or by 45 and 53 cents per bushel, in 2003/04 and 2004/05, respectively. The loss is larger in the second year because the sharply higher prices expected to be received by U.S. competitors in 2003/04 result in significantly expanded production in 2004/05. We assumed that the European Union would not put a tax on wheat exports to hold down its domestic prices. U.S. domestic prices partially recover relative to the baseline in succeeding years with recovery of some of the lost export markets. The prices under the scenario are still below baseline prices by 13 percent in 2007/08. With domestic prices lower under the scenario, the U.S. area planted to wheat declines relative to the baseline (fig. A- 4). However, the response by producers to the lower wheat prices is muted somewhat over the initial years because of U.S. Government farm programs. Part of the market revenue loss that producers experience due to lower farm prices over this period is offset by an increase in marketing loan benefits that they receive from the government. As a result, the area planted to wheat declines relative to the baseline by 2 and 3 percent, or by 1.0 and 2.1 million acres, respectively, in 2004/05 and 2005/06. In contrast, area planted to wheat declines by 2.7 million acres below the baseline level in 2007/08 when producers are not expected to receive any offsetting compensation through marketing loans. Because the production response is muted in the early years, excess production occurs, causing the price impacts to be larger than they would be in the absence of government programs. With lower prices under the scenario, domestic feeding of wheat increases sharply, by 32 and 107 percent, or by 88 and 295 million bushels, in 2003/04 and 2004/05, respectively. With smaller price impacts in the succeeding years, the changes in feed demand also become smaller. Nonetheless, wheat feeding under the scenario remains above the baseline level by about 32 percent in 2007/08. Part of the reason these impacts are large is that the model solution was constrained to ensure that the price of wheat never falls below its feed value in relation to the price of corn. Wheat displaced corn as an animal feed to the extent necessary to ensure this constraint was satisfied. Total domestic use of wheat is estimated to rise by 7 and 22 percent, or by 90 and 296 million bushels, for 2003/04 and 2004/05, respectively (fig. A-5). This rise is almost entirely due to the increased feeding of wheat, with only a slight increase in food use. Seed use declines under the scenario relative to the baseline because of the reduction in area planted to wheat. Even though wheat feeding increases sharply under the scenario, this rise is not enough to offset export losses. Thus, ending stocks are estimated to rise above the baseline by 22 and 27 percent, or by 154 and 179 million bushels, for 2003/04 and 2004/05, respectively (fig. A-6). Although the impacts on ending stocks become smaller in the succeeding years of the scenario, stocks remain above baseline levels by 21 percent in 2007/08. The reduction in wheat production and the lower farmgate prices under the scenario combine to reduce U.S. cash receipts received by wheat producers from farm marketings (fig. A-7). Cash receipts for wheat are estimated to drop below the baseline by $915 million and $1,293 million in 2003 and 2004, respectively. By the final year of the analysis, cash receipts remain below baseline levels by $1,167 million. Cumulative wheat cash receipts decline by $5.8 billion below the baseline over the 2003-07 period. No marketing loan payments are assumed for wheat over the 2003-07 period under the baseline. However, the price declines for wheat over the 2003-05 period under the scenario are sufficient to trigger marketing loan benefits. The payments to wheat producers are $0.7, $0.6, and $0.2 billion for 2003/04, 2004/05, and 2005/06, respectively. The cumulative marketing loan benefits associated with all crops increase by $2.0 billion above the baseline over the 2003-07 period. As suggested above, other commodities are also affected by the price adjustments that occur in the wheat sector under the scenario. As the profitability of wheat production declines, producers shift production from wheat to alternative crops. The increase in production causes the prices for other crops to decline. However, the price changes associated with other crops are small in relation to the price changes for wheat. Farm prices of other crops change by less than 5 percent from their baseline levels over the 2003-07 period. The price impacts for the livestock sector, stemming from lower feed costs, are even smaller. The farm price of corn is estimated to decline below the baseline level by 4.5 percent in 2003/2004 as livestock producers shift from corn to the lower priced wheat in their feed rations. On average, corn prices are 1.3 percent below baseline levels over the 2003-07 period, with comparable changes for other feed grain prices. As a result, cumulative cash receipts for feed grains decline by $1.2 billion below the baseline over the 2003-07 period. With lower wheat exports and prices under the scenario, the value of U.S. exports of wheat declines below baseline levels. The cumulative value of total U.S. agricultural exports is estimated to fall by over $6.3 billion over the 2003-07 period under the scenario (fig. A-8). Although most of the decrease is associated with wheat, there are also downward adjustments in the value of exports for other commodities due to lower prices. Because prices of all agricultural commodities decline under the scenario, total U.S. cash receipts from the farm marketings decline below baseline levels. Cumulative cash receipts over the 2003-07 period are estimated to be $10.4 billion below the baseline level. More than half of this decline is associated directly with wheat. There are also some offsetting adjustments. Because there is less total crop area planted under the scenario, producers incur fewer production expenses. In aggregate, cumulative farm expenses are seen as $2.9 billion below the baseline level over the 2003-07 period. In addition, with producers receiving increased government support payments through marketing loan benefits, cumulative net farm income over the 2003-07 period is estimated to be $5.3 billion lower than the baseline level (fig. A-9). The average impacts discussed here would not be spread evenly across the Nations wheat sector. Because Karnal bunt deregulation would be focused on hard red winter and soft red winter exports, impacts would center on wheat producers in the Central and Southern Plains and the Southeastern region of the country. It is possible that a longer run effect of deregulation would be to reduce wheat acreage in the Central and Southern Plains and to increase wheat acreage in the Northern Plains, if foreign customers continue to be reluctant to purchase wheat grown in areas potentially affected by Karnal bunt. The analysis assumes that domestic millers of wheat are not affected by deregulation. However, if domestic millers do respond negatively to wheat from potentially affected areas, the economic incentives to shift wheat acreage to the North would be enhanced. Conclusions Karnal bunt seldom results in significant yield losses to wheat in the field. However, Karnal bunt affects flour quality if more than 3 percent of the grains are bunted because it gives off a fishy odor. In addition, pasta products made with flour contaminated with Karnal bunt can have an unacceptable color. The fungus that causes Karnal bunt does not produce any toxic compounds in leaf, stem tissue, or seed that pose health risks when consumed. Thus, Karnal bunt is a food quality issue rather than a food safety issue. Because the fungus poses no risk to human health, the U.S. Government does not have any food safety regulations concerning wheat infected with Karnal bunt. However, the compensation payments for the Karnal bunt quarantine regulatory program have totaled about $35 million from 1996 through 2001. Even though scientific evidence is that Karnal bunt posses no health risk, many U.S. wheat export markets require that wheat from the United States be from areas where Karnal bunt is not known to occur. Such countries would likely resist importing U.S. wheat if the certification procedures were terminated. The assumed impact of terminating Karnal bunt certification is entirely through reduced exports. Using an ERS model of U.S. agriculture, an export scenario was evaluated. Domestic prices dropped sharply, which, in turn, reduced the area planted to wheat. Although wheat feeding rose with the lower prices, the increase was not nearly enough to offset the loss of export markets. Wheat prices remained below baseline levels. The reduction in wheat production and the lower prices combined to reduce the total value of the wheat produced in the country, as well as the net income of U.S. agriculture. The effects primarily affected producers in the Central and Southern Plains and in the Southeast. The cumulative total reduction of national net farm income from 2003 to 2007 is $5.3 billion. The cumulative marketing loan payments associated with all crops increase by $2.0 billion above the baseline over the 2003-07 period. This article does not consider the cost of testing of wheat for Karnal bunt contamination, or the wheat quality discounts that could emerge in the world marketplace. Other important issues include possible contamination of vessels and handling facilities, regulations for the transhipment of grain through the St. Lawrence Seaway, and possible trade impacts for other grains such as corn and soybeans if the Karnal bunt quarantine system is deregulated. Examples by Country Egypt is an important example of how a country might react to Karnal bunt decertification. Egypt has strict phytosanitary regulations regarding Karnal bunt. Moreover, it is a significant producer, with irrigated land that could be quite susceptible to the disease. These factors would likely cause Egypt to be inflexible about accepting wheat with Karnal bunt spores (a Group A country). However, while most U.S. exports to Egypt have been HRW or SRW, some are other classes. U.S. shipments of white wheat could be expected to increase, limiting U.S. losses in the first year of the scenario (2003) to less than 3 million tons (see table A-1). However, in 2004, increased competition, in this case especially from Australian white wheat, is expected to push U.S. wheat out of the Egyptian market. In the third year and later, after prices and production in Australia decline from the peak in the second year, U.S. white wheat shipments to Egypt recoup losses, ending up higher than without Karnal bunt. However, without SRW and HRW, the United States has still lost most of its wheat export market to Egypt. Venezuela is an example of a Group B country (with medium Karnal bunt antipathy). While Venezuela has regulations prohibiting Karnal bunt in wheat imports, and Karnal bunt might propagate in that climate, Venezuelas wheat production is insignificant. Eventually, Venezuela could be expected to accept a Karnal bunt spore tolerance greater than zero. However, it would likely take extensive negotiations. About 70 percent of U.S. exports to Venezuela are HRW or SRW. In the first year of the scenario, U.S. HRS shipments would be expected to increase some, but Canada and Argentina would be expected to provide intense competition, replacing most of U.S. HRW and SRW shipments. In the second year, with negotiations ongoing and intense competition from Canada, even the U.S. HRS share is reduced. In the third year, Venezuela is assumed to accept a reasonable tolerance for Karnal bunt spores, and U.S. exports increase dramatically, but in the long run Canada has gained a competitive edge, and the U.S. share remains about 17 percent below what it would have been without Karnal bunt. A Group C country, with low Karnal Bunt antipathy, like Israel, has no regulation concerning Karnal bunt. Imports of U.S. wheat are above baseline levels throughout the scenario, but the increase in 2004 is less because increased competitor supplies and reduced prices limit U.S. gains. In 2005 and later, the U.S. share increases again because the price of U.S. HRW and SRW is comparatively attractive. References American Phytopathological Society. 1996. Position Statement of: The American Phytopathological Society. The Use of Quarantines for Wheat Karnal Bunt. APS Karnal Bunt Symposium Transcripts. The American Phytopathological Society. http://www.apsnet.org/online/karnal/index.htm., June 24 - August 16. Bonde, Morris. Private communication. Agricultural Research Service. U.S. Department of Agriculture. March 7, 2002. Combs, Susan. 2001. Ag Commissioner Recommends Changes to Current Karnal Bunt Policy. Austin. http://www.tpma.org/news_reports/reports/072001G.html. July 20. Davila, G. Fuentes. 1997. Karenal Bunt of Wheat. CIMMYT, Mexico. Available at: http://www.cimmyt.org/Research/wheat/kb/htm/KBcontents.htm. October. Department for Environment, Food & Rural Affairs (DEFRA). 2001. Karnal Bunt. Available at: http://www.defra.gov.uk/planth/pestnote/karnal.htm. July 2. Dobesberger, Erhard, Norma Alejandra Elizalde Jimenez, and Ron A. Sequreira. (2001). An Epidemiological Approach to Assessing the Risk of Establishment of Karnal Bunt, Tilletia indiaca Mitra, in North America. North American Plant Protection Organization. http://www.nappo.org/ KarnalBunt/KB-Aug25-01.pdf. October. Forster, Robert L., and Blair J. Goates. 1996. Karnal Bunt of Wheat. Cooperative Extension Service. University of Idaho. CIS 1067. Available at: http://www.uidaho.edu/ag/plantdisease/kbwheat.htm. Kelly, Keith. 1996. Karnal Bunt, Where Are We Headed? APS Karnal Bunt Symposium Transcripts. The American Phytopathological Society. Available at: http://www.apsnet.org/online/karnal/index.htm. June 24 - August 16. Murray, Gordon M. and John P. Brennan. 1996. The Risk to Australia from Tilletia indica Mirta, the Cause of Karnal Bunt of Wheat. APS Karnal Bunt Symposium Transcripts. The American Phytopathological Society. Available at: http://www.apsnet.org/online/karnal/index.htm. June 24 - August 16. U.S. Department of Agriculture, Office of the Chief Economist, Interagency Agricultural Projections Committee. 2002. USDA Agricultural Baseline Projections to 2011. United States Department of Agriculture. Staff Report WAOB-2002-1. February. U.S. Department of Agriculture. Unpublished data. March 2002. How Wheat Production Costs Vary Mir Ali and Gary Vocke 1/ ----- 1/ Agricultural economists with Resource Economics Division and Market & Trade Economics Division, respectively, ERS. ----- Abstract: Data for 1998, from the most recent Agricultural Resource Management Study (ARMS) for wheat farms, show that costs of producing wheat per acre and per bushel varied greatly among wheat growers, due primarily to differences in production practices and yields. The growers in the survey produced wheat at an average total cost of $3.97 per bushel (or $166 per acre). Keywords: wheat, costs of production, cost variation, Agricultural Resource Management Study. Wheat production costs vary widely across the country because of regional differences in cropping practices, yields, and costs of land, labor, and capital.2/----- ----- 2/ For more information on characteristics of wheat farms at the regional level see Mir Ali, Characteristics and Production Costs of U.S. Wheat Farms. Economic Research Service. http://www.ers.usda.gov/publications/SB974/. (Forthcoming) ----- This variation can be shown by ranking the wheat farms with the lowest to highest costs per bushel to form a cumulative distribution of farms and production in 1998. Data are from the 1998 Agricultural Resource Management Study (ARMS) of the Wheat Production Practices and Costs Report.3/----- ----- 3/ Twenty wheat-producing States were included in the survey. Respondents to the wheat survey (1,941 farms) represented 183,373 farms or 57.7 million acres of the 59 million acres planted in 1998. ----- Such a distribution of operating costs (operating costs include hired labor for this analysis) reveals that 50 percent of farms in the survey incurred operating costs of $1.40 per bushel or less and 75 percent incurred costs of $2.00 per bushel or less (fig. B-1). The cumulative distribution of operating and ownership costs reveals that 50 percent of farms in the survey incurred costs of $2.50 per bushel or less and 75 percent incurred costs of $3.65 per bushel or less. The study showed that 50 percent of farms in the survey incurred total costs of $4.10 per bushel or less, and 75 percent incurred total costs of $6.00 or less (see box for discussion of types of costs). While planted area has dropped over the past few years, this distribution analysis helps to explain why U.S. farmers have continued to plant wheat despite the low prices of recent years. For example, 85 percent of surveyed wheat farms produced wheat at an operating cost of $2.65 per bushel or less in 1998. The average farm-level wheat price in the 1998/99 marketing year was $2.65. However, only about half of U.S. wheat farmers covered both operating and ownership costs at $2.65 per bushel. Farmers cannot continue to grow wheat if they cannot cover ownership costs and thus replace capital stock as it deteriorates. When the opportunity costs of land, farmers labor, and other farm overhead expenses are included, only 15 percent of farmers produced wheat at or below $2.65 per bushel. The low proportion of farms covering all their costs raises concerns about the long-term sustainability of many wheat producers. Their resources may be able to earn a higher return in other uses. Although Government program payments are not included in the Economic Research Service (ERS) costs and returns accounts, wheat growers who participated in the program received additional receipts through the marketing assistance loan program, production flexibility contracts, and crop insurance. Also, note that some wheat producers received income from secondary products such as grazing and wheat straw. While these additional revenues varied widely among wheat growers, the revenues offset some production costs. Regional Analysis of Costs and Returns The national data show that, on average for 1998, aggregate wheat returns were enough to cover aggregate operating costs, but not adequate to cover total costs. Disaggregating the national data to a regional level allows inspection of the variation in costs and returns across the country. For this article, some of the ERS farm resource regions are combined into larger regions (fig. B-2). The Northern Crescent and the Heartland regions are combined into a region called the North Central region, while the Eastern Uplands, Southern Seaboard, and Mississippi Portal regions are combined into a region called the Southeast. The most important wheat-producing regions are the Prairie Gateway and the Northern Great Plains. These two Plains regions accounted for 79 percent of acreage and 70 percent of total U.S. wheat production in 1998. These two regions had the lowest gross returns per acre in the country because they had the lowest yields in that year (table B-1). Per- acre gross returns were higher in the North Central region than the Plains regions because of both higher yields and substantial income from wheat straw. Gross returns per acre were highest in the Basin and Range and the Fruitful Rim regions where irrigation helped produce the highest yields in the country. In the Fruitful Rim, 35 percent of the wheat acres were irrigated on the farms surveyed. In the Basin and Range region, 8 percent of the wheat acres were irrigated. Per-bushel costs also varied widely across regions. Average operating and ownership costs ranged from a low of $2.28 per bushel in the North Central region to a high of $3.12 in the Southeast. The data reflect the substantial effect of weather on yields in some areas. For example, low yields in the Southeast because of dry weather raised costs per bushel higher than if normal yields had been attained. The average total production cost ranged from a low of $3.63 per bushel in the Prairie Gateway region to a high of $4.54 in the Southeast. For comparison, the average farm price for all wheat was $2.65 for the 1998/99 marketing year. The average prices for the previous 1996/97 and 1997/98 marketing years were $4.30 and $3.38, respectively. No region showed enough average returns to cover all costs, indicating that the relatively low prices of 1998 were below long-term sustainable levels. The largest shortfalls from covering total costs were in the Fruitful Rim and the Basin and Range regions, with losses ranging from $87 to $118 per acre due to irrigation-related expenses. Producers in the two Plains regions had the smallest shortfalls in the country, but these losses were still a very substantial $36 to $47 per acre. Total operating and ownership costs per acre were lowest in the Prairie Gateway and the Northern Great Plains regions. The per-acre operating and ownership costs are much higher in the Fruitful Rim and the Basin and Range regions because of irrigation-related expenses. Weather conditions in 1998 affected survey results. On average, U.S. wheat yields in the 1998 survey were slightly higher than growers expected based on past years. That year, the United States had a record all-wheat yield, yet total costs still exceeded total returns for every region. Even so, some areas were adversely affected by weather in 1998. Wheat producers in the Southeast region, in particular, were hard hit by drought in 1998. This regions actual yields were down 6 bushels per acre from expected yields. The expected yield represents the yield farmers reported in the survey that they expected at the time they planted their crop. Wheat producers in the Basin and Range region, on the other hand, benefited from favorable conditions in 1998. Actual yields in this region were 4 bushels per acre above expected yields. Comparing Low-Cost and High-Cost Producers Another view of the cost and return characteristics of the U.S. wheat producers is provided using the cumulative distribution of costs to classify farms into one of three cost categories. The low-cost group is comprised of the 25 percent of farms with the lowest operating and ownership costs, and the high-cost group is comprised of the 25 percent of farms with the highest operating and ownership costs (fig. B-3). Mid-cost farms constitute the remaining 50 percent of the farms. The low-cost farms had operating and ownership costs of $1.86 or less per bushel and accounted for a third of the total production on the farms surveyed in 1998 (table B-2). Thirty-five percent of Prairie Gateway wheat farms were in the low-cost group, compared with about 10 percent of farms in the Northern Great Plains, Fruitful Rim, and Southeast (fig. B-4). At the other end of the distribution, the high- cost farms had operating and ownership costs of $3.62 or more per bushel and accounted for 12 percent of U.S. wheat production. Forty percent of the Southeast wheat producers were in the high-cost group, followed by Northern Great Plains and Prairie Gateway farms with about 30 percent. While the three groups of farms did have significant per- acre cost differences, these differences become much sharper on a per-bushel basis (table B-2). On a per-acre basis, the total costs of the high-cost producers were 36 percent greater than for the low-cost farms. On a per bushel basis the high-cost groups costs were $5.43 per bushel, or nearly four times higher than those of the low-cost group. The 1998 returns were adequate to cover all costs for the low-cost producers, but not for the mid- and high-cost producers. The high-cost producers were barely able to cover their operating costs in 1998. The differences of cost per bushel between the groups are substantially overstated because unusual weather conditions in 1998 affected yields. Favorable weather raised actual yields above expected yields in some regions and lowered yields in other regions. The actual yield for the group of high-cost producers was 14 bushels below what was expected, while low-cost producers surpassed their expected yields in 1998 by an average of 12 bushels per acre (table B-2). On the basis of expected yields, per-bushel operating and ownership costs were still nearly $1.50 more for high-cost producers than low-cost producers. The data suggest that many of the high-cost producers would be high-cost producers regardless of weather conditions. Summary Wheat is grown under a wide range of conditions in the United States, from the humid East to the arid Plains, and even significantly irrigated areas in the Pacific Northwest. Production costs vary widely across this range of climatic/production conditions. With low returns to wheat production, many growers were unable to cover all their production costs. If wheat prices remain low, producers may look for alternative crops that offer higher returns, such as corn, soybeans, and sorghum in areas where they can be grown. Some producers may leave the land fallow, especially in the dry areas. This substitution of competing crops for wheat has been facilitated by legislation passed in the 1990s, allowing crop-planting decisions to be more market oriented. ERS Costs of Production and Returns Accounts Economic Research Service (ERS) costs of production accounts include estimates of both cash and non-cash costs (sometimes called economic or opportunity costs). Cash costs are incurred when factors of production are purchased or rented. Non-cash costs occur when factors are owned. For example, a farmer who fully owns the land used to produce a commodity (e.g., wheat) has no cost for land rental or loans to pay for purchasing land. Yet, an economic cost arises. By owning the land and using it to grow wheat, the farmer forgoes income from other uses of the land, such as renting it to another producer. If a farmer uses savings to pay for operating inputs, such as fertilizer, chemicals, and fuel, and thus pays no interest on operating loans, the farmer still incurs an economic cost because the savings could have earned a return in another use. Likewise, the farmer has an opportunity cost of his/her labor used in the production of the commodity because it could have been used on another farm or in off-farm employment. The opportunity cost of farm operators unpaid labor was imputed by using off-farm wage equations for U.S. farm operators based on production region, size of farm, and farm type. Owned farm inputs are not without costs because they are limited and have alternative uses. Non-cash costs in the ERS accounts are estimated using methods recommended by the American Agricultural Association Task Force on Commodity Costs and Returns in 1998. Returns above total costs in ERS accounts are consistently negative for several commodities over many years. Reasons for negative returns are: Impact of government programs. Because government payments are excluded from the accounts, the estimated gross value of production is less than what farmers actually receive for being engaged in the enterprise. Exclusion of marketing costs and returns. Accounts include only costs associated with crop production and end at the point when the commodity is hauled from the field to storage or directly to market. Production is then valued at the harvest period price. However, farmers often delay sales and store grain with the expectation that the price in later months will exceed the harvest period price plus any costs associated with storing the crop. Non-cash costs. Accounting methods and measurement procedures used for noncash costs affect costs and return estimates. For example, opportunity costs are used to value capital, land, and unpaid labor. Because of various farm financial arrangements and the unique nature of many farm production inputs, opportunity cost estimates may not exactly represent exactly individual farmers true opportunity costs. International Wheat Breeding and Future Wheat Productivity in Developing Countries Paul W. Heisey 1/----- ----- 1/ Paul W. Heisey is an agricultural economist with the Resources, Technology, and Productivity Branch, Resource Economics Division, Economic Research Service, USDA. ----- Abstract: International wheat breeding for developing countries has been marked by a predominance of public sector research, multilateral exchange of wheat germplasm, and notable success in the widespread diffusion of modern wheat varieties in the developing world. Since the Green Revolution, wheat yields have grown much faster in developing countries than in developed nations. Between the mid-1960s and 1980, however, net wheat imports by most developing countries increased rapidly. Since 1980 aggregate net imports have stabilized, almost entirely because of higher production levels in three large producers, China, India, and Argentina. Wheat yield growth is slowing in developing countries, partly because varietal replacement is now more important than initial adoption, but perhaps also because of environmental factors. Future challenges for wheat breeding in developing countries include maintaining the level of investment in the international system, adapting to greater use of intellectual property in genetic material, and overcoming environmental constraints to intensified wheat production. Keywords: wheat, plant breeding, wheat yields, wheat consumption, wheat imports, research investment. Introduction Today, developing countries (not including transitional economies of Eastern Europe or the former Soviet Union) produce just under half of the worlds wheat, on half of the total harvested area devoted to wheat. Developing countries share of world wheat consumption is even higher, at slightly under 60 percent, implying that as a whole, the developing countries function as a net wheat importer. Over the last 40 years, production and yields of wheat in developing countries have grown faster than they have in high-income countries. Today, average wheat yields in developing countries are about the same as the world average, above yields in Eastern Europe and the former Soviet Union, but slightly below yields in high-income countries. Much of the initial growth in developing country wheat production has come as a result of technological change, known loosely as the Green Revolution. The Green Revolution was based on the introduction and diffusion of high-yielding, short statured wheat varieties that were more responsive to fertilizer. Shorter wheat with greater stalk strength permitted higher rates of fertilizer application without lodging. Irrigated wheat area also increased, particularly in Asia. The new varieties at the center of the Green Revolution were the product of an international wheat breeding network that included national agricultural research systems (NARS) and the International Maize and Wheat Improvement Center (CIMMYT), which was founded in 1966 and grew out of an earlier Rockefeller Foundation program in Mexico. Since the Green Revolution, this wheat breeding system has continued to develop new wheat varieties. In the post-Green Revolution period, wheat breeders have continued to improve yield potential, stress resistance, and input use efficiency. In other words, wheat varieties released today in developing countries are in general superior to the original Green Revolution varieties (Evans and Fischer 1999). In the first post-Green Revolution period, total factor productivity in wheat production (as measured primarily in India) grew even faster than it did in the immediate Green Revolution era. More recently, however, both total factor productivity (TFP) and yield growth have slowed in the most intensely cultivated irrigated wheat areas (Rejesus, Heisey, and Smale, 1999); declining land quality has been observed in some of these areas (Ali and Byerlee 2001); the level of future investments in international wheat improvement has become more uncertain (Heisey, Lantican, and Dubin 2002); and public wheat breeders in both high income and developing countries have expressed concern over the effects of greater intellectual property protection on plant breeding (Kronstad 1996). This article begins with a history of the international wheat breeding system. The paper outlines the current structure of this system and makes a rough estimate of resources devoted to wheat breeding for developing countries. The paper then summarizes the diffusion of high- yielding, semidwarf wheat varieties in the developing world. The final section assesses recent changes in the system, and briefly discusses some of the challenges it faces. Throughout the report the worlds wheat breeding and production areas will be divided into three major areas. High-income or developed countries, whose recent (1996- 2000) wheat production ranged from 205-220 million metric tons annually, will include wheat producers such as the United States, Canada, Australia, and the European Union. Countries of the former Soviet Union and Eastern Europe, in which recent annual wheat production was about 90-115 million metric tons, will be designated transitional economies. Developing countries make up the rest of the world, with annual wheat production of about 270-285 million metric tons. These divisions attempt to take into account political and economic realities, which are subject to change, as well as environmental factors that affect wheat production. The Development of International Wheat Breeding Efforts Perhaps more than for any other major world crop, modern wheat varieties are based on genetic material from many parts of the world. Germplasm from developing countries has been used to improve the varieties grown in high-income countries, and germplasm from high-income countries and transitional economies has been used to improve varieties planted in developing countries (Smale et al. 1996; Pardey et al. 1996). Although the ancient zones of origin of wheat were in Mesopotamia, wheat spread east and west from these zones very early. Wheat was cultivated in many parts of Eurasia and North Africa by 3000 B.C. and reached China by the second millennium B.C. (Harlan 1987). More recent diffusion of wheat can be described as colonial wheat germplasm flows, which began about 1500 A.D. (Smale and McBride 1996). Modern scientific plant breeding can trace its development to cereal hybridization or planned cross-breeding which began in England in the 1790s and continued there through the work of Sherriff in the mid-19th century. The last decades of the 19th century were marked by greater interest in both cross-breeding and better methods of selection in Europe, North America, and Australia. Wheat improvement began to take the form of crossing locally adapted material with wheat from other areas in an effort to improve production characteristics or quality (Lupton 1987). The rediscovery of Mendels laws of heredity at the turn of the 20th century led to renewed interest in using genetics to improve crops. The narrow economics of plant breeding-- defined by the costs of achieving a given objective by alternative means-- have been marked by a tradeoff between working with the germplasm most suited for the target area and acquiring genetic material from outside to address problems that cannot be solved within the basic gene pool. Using traditional plant breeding methods, the genetically more distinct the source plant population for a desired trait is from the target plant population, the higher the costs of incorporating that trait into the target population. The success of a modern plant breeding program depends, among other things, on access to a large pool of germplasm agronomically suited to the target area, ability to tap new genetic resources as the need arises, and the capacity to recombine large amounts of genetic material and efficiently evaluate the resulting progeny over a wide variety of conditions. The cost of a plant breeding program is reduced to the extent that it can rely on other institutions to store and test genetic resources, and incorporate these resources into agronomically adapted material. These technical factors help to explain the historical path of plant breeding in developing countries. The advent of scientific plant breeding in areas of the world characterized as developing probably began in India in the first decade of the 20th century (Jain and Byerlee 1999). Research stations with the aim of wheat improvement were founded in Turkey in the 1920s and the 1930s, and planned crosses were made in Argentina and Brazil in the 1930s. Although some crossing was done in China as early as the 1920s, it was not until the 1950s that planned crossing began to replace selection from landraces 2/----- as the ----- 2/ Landraces are usually varieties developed in traditional agriculture by many years of farmer selection. They are not the result of planned crosses between two distinct breeding lines. ----- primary means of wheat improvement. Introduction of foreign germplasm into China also became more prominent in the 1950s (Dalrymple 1986; Smale and McBride 1996; Yang and Smale 1996; He and Rajaram 1997). The evolution of the modern system of wheat improvement in the developing world has often been linked to the Green Revolution. The Green Revolution had its origins in the transfer of semidwarf wheat varieties developed by the Rockefeller Foundation research program in Mexico to India and Pakistan. This initial transfer was followed by the establishment of CIMMYT in Mexico in 1966 as the successor to the Rockefeller Foundation program. Countries that already had wheat improvement programs reorganized and expanded them, and countries without wheat research programs began to develop them. The pace of interchange of wheat germplasm between NARS and CIMMYT and among NARS accelerated. International nursery activity became a major feature of the international wheat breeding effort, and visits of wheat scientists to CIMMYT and other countries also grew rapidly (Dalrymple 1986; Byerlee and Moya 1993; Maredia and Byerlee 1999; Smale and McBride 1996; Skovmand et al. 1995; Smale et al. 1996). Although China also participated in NARS-CIMMYT interchange, wheat-growing environments in China differ somewhat from those originally targeted by the rest of the international system. The international system originally primarily targeted low latitude spring wheat environments (70 percent of the total wheat area in developing countries, or 85 percent if China is excluded), while over half the Chinese wheat area was winter wheat. Chinese breeders developed many of their modern varieties independently of the international system. In high-income countries much wheat breeding has also remained within the public sector, especially in Australia, Canada, and the United States. As with developing countries, the public wheat breeding system developed with an emphasis on germplasm exchange among different research institutions (Kronstad 1996). Wheat germplasm flows also continued between high income and developing countries. This is in contrast to corn, where the innovation of hybrid varieties led to technical means of intellectual property protection through inbred line development, encouraged widespread private sector investment in corn breeding, and resulted in fewer direct germplasm exchanges among distinct breeding programs. In the case of wheat, factors such as plant varietal protection, the role of wheat within the cropping system, and level of wheat yields affected incentives for private companies to invest in wheat breeding. Private sector wheat breeding was practiced in Western Europe from the early 20th century and accelerated since the mid-1960s. Today 70 percent or more of the European Union wheat area is planted to private varieties. In comparison with other high-income wheat producers, European Union wheat production is technically higher yielding, and high subsidies in the European Union encourage more input use and yield-enhancing investment. Intellectual property rights applied to plant breeding have also had a longer history in Europe. Private varieties are less common in the United States, Canada, and Australia, but institutional developments such as research funding through farmer check-offs, or the strengthening of intellectual property rights in plant breeding, continue to influence the organization of wheat breeding in these countries (Heisey, Srinivasan, and Thirtle 2001). In developing countries, private sector wheat breeding has a long history in the Southern Cone of South America, particularly in Argentina. Outside of the Southern Cone, the only countries where private sector wheat breeding is currently important are South Africa and Zimbabwe. With the partial exception of South Africa, private breeders in developing countries make extensive use of genetic material developed by the international public sector wheat breeding system (Heisey, Lantican, and Dubin 2002). Developing countries that have notable levels of private sector wheat breeding investment are usually characterized by the presence of large-scale commercial farmers in wheat production. The early introduction of intellectual property rights for plants in Argentina also played a role. The wheat areas of Eastern Europe and the former Soviet Union have played an interesting role within the international wheat breeding system. These areas have been a major source of wheat germplasm for the world. Furthermore, in the 1920s, the Russian scientist N.I. Vavilov was the foremost explorer of plant genetic resources for a variety of crops. But for both historical and technical reasons transfer of genetic material from the currently transitional economies to developing countries has been indirect for the most part. For example, the related winter landraces Turkey and Turkey Red, which originated in the Crimea, appear in many pedigrees of spring bread wheat varieties that are grown in developing countries. But the first commercial spring bread wheat variety in the developing world that descended from Turkey was probably five generations removed from Turkey, and resulted from the use of many other genetic sources as well (Smale and McBride 1996).3/----- ----- 3/ Along some branches of the pedigree, the path that Turkey followed passed through both the U.S. and Japan. ----- In the early 1970s, CIMMYT began to incorporate winter habit germplasm, much of it from the Soviet Union, into the spring wheat gene pool. The Soviet variety Kavkaz (which descended from the widely used Soviet variety Bezostaya on both sides of the pedigree) was an important ancestor of many of the spring bread wheats grown in developing countries today.4/-- --- ----- 4/ CIMMYT probably obtained Soviet germplasm from the country of Turkey, which in turn had received it from the former Yugoslavia. ----- As the economies of the countries of the former Soviet Union contracted, plant breeding in those countries has also faced increasingly severe resource constraints. CIMMYT began collaborating with countries of Central Asia and the Caucasus in the mid-1990s and opened a regional office in Kazakhstan in 1998. To cross winter with spring varieties using traditional breeding methods, as in the examples just cited, requires environments where the winter wheat can be planted at a time that its growth cycle will pass through temperatures cold enough that it will vernalize, enabling it to flower later, but the spring variety can be planted at a time that it will not be subject to winter kill. Flowering of the two varieties must also be synchronized. CIMMYT has locations in the highlands of Mexico where such crossing is possible. Day length considerations also affect the manner in which higher latitude wheat germplasm, of both winter and spring habit, can be incorporated into wheat varieties planted at the lower latitudes more typical of much developing country production. In summary, the global wheat improvement system consists of both national and international public sector wheat improvement programs and private sector firms. Exchange of genetic material among different wheat research programs has been commonplace, but environmental considerations have influenced the ways in which germplasm with different genetic backgrounds has been combined. Over time and space, public sector programs have provided the majority of wheat varieties grown, although private sector breeding programs have become increasingly important in Europe and, to a more limited extent, in the United States. Public sector wheat breeding continues to provide the vast majority of wheat varieties planted in developing countries. Wheat Production in Developing Countries and the Structure Of Wheat Breeding Programs Since the breakup of the Soviet Union, the two largest wheat producers in the developing world, China and India, are now the two largest single country producers in the world. Argentina, the fifth largest wheat producer in the developing world in most years from 1996 to 2000 (after China, India, Turkey, and Pakistan), is one of the major world wheat exporters. Wheat area and production in China, India, and Argentina, as well as other world regions, are summarized in the second and third columns of table C-1. After China and India, developing country wheat production is largest in the Middle East (including North Africa),5/----- ----- 5/ Within the international agricultural research system, the Middle East and North Africa are usually referred to as West Asia/North Africa, or WANA. ----- where roughly 50 million metric tons of wheat are produced annually. Turkey is the largest producer in this group of countries. Latin America and Asia, excluding China and India, each produce roughly 20 million metric tons annually, with Argentina being the largest producer in Latin America and Pakistan the largest producer in Asia after China and India. Relatively little wheat is produced in Sub-Saharan Africa. Because of the importance of growth habit and day length in shaping conventional breeding possibilities, it is important to distinguish growth habit from time of planting in characterizing major wheat growing environments around the world. Spring bread wheat is the dominant type of wheat grown in developing countries, although at the low latitudes characteristic of many of the wheat growing environments in these countries, it is usually planted in the fall to take advantage of cooler growing conditions. Facultative 6/----- ----- 6 Facultative wheats are intermediate in growth habit between winter and spring types. They possess fewer of the major genes for vernalization than winter types. They are usually planted in the fall, but in somewhat warmer environments (e.g. parts of the U.S. Pacific Northwest, central and southern Texas) than environments in which winter wheats are grown (e.g. Kansas), although the growing environments may overlap. A good variety with some facultative characteristics such as Jagger is sometimes planted in colder environments, although winterhardiness, which is often linked with the vernalization characteristics, may be an important factor in farmers planting decisions. ----- and winter habit wheats are very important in China, and winter wheat is also important in the Middle East, particularly in Turkey and Iran. Outside of these regions, facultative or winter wheats are grown in South Africa and parts of southern South America. Because growing areas often overlap, facultative and winter wheats are often grouped together as winter wheat, and the rest of this article will follow that convention.7/----- ----- 7/ Failure to distinguish growth habit from time of planting can lead to considerable confusion. For example, official statistics for China call all wheat planted in the fall winter wheat. This provides useful marketing information, but it is less useful from a breeding perspective. In fact, some of Chinas winter wheat area is planted to pure winter varieties, much is planted to facultative habit varieties, and some is planted to spring habit wheat planted in the fall (He and Rajaram 1997). ----- Durum wheat is also important in the Middle East. Outside of the Middle East, durum wheat is grown in Ethiopia, parts of Latin America, and to a relatively minor degree in India (fourth column, table C-1). Much of the wheat grown in China and South Asia is grown under irrigated or high rainfall conditions. In general, outside of China and South Asia less wheat area is irrigated or high rainfall (fifth column, table C-1).8/----- ----- Much of the irrigated/high rainfall wheat area in China and South Asia actually receives some irrigation water. In Latin America, in contrast, most of the irrigated/high rainfall wheat area is high rainfall, with the exception of northwest Mexico, where considerable wheat area is irrigated. ----- Some of the irrigated/high rainfall wheat area is subject to other non-biological stresses such as heat, cold, or acid soil conditions. Much of the worlds wheat area, including that situated in developing countries, is subject to biological stresses, particularly wheat rusts, which are fungal diseases. As noted, both national and international wheat breeding efforts attempt to increase wheat yield potential and overcome both biotic and abiotic stresses. It is very difficult to get accurate estimates of the resources devoted to wheat breeding worldwide. In the 1990s, investment in wheat breeding research across all developing countries was estimated to fall somewhere between $110 and $170 million (1996 U.S. dollars) annually. This figure consists primarily of public sector investment. In addition, wheat breeding expenditures at CIMMYT and elsewhere in the international public research system were estimated from $10 to $15 million (1996 U.S. dollars) each year (Heisey, Lantican, and Dubin 2002). As a point of comparison, in roughly the same time period, wheat breeding investment in the United States was estimated at about $50 million annually. Investment in the U.K. was around $20 million each year, and in Canada, Australia, and Germany annual wheat breeding expenditures were estimated to fall between $10 and $12 million (Heisey, Srinivasan, and Thirtle 2001). Although CIMMYTs investment has been a relatively small proportion of the overall wheat breeding effort directed at developing countries, this investment continues to have a large impact, particularly in spring habit wheats and particularly outside of China. The large impact of CIMMYT may be attributed to many factors, but three technical explanations and one institutional reason stand out. The most widely noted explanation is that CIMMYT (including its predecessor, the Rockefeller Foundation program in Mexico) was the first institution to incorporate dwarfing genes into wheat varieties aimed at the developing world. Less widely known technical factors include an early commitment to improved disease resistance, which was deliberate, and the incorporation of day-length insensitivity into much of the CIMMYT germplasm, which was a byproduct of early shuttle breeding between different latitudes in Mexico. The institutional factor was the widespread collaboration between CIMMYT and NARS wheat breeding programs, and the resulting access to trial performance data across an extremely wide number of locations and wheat growing environments. In the 1990s, over half the spring bread wheat varieties released in developing countries were based on crosses made by CIMMYT, with further selection done by NARS. Nearly 90 percent of spring bread wheat releases contained some CIMMYT germplasm. If anything, CIMMYTs influence in spring durum wheat in developing countries was even larger, with over three-quarters of the crosses made by CIMMYT and nearly all the releases containing some CIMMYT germplasm. In contrast, only 15 percent of the winter bread wheat crosses were made by CIMMYT, and only 40 percent of the releases contained some CIMMYT germplasm. Furthermore, unlike spring habit wheats, in earlier periods very little CIMMYT germplasm was present in winter wheats released in developing countries (Heisey, Lantican, and Dubin 2002). This is because wheat breeding in China, the major winter wheat producer among the developing countries, developed rather independently of the international system, and CIMMYT only began to target the winter wheat areas in the Middle East in 1985. Diffusion of Semidwarf Wheat in Developing Countries In the developing world, semidwarf Green Revolution varieties diffused fastest and most quickly in South Asia, after their initial use in irrigated wheat production in northwest Mexico.9/----- ----- 9/ Both before and after the Green Revolution, scientific wheat breeding programs in both developed and developing countries continued to release improved tall varieties as well as semidwarfs. Taller improved varieties continue to be widely grown in major wheat-producing regions such as Canada and parts of the United States. Although a few improved tall varieties are still released and grown in a few developing countries, in this latter group of countries the terms HYV (high-yielding varieties), semidwarf (referring to shorter stature conferred by genes for reduced height) and improved (referring to scientifically-bred varieties) have become almost synonymous. ----- Diffusion in Latin America has also been particularly widespread, and in more recent years shorter stature wheats have covered increasing percentages of wheat area in China. Even in the Middle East and Sub-Saharan Africa, the areas in which diffusion of semidwarf wheats has been slowest, adoption in the late 1990s stood at about two-thirds of total wheat area. In the aggregate, semidwarf wheat varieties are now planted on about 80 percent of the total wheat area in developing countries (fig. C-1). Across the developing world, adoption of modern spring bread wheat varieties, the most commonly grown wheat type, stood at just under 90 percent of spring bread wheat area. Adoption of spring durum wheat high-yielding varieties (HYV) and winter bread wheat HYV was just over 70 percent of the area planted to each of these wheat types. One of the early criticisms of the Green Revolution was that HYV wheat was thought to require optimum growing conditions in terms of moisture and fertilizer use. In reality, in many instances HYV wheat varieties have performed well in less favorable environments too, compared with earlier varieties grown in these areas, or they have been actively adapted to these less favorable areas. Although adoption of semidwarfs was fastest and highest in more optimum moisture environments, the technology has spilled out into less favorable environments as well. By the late 1990s, adoption of HYV wheat ranged from 80 percent to 100 percent in nearly all irrigated or high rainfall environments for both spring and winter wheat, and between 50 percent and 60 percent in dry spring wheat environments. HYV wheat was least widely grown (around 30-40 percent) in dry winter wheat environments, in part because these dry winter wheat environments were among the last targeted by the international system (Heisey, Lantican, and Dubin 2001).10/- ---- ----- 10/ In contrast, scientific plant breeding has developed varieties for the dry, hard red winter wheat environment in the United States over a much longer period of time. ----- Lantican, Pingali, and Rajaram (2001) found that in dry and hot spring wheat environments in developing countries about three-quarters of the improved wheat area (i.e. area excluding landraces and unknown varieties) was planted to varieties that had one or both parents originating in irrigated environments. This demonstrates that spillover effects from favorable environments have played a major role in the use of HYV wheat in less favorable environments. In much of the developing world, nearly all the HYV spring wheat varieties released and planted contain considerable genetic material from CIMMYT and the international wheat breeding system. Today, CIMMYT also plays a major role in winter varieties released in the Middle East and Latin America. China is the major exception in the use of CIMMYT- related varieties. Although some CIMMYT germplasm has found its way to China and has been used there, Chinese wheat breeders developed shorter stature wheats more or less independently from the international system. Since the major genes conferring shorter stature appear to have originated in East Asia (Korea or Japan), Chinese breeders independently may have been using the same sources of short stature that also found their way into international wheat breeding from Japan through the United States or Italy (Dalrymple 1986). India, the other very large developing country wheat producer, has an extensive wheat breeding program with a long history dating to the early 1900s. Many of the post- Green Revolution varieties released by the major wheat breeding programs in India are now several generations removed from original Green Revolution varieties. Much of the crossing has been done by Indian scientists, who have also incorporated some local genetic material. In the late 1990s, large portions of Indias wheat area were planted to varieties based on several generations of crosses by these scientists. However, India still makes use of the international system; over the last 5 years the wheat variety that has diffused most rapidly in India is based on a cross made by CIMMYT (Dr. J. Singh, Punjab Agricultural University, personal communication). One major result of the diffusion of HYV wheat, starting in the early to mid-1960s, has been rapid growth in wheat yields in developing countries. Since the Green Revolution, wheat yields have grown particularly rapidly in China and South Asia. If this yield growth is broken down by periods, however, it is shown that growth has slowed considerably since the mid-1980s (table C-2). The next section looks more closely at this and other phenomena that might provide a few clues about future trends in wheat production in developing countries. Changes and Challenges in the International Wheat Breeding System Despite the increases in wheat yields and wheat production in developing countries driven by technological change, production has not kept pace with increases in wheat consumption. Wheat imports have increased rather steadily in most regions of the developing world since the advent of the Green Revolution, with a few notable exceptions (table C-1, sixth column). The exceptions are, as indicated earlier, China, India, and Argentina. Chinas wheat imports increased in the late 1970s, but fell to relatively modest levels in the late 1990s. Over the past 25 years, Indias wheat imports have generally declined. Since the mid-1980s, India has been nearly self-sufficient in wheat. Argentina has always been a wheat exporter, and the trend in its net exports over the past 35 years has generally been upward. Predicted future wheat consumption and imports by developing countries depend crucially on two sets of assumptions-- those that concern production and those that concern consumption. For the most part ERS International Agricultural Baseline Projections (ERS 2002), with a 10-year horizon, make similar predictions to the longer term (to 2020) projections of the International Food Policy Research Institute (IFPRI) (Rosegrant et al. 2001). These would include increasing wheat imports by most developing countries, and increasing exports by Argentina. However, these projections differ sharply in the aggregate, largely because of differences in assumptions for China and India. ERS predicts per capita wheat consumption in these countries to remain basically flat from the present onwards, while IFPRI projects modest increases in per capita wheat consumption will continue for most of the next 20 years as income growth and urbanization promote shifts from rice to wheat. ERS projects supply shifts basically on an analysis of trends, while IFPRI explicitly models the effects of investments both in agricultural research as well as in irrigation, rural roads, and education. Both forecasts suggest modest increases in net wheat imports in China, which may be the biggest single uncertain factor in the future of world wheat trade (ERS 2002). ERS expects India to remain a small net exporter, while IFPRI predicts a modest increase in Indian wheat imports over the longer term. Over the past 10 or 15 years, the rate of growth of wheat yields in developing countries has already decelerated notably. Nonetheless, there is little hard evidence that breeders are making slower progress in increasing wheat yield potential than they have over the entire post-Green Revolution period. Furthermore, breeders have been making gains not only in wheat yield potential, but also in more robust disease resistance. In fact, in favored environments, better disease resistance may be the largest component of current increases in average experimental yields (Sayre et al. 1998). There is also evidence that although yield growth has slowed in favored wheat production environments, it has grown faster over certain limited periods in some marginal environments, relative to previous yield increases in these marginal environments. These increases in marginal areas, for example in drier regions of Argentina, or some parts of the Middle East such as Syria and Tunisia, are in large part the result of increased HYV adoption and HYV yield growth. Both the increased adoption and yield growth in marginal environments have resulted primarily from spillovers from research in more favored areas. The evidence for these contentions comes from some analysis of experimental trials, some circumstantial aggregate evidence from farmers fields, and a few micro-level studies in favorable wheat-growing areas that have been characterized by early HYV adoption and relatively high yields (Byerlee and Moya 1993; Heisey, Lantican, and Dubin 2002). Because of the difficulties in obtaining aggregate yields based on environments rather than political units, these arguments are not completely conclusive, but they do bear some weight and deserve further scrutiny. The evidence to date also suggests that the broad international public sector strategy of directing more breeding research efforts on more favored wheat-growing environments, at the same time that some resources are devoted to maximizing spillovers into less-favored environments, has been a successful one. Furthermore, payoffs to investments in disease resistance, for example non-race-specific resistance to leaf rust, are likely to continue to be high. What is less clear is what combination of tactics will be most successful in continuing to advance yield potential in wheat-- conventional breeding, hybrid wheat, wide crossing, 11/----- ----- 11/ Wide crossing refers to the incorporation of genetic material from wheats wild relatives into the wheat breeding germplasm pool. ----- biotechnology (including functional genomics), and the like. It will also be useful to analyze further the apparent slowdown in wheat yield gains in highly productive environments. This analysis would help to determine possible environmental factors in this slowdown, and to consider what combination of wheat breeding, wheat crop management, and policy will continue to best advance wheat yields, wheat production, and most importantly wheat productivity worldwide. Furthermore, relative prices and changes in consumer tastes and preferences will play an increasing role in determining wheat breeding priorities. Several major sets of factors related to wheat breeding will be crucial to achieving continued growth in wheat yields and production in developing countries in the future. The first set of factors are development investments, including investment in wheat breeding research, which will be discussed here, as well as complementary investments, which will not be considered in detail. The second set of factors concerns potential environmental constraints to further increases in wheat yields. The third set of factors are institutional, particularly those that affect seed production and distribution, intellectual property, and the flow of germplasm within the international system. Over the 1990s, there have been notable changes in funding for international wheat improvement research. These changes have been exemplified by a decline in real resources committed to wheat improvement research at CIMMYT since the late 1980s (Heisey, Lantican, and Dubin 2002). CIMMYT wheat improvement research constitutes a relatively small part of the international breeding effort in expenditure terms, but as shown above, its influence is large. The view has often been expressed that overall real resources devoted to wheat breeding research for developing countries have also declined. At the level of the NARS, there is relatively little hard evidence to support this view. Declines in NARS public-sector investments in wheat breeding research may be easiest to document in Sub-Saharan Africa and possibly parts of Latin America, with anecdotal evidence from other developing countries. It is possible that increases in wheat breeding investment in large producers such as China may have masked declines in investment in smaller producers, but this remains conjecture rather than demonstrable fact. For many countries, even those in which real resources allocated to wheat research have not declined, several additional features may be important. A very high proportion of wheat research investment (80 percent, 90 percent, or higher) in national wheat breeding programs has often gone to salaries, with limited funds remaining for operational budgets crucial to conducting research. 12/----- Furthermore, it might be ----- 12/ Anecdotal evidence suggests that large private sector breeding firms in the U.S. may spend about 70 percent of their research budgets on salaries. ----- possible to increase breeding efficiency with greater reliance on the international system or reallocation of resources within larger countries. In general, many wheat breeding programs targeting relatively small areas within developing countries maintain their own crossing programs, when it would be more cost effective for them either only to test varieties from other programs, or perhaps shut down completely (Maredia and Byerlee 1999). It is too soon to say how the decline in real breeding resources at CIMMYT will affect the international wheat breeding system. Up through the late 1990s, the pivotal role of CIMMYT in many developing country wheat releases was maintained with some actual increases in the frequency of CIMMYT-related winter releases, a wheat type for which CIMMYT research efforts only really began in the mid-1980s. Since lag times in agricultural research tend to be long, however, it is possible that this decline in real CIMMYT funding may have an adverse effect on the number of wheat varieties that NARS will release from the present onwards. What will determine the likely investment in wheat improvement research in China and India, the two largest sources of uncertainty in the level of wheat production in the developing world over the next 20 years or more? On the one hand, these countries stand counter to the trends of stagnant or declining investments in public sector agricultural research, and so simple trend projections would suggest some increases in wheat breeding expenditures. On the other hand, other observers might conclude that having stemmed the tide of rising imports notable in most other developing countries, China and India might not find wheat breeding investment as crucial. One trend is already observable in China, where shifting consumer tastes and preferences have resulted in the development of several different kinds of higher quality wheat varieties. Quality wheat area was estimated to be as high as 3.9 million hectares in 2001/02, but price policies and state grain procurement have not completely adjusted to support incentives for high quality wheat production (Hsu et al. 2001). Possibly 30 percent of Chinese wheat breeding resources are currently directed at producing high quality varieties, and this may increase. Management conditions as well as the varieties planted, however, will also influence the quality of harvested wheat (Dr. He Zhong-Hu, CIMMYT regional wheat coordinator, East Asia, personal communication). Some perspective might come from U.S. experience. Although there have been wide fluctuations in the real price of wheat, the long-run trend for this price has been downwards at least since the end of the Civil War. Technological change has been almost surely a major factor in this trend-- first changes in mechanical technology, and, from about 1940, changes in biological technology (new varieties, increasing fertilizer use) that have resulted in a long-run increase in U.S. wheat yields. Long-run levels of investment in wheat research seem to bear little predictable relationship to the long-run declining real price of wheat. There are a number of reasons why developing countries, including China and India, might continue to invest in wheat improvement research. First, a considerable proportion of current research expenditures in both high-income and developing countries is now devoted to research simply aimed at maintaining yields in the face of evolving pests and diseases (Adusei and Norton 1990; Collins 1995). Second, policymakers and research scientists are concerned about a notable productivity slowdown in the most favorable and most intensively cropped wheat production regions, and the possible environmental factors contributing to this slowdown (Ali and Byerlee 2001). Since it often takes 15 to 20 years from the time a cross is made until the resulting variety reaches its peak area in developing countries (Heisey, Lantican, and Dubin 2002), committing wheat breeding resources now is partially akin to taking out an insurance policy on a highly uncertain future. Demand for wheat will continue to rise in these countries, even if only through population growth, and policymakers usually show marked preferences for meeting a sizeable proportion of domestic demand for such an important commodity through domestic production. Third, once a countrys farmers start using the results of scientifically based agricultural research, they are, in a sense, on a technological treadmill. The relatively modest amounts necessary to fund cost-reducing wheat improvement research can be complementary, not competitive, with more market-oriented price policies at a national level. Potential effects of environmental factors are also illustrated by the two crucial large wheat producers, China and India, as well as other countries in Asia. Some observers feel that wheat breeding investments alone may not be sufficient to overcome land degradation or competition with nonagricultural sectors for crucial resources such as water (Rosegrant et al. 2001). Ali and Byerlee (2001) provide a fairly comprehensive study, in this case for Pakistan, of the effects of declining land quality on agricultural production in wheat based systems, and suggest that greater attention will need to be given to crop and water management in addition to varietal development in research for these systems. One institutional issue affecting future impacts of wheat breeding research has been evident for some time. In areas where HYV wheat was adopted relatively early, older varieties are continuously replaced by newer ones. However, lengthy adoption lags often continue to reduce research impacts below what they would be were new varieties to reach farmers faster. These adoption lags are related to the performance of wheat seed systems, and to the performance of institutions such as agricultural extension. More recently, increased intellectual property rights (IPR) protection for plants has influenced plant breeding in both developed and developing countries. There is fairly widespread acceptance that some level of IPR protection for plant varieties is desirable, but there is considerable disagreement over how strong this protection should be in the future. For example, should research and farmer exemptions to plant IPR be limited, as they have been increasingly in many high income nations? In theory, IPR encourage innovation (in this case the development of new wheat varieties) at some cost in temporary monopoly granted to the innovator (in this case the wheat breeding institution). But some observers have also noted a second potential cost of increased IPR for products in which innovation is cumulative, which is certainly the case in wheat breeding. If initial IPR for plant varieties are too strong, progress in plant breeding may be slowed if other researchers are not allowed to use these varieties in their breeding programs. IPR are almost certain to be a crucial factor in the use of biotechnology innovations in wheat, where they have not yet reached commercial varieties. But they are also already influencing so-called conventional wheat breeding as well. Formal materials transfer agreements are becoming commonplace, and there are continuing controversies over issues such as private firms securing IPR for varieties that have been developed from germplasm obtained freely from the international system. Because of the long history of widespread exchange of genetic material among different wheat breeding programs in both developed and developing countries, wheat breeders are sometimes at the forefront of those warning of potentially deleterious effects of increasing IPR protection (Kronstad 1996). Empirical evidence of the effects of IPR protection on innovation in general is mixed, varying widely by industry, (Jaffe 2000), and this is certainly the case for plant breeding. In the United States, for example, Knudson and Hansen (1991) found that private wheat seed producers often were unable to charge a price high enough to cover the costs of their breeding programs at the same time that the price was low enough to make the use of private wheat seed attractive to farmers. Furthermore, Alston and Venner (2000) concluded that the U.S. Plant Varietal Protection Act (PVPA) contributed to increased investment by State agricultural experiment stations in developing new wheat varieties, but that private sector efforts in developing non-hybrid wheat varieties had not increased. In addition, the PVPA did not appear to have contributed to greater technical progress in wheat breeding. As a result, it is not possible to make strong a priori arguments about the likely net impacts of increasing IPR on wheat breeding. Given the importance of widespread germplasm exchange in the international system, however, and the relative unimportance of private wheat breeding for much of the developing world, it seems quite unlikely that in the near future stronger IPR would call forth sufficiently increased private sector wheat breeding investment to replace public sector breeding to any significant degree. Conclusion The international wheat breeding system that developed with and after the Green Revolution has had several major impacts. First, adoption of modern wheat varieties continued in the post-Green Revolution period, with new modern varieties replacing older ones in areas of early adoption, and the spread of modern varieties into other wheat growing areas as well. Second, particularly outside of China, the international wheat breeding system as exemplified by CIMMYT and its NARS partners has continued to be an important source of genetic material for post-Green Revolution wheat varieties. Third, diffusion of modern wheat varieties has been a major factor in the rapid growth of wheat yields in many developing countries, and the internal rate of return to investment in international wheat breeding research has been high, estimated at 52 percent for the period 1977-90 (Byerlee and Moya, 1993; Byerlee and Traxler 1995). However, the future performance of the system remains in question. Already wheat yield increases have slowed in many developing regions, in part because steady increases in post-Green Revolution yields are nonetheless not as spectacular as one-time yield increases resulting from the initial adoption of high-yielding wheat varieties. Other potential explanations for slowing yield growth include declining returns to wheat production and environmental constraints to further intensification of wheat production. 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