July 21, 2008

US: Storing wheat grain for emergency use inefficient, farmers prefer cash

Government stockpiles of nearly a million tonnes of US wheat have been emptied this year and now Congress must decide whether to continue the practice of buying grain and selling it, only to buy other grain to donate overseas.

The Bill Emerson Humanitarian Trust started out nearly 30 years ago under another name -- the Food Security Wheat Reserve -- as a surplus disposal program designed to boost prices for US wheat farmers. But recent price swings and low domestic stocks convinced US Department of Agriculture officials that it's better to have just cash in the trust.

The trust has evolved since its conception in 1980, USDA Deputy Secretary Chuck Conner told Dow Jones Newswires. Now that -- for the first time ever -- the trust is empty of wheat, lawmakers in Congress must decide if it wants to rebuild those costly stocks or leave the trust as a cash account for emergencies overseas.

The USDA, in April and May, was ordered by the White House to sell portions of the stored wheat. Because market prices were dipping and storage costs were adding up, the USDA decided to liquidate its entire supply, USDA Undersecretary Mark Keenum told Dow Jones Newswires in an interview.

That sale of 33.6 million bushels of wheat was conducted in three traunches and netted the USDA $242.5 million.

Renewed demand for food aid to countries like Afghanistan and North Korea prompted USDA to take action in April and May. Officials were considering selling all of the remaining trust wheat as early as January, said Larry Adams, head of USDA's warehouse and inventory division.

"There had been some thinking about converting this to cash ... so we could get more buying power," Adams said.

Congress has made changes to the trust, allowing other commodities than wheat to be stored in it, but even so, it's always been wheat. Although the wheat is there for humanitarian purposes, it's never directly donated. Instead, the US Agency for International Development tells the USDA what it needs for an aid package. The USDA then calculates how much money it will need to acquire rice, corn and even wheat and then sells the trust wheat to buy whatever is on USAID's shopping list.

The USDA can only buy US food with the proceeds of wheat sales from the trust and can only donate that food to help with emergencies overseas.

If USDA had held on to the excess wheat supplies it wasn't directly ordered to liquidate in April and May, the agency would have likely gotten less for the commodities and would still be paying storage costs, USDA officials said.

"It was costing us about $10 million a year in storage for the wheat ... plus you've got an asset that is going down in price," Keenum said. Since hitting a high of $13.34 1/2 earlier this year, wheat prices traded on the benchmark Chicago Board of Trade settled at $8.04 Friday for the nearby September contract.

The amount of wheat the USDA has maintained in the trust has trended downward since 1993, 13 years after the Jimmy Carter administration bought 147 million bushels to make up for the loss of Afghanistan as an import market during the Soviet Union's attempt to occupy the country.

The trust's inventory of wheat fell to about 139.6 million bushels in 1994, 95.2 million in 1997, 74.1 million in 2002, 59.4 million in 2003, 52 million in 2005, 33.6 million in 2006.

Then it dropped to zero this year, although a cash reserve of $273.3 million remains. Cash is easy to maintain, easy to access and no storage costs are needed.

Just last year the USDA paid about $9.7 million to store Trust wheat. USDA's Keenum said he considered that cost a heavy burden, but it was actually low by historical standards. The USDA paid about $46.6 million in 1981 to store the wheat and total storage costs for the life of the program add up to about $936.5 million, according to USDA data.

The Bill Emerson Humanitarian Trust has evolved since the Russians were in Afghanistan. Now, 30 years later, government and non-government agencies see the program as less of a means to support farmers and more of a resource to provide much-needed food aid in needy regions around the world.

Paul Green, an economist working for the North American Millers Association, is lobbying lawmakers to keep funding the Trust because of its growing importance to provide emergency aid.

Much of USDA's yearly budget for overseas food commodity donations is traditionally slated to benefit development programs in needy countries, Green said, but often those resources are diverted to emergencies.

The trust should be strengthened and tapped for future emergencies around the world, Green said, so that the USDA's more traditional "PL-480" food donations are not diverted away from the programs they support in developing countries. The US spends about a billion dollars a year to donate US farm commodities to fund social and economic development projects in needy countries or to address emergencies that arise.

The trust can only be built up slowly. Congress, by law, can only add a maximum of $20 million to it each year.

The Senate's fiscal year 2009 spending bill allows the USDA to put $20 million into the trust, but only if the funds are taken out of the $1.2 billion budget for PL-480 donation program. The Senate Appropriations Committee did not specify in the 2009 bill whether USDA had to buy wheat with the trust money, according to Senate aides.

The House has not yet released details of its version of the 2009 USDA spending bill.

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