Tuesday Talks with Dr. Patterson
December 9, 2014
THE PROBLEMS OF WHEAT
Grain trade has been a commercial enterprise and a topic of political concern since the time of the early civilizations in Greece and Rome. Indeed, Socrates once said that “no man qualifies as a statesman who is entirely ignorant of the problems of wheat.” So with the largest U.S. corn harvest in history moving into storage or into use and global grain stocks recovering, are there any problems?
In its November 24 Crop Progress report, the USDA reported that the U.S. corn crop was 94 percent harvested. Furthermore, in the November 10, World Agricultural Supply and Demand Estimates report, the USDA set the U.S. corn crop at a record 14.4 billion bushels (365.97 MMT), marking the second year in a row that the United States has produced a record corn crop. Strong production in the United States and in other course grain producing nations during the last two years, along with strong global production of wheat and rice, have allowed global food supplies to recover from the near crisis conditions the world faced between 2011 and 2012 and earlier between 2007 and 2008. During each of those time periods, global production of grains faltered in the face of strong global demand. These events drew down global supplies and raised prices. U.S. corn prices rose to $4.80 per bushel in 2007/08 and over $7.00 per bushel in 2012/13. These increases in food prices, which saw the U.S. food price inflation increase to five percent in 2008 and nearly four percent in 2011, led to global political unrest. In 2008, there were food riots in as many as 30 countries. And, high food prices were a contributing factor to the so-called Arab Spring, which toppled governments in four countries and led to protests in 15 other Middle Eastern and North African countries. These recent events are good reminders of the volatility of food markets and the political instability it can produce. However, it is not new and the era of increased food price volatility can be traced back to 1972.
Global food markets changed in 1972 due to several factors. First, the Union of Soviet Socialist Republics (USSR) turned to its Cold War enemy, the United States, to for the first time purchase large volumes of wheat to meet its food needs and the food needs of close allies (Eastern Europe, Cuba, North Korea, North Vietnam, and Egypt). Soviet wheat production had failed in 1972. This purchase was made through the leading, privately held multinational grain trading companies in secret. The U.S. government did not know of the sale until it had transpired and the USSR took shipment of 9.5 million metric tons of U.S. wheat. Second, U.S. shipments of food and agricultural exports grew after 1972 when President Nixon officially moved the United States dollar off of the gold standard, which resulted in lowering the value of the dollar, making U.S. exports relatively less expensive for foreign buyers. Third, the early 1970’s were a period of strong global economic growth, particularly in upper and middle income nations. Fourth, with this economic growth, food demand, particularly demand for meat protein grew, producing increased demand for feed grains. These third and fourth factors continue to pressure global food markets today. Following the Soviet wheat purchase in 1972 and the strong export growth, U.S. grain stocks were drawn down and food prices increased. As a result, some commentators referred to this episode as the Great Grain Robbery. Again in 1975, the USSR purchased large quantities of wheat from the United States, resulting in another round of food price inflation. Note, Congress mandated an export sales reporting requirement in 1973 as a way of providing the public and policymakers with information on export sales. However, the reporting requirement did little to inform policymakers of the 1975 Russian grain sale until after the deals were made. Like 2008 and 2011, these sharp increases in food prices in the early 1970s also prompted food riots in many countries.
So, does the current rebuilding of global food supplies mean that we have no grain problems? Current projections place world ending stocks of corn at an amount equal to about 72 days of supplies at current use levels. During the 2007/08 and 2011/12 periods, stocks had dropped to about 55 days of use. The increase in supplies has brought grain prices down. Currently, corn is trading at about $3.50 per bushel.
While the current 72 days of stocks provides some comfort in keeping supply lines open, it should be recognized that it is shorter than the growing season for corn. So, any disruptions in production could result in renewed rounds of food price inflation. Other industry observers have noted that the there is a marked shift in who is holding grain stocks. Increasingly, they are being held by large grain importing nations and not by large grain exporting nations. For instance, China now holds about 40 percent of all corn stocks in the world. In the event of a disruption in production, the supplies held in grain importing countries will likely not move to global markets to meet the needs in other countries. These supplies are effectively locked down. Policies that limited movement of cereal grains into international markets were observed during the 2007/08 food crisis.
So despite the growth in current grain stock levels, global commodity markets will face renewed price volatility and uncertainty in supplies in the future. Indeed, this volatility will likely be exacerbated by climate change and government policy actions. So, the problem of wheat persists.
Dr. Paul Patterson is associate dean for instruction for the College of Agriculture and Professor of Agricultural Economics.