My Opinion Article on the Global Grain Crisis

Globally, the rising cost of food has taken every households by surprise, and the challenge to satisfy the global demand for grains promises to make for an interesting year for 2008.

The price of wheat has gone up by 130% over the last year. Rice has doubled in price in Asia in the first three months of 2008 alone. The price increase of soybean also is about par with these 2 grains.

From Asia-to-Americas-to-Africa, people have been pouring out to the street in anger at being unable to afford the daily food necessity. In fear of political turmoil, world leaders are sending out SOS signals for increased food aid, increased monetary aid, and technology aid to boost agricultural production.

Grain exporting countries, meanwhile, are closing their borders to protect their own domestic markets, while other countries have been forced into panic buying.

These are definitely not a typical price blip and/or food shortage. What we are witnessing is a structural meltdown of grain market, the direct result of three decades of Globalization. Globally, farmers produced a record 2.3 billion tons of grain in 2007, up 4% compare to 2006. Since 1960’s, the world’s grain output has tripled, while the population has doubled. As such, the bottom line is that the global production of grain is more than enough to feed the entire population. The problem is that the food produced doesn’t get to all of those who need it. Less than half of the world’s grain production is directly eaten by people. The rest go into animal feeds and, increasingly, biofuels (ethanol, bio-diesel, etc..) – massive inflexible industrial chains.

The grain crisis is net result of allowing food to be transformed from something that nourishes people and provides them with secure livelihoods into a commodity for speculation and bargaining. The perverse logic of world food system has come to a head, system that puts the profits of investors before the people’s need of food.

Market Realities

Market experts and the policy makers have come out with a number of explanations for the current grain crisis that everyone has heard over and over again: drought and other environmental issues affecting harvests; rising demand in developing nations such as China and India where people are supposedly eating more and better than in the past; crops and lands being massively diverted into biofuel production; and so on. All of these issues, of course, are contributing to the current food crisis. But these issues do not address the full depth of what is happening. In a nut shell, there is something more fundamental issues that brings all these issues together, and these issues are kept out of public discussion.

The various explanations by market experts and the policy makers can not obscure the fact that today’s food crisis is the outcome of both an incessant push towards a “Green Revolution” agricultural model since the 1950s and the trade liberalization and structural adjustment policies imposed on poor countries by the World Bank and the International Monetary Fund since the 1970s. These policy prescriptions were reinforced with the establishment of the World Trade Organization in the mid-1990s and, more recently, through a barrage of bilateral free trade and investment agreements. Together with a series of other measures, they have led to the ruthless dismantling of tariffs and other tools that poor developing countries had created to protect local agricultural production. These countries have been forced to open their markets and lands to global agribusiness, speculators and subsidized food exports from rich developed countries.

In that process, fertile lands have been diverted away from providing local food supplies to the production of global commodities or off-season and high-value crops for Western markets. Today, roughly 70% of all developing countries are net importers of food. And, ironically, of the estimated 845 million hungry people in the world, 80% are small farmers. Add to this, the reengineering of credit and financial markets to create a massive debt industry, with no control on investors, and the depth of the problem becomes clear. Agricultural policy has completely lost touch with its most basic goal of feeding people. Hunger hurts and people are desperate.

The UN World Food Program estimates that recent price hikes have meant that an additional 100 million people can no longer afford to eat adequately. Governments are frantically seeking shelter from the system. The fortunate ones, with export stocks, are pulling out of the global market to cut their domestic prices off from the skyrocketing world prices.

With wheat export bans or restrictions in Kazakhstan, Russia, Ukraine and Argentina, a third of the global market has now been closed off. The situation with rice is even worse: China, Indonesia, Vietnam, Egypt, India and Cambodia have banned or severely restricted exports, leaving just a few sources of export supply, mainly Thailand and the US.

Countries like Bangladesh can’t buy the rice they need now because the prices are so high. For years the World Bank and the IMF have told countries that a liberalized market would provide the most efficient system for producing and distributing food, yet today the world’s poorest countries are forced into an intense bidding war against speculators and traders, who are having a field day. Hedge funds and other sources of hot money are pouring billions of dollars into commodities to escape sliding stock markets and the credit crunch, putting food stocks further out of poor people’s reach.

According to some estimates, investment funds now control 50–60% of the wheat traded on the world’s biggest commodity markets. One firm calculates that the amount of speculative money in commodities futures – markets where investors do not buy or sell a physical commodity, like rice, corn, or wheat, but merely bet on price movements – has ballooned from $5 billion in 2000 to $175 billion to 2007.

Crisis Benefactors

The benefactors from current global grain has never been more obvious.

The most basic element of food production is soil. The industrialized grain production system is a chemical fertilizer junkie. It needs more and more of the fertilizer just to keep alive, eroding soils and their potential to support crop yields in the process. In the current context of tight grain supplies, the small clique of corporations that control the world’s fertilizer market can charge what they want – and that’s exactly what they are doing. Profits at Cargill’s Mosaic Corporation, which controls much of the world’s potash and phosphate supply, more than doubled last year. The world’s largest potash producer, Canada’s Potash Corp, made more than $1 billion in profit, up more than 70% from 2006.

Panicking now about future supplies, developing countries are becoming desperate to boost their grain production, giving these corporations additional leverage. In April 2008, the joint offshore trading arm for Mosaic and Potash hiked the price of its potash by 40% for buyers from Southeast Asia and by 85% for those from Latin American. India had to pay 130% more than last year, and China 227% more.

Profit increase for some of the world’s largest fertilizer corporations
Company Profits 2007 (US$ million) Increase from 2006
Potash Corp (Canada) 1,100 72%
Yara (Norway) 1,116 44%
Sinochem (China) 1,100 95%
Mosaic (US) 708 141%
ICL (Israel) 535 43%
K + S (Germany) 420 3%
Source: Compiled from corporate reports

While big money is being made from fertilizers, it is just a sideline for Cargill. Its biggest profits come from global trading in agricultural commodities, which, together with a few other big traders, it pretty much monopolizes. In April 2008, Cargill had announced that its profits from agricultural commodity trading for the first quarter of 2008 were 86% higher than the same period in 2007. “Demand for food in developing economies and for energy worldwide is boosting demand for agricultural goods, at the same time that investment monies have streamed into commodity markets,” said Greg Page, Cargill’s chairman and chief executive officer. “Prices are setting new highs and markets are extraordinarily volatile. In this environment, Cargill’s team has done an exceptional job measuring and assessing price risk, and managing the large volume of grains, oilseeds and other commodities moving through our supply chains for customers globally.”

Profit increase for some of the world’s largest grain traders
Company Profits 2007 (US$ million) Increase from 2006
Cargill (US) 2,340 36%
ADM (US) 2,200 67%
ConAgra (US) 764 30%
Bunge (US) 738 49%
Noble Group (Singapore) 258 92%
Marubeni (Japan) 90* 43%*
Source: Compiled from corporate reports
*Data is for Marubeni’s Agri-Marine division only.

Absent from this list is Louis Dreyfus (France), a private agricultural commodities trader with annual sales in excess of $22 billion, which does not report its profits. Indeed, all of the big grain traders are making record profits. Bunge, another big food trader, saw its profits of the last fiscal quarter of 2007 increase by $245 million, or 77%, compared with the same period of the previous year. The 2007profits registered by ADM, the second largest grain trader in the world, rose by 65% to a record $2.2 billion. Thailand’s Charoen Pokphand Foods, a major player in Asia, is forecasting revenue growth of 237% this year.

The world’s big food processors, some of which are commodity traders themselves as well, are also making record profits. Nestlé’s global sales grew 7% last year. “We saw this coming, so we hedged by forward-buying raw materials”, says François-Xavier Perroud, Nestlé’s spokesman. Margins are up at Unilever, too. “Commodity pressures have increased sharply, but we have successfully offset these through timely pricing action and continued delivery from our savings programs”, says Patrick Cesar, Group CEO of Unilever. “We will not sacrifice our margins and market share.”

The food corporations don’t seem to be making these profits off the back of the retailers. UK supermarket Tesco reports profits up 12.3% from last year, a record rise. Other major retailers, such as France’s Carrefour and the US’s Wal-Mart, say that food sales are the main factor sustaining their profit increases. Wal-Mart’s Mexican division, Wilmer, which handles a third of overall food sales in Mexico, reported an 11% increase in profits for the first quarter of 2008. (At the same time Mexicans are demonstrating in the streets because they can no longer afford to make tortillas.) It seems that nearly every corporate player in the global food chain is making a killing from the food crisis. The seed and agrochemical companies are doing well too. Monsanto, the world’s largest seed company, reported a 44% increase in overall profits in 2007. DuPont, the second-largest, said that its 2007 profits from seeds increased by 19%, while Signet, the top pesticide manufacturer and third largest company for seeds, saw profits rise 28% in the first quarter of 2008. Such record profits have nothing to do with any new value that these corporations are creating and they are not one-off windfalls from a sudden shift in supply and demand. Instead, they are a reflection of the extreme power that these middlemen have accrued through the globalization of the grain supply system. Intimately involved with the shaping of the grain trade rules that govern today’s grain supply system, tightly in control of markets, and the ever more complex financial systems through which global trade operates, these companies are in perfect position to turn grain scarcity into immense profits. The fact remains, “People Have to Eat, Whatever the Cost”.

Current Situation

The global food crisis intensified as Kazakhstan, one of the world’s biggest wheat exporters ban the export and rice prices shot up to a record high after Indonesia ban the export.

In another sign of grain crisis, a big food company in Japan, Nihon Shokuhin Kako, said high corn prices had forced it to buy cheaper genetically modified corn for the first time, breaking a social, though not legal, taboo, and signaling that opposition to genetically modified foods could weaken in the face of record grain prices.

Meanwhile, fresh wheat export ban in Kazakhstan, the world’s fifth largest exporter, and the rice export bans in Indonesia, threaten to trigger bans in other grain exporting countries, which will now face much higher demand from importing countries.

Hussein Allidina, at Morgan Stanley in New York, said pressure for export bans was likely to increase elsewhere as developing countries suffering high inflation tried to combat rising local prices by cutting back on exports of agriculture commodities.

The first arises from the fact that prices for commodities, including oil as well as most agricultural commodities, are typically quoted in US$....In substantive terms, the increase in US$ commodity prices is a big problem for the many Asian economies that have pursued their currencies peg to the US$ as a means of maintaining export competitiveness. The adverse impact on domestic consumers is now becoming obvious, and the only solution is to abandon the dollar peg and allow an appreciation. China is already moving in this direction.

A second important point is the impact of demand from the biofuel sector, particularly for corn in the US. The idea of making biofuels from food crops was always problematic. As the biofuel is long term government mandated program, and changing biofuel source from food crop to grass grown on marginal or non-arable land does not appear to be a short term viable solutions.

Finally, the biggest increases have been in wheat prices, reflecting the drought in Australia and in some other wheat producing countries. It seems likely, though it’s still impossible to prove, that human-induced climate change is increasing the frequency and severity of environmental issues i.e. draught. As such, it’s important not to regard climate change as a problem for the future. The fact remains, adverse effects are already here.

Grain Exporter Market

Corn:

Of the over 190 countries in the world, only a very few export corn. The other impression is how little of world-wide corn production is exported.

Top Corn Exporters

1. United States
2. Argentina
3. China
4. Brazil
5. South Africa
6. Hungary
7. Ukraine

The top three corn exporting countries account for 88 percent of the world's corn export. The United States held the largest share, marketing 62 percent of all corn exports.

Overall, the international corn export market has a structure more consistent with an oligopoly than a perfectly competitive market. Such indicators as the United States' serving as both the price leader and the residual supplier would be a natural expectation from this type of market structure.

Soybean:

Soybeans are the most imported agricultural commodity in the world both in terms of value and quantity.

United States leads the world in soybean production, with Second-place Brazil, followed by Argentina.

Top Soybean Exporters

1. Brazil
2. United States
3. Argentina

The top three soybean exporting countries account for 90 percent of the world's soybean export. The United States alone digest 40 percent of all corn exports.

Wheat:

The International Grain Council estimates that world wheat production will drop 7 million from last season to 607 million tons for the 2007-8 season. This represents a 3.2% decline from the global harvest of 626.5 million tons just two seasons ago.

While world wheat reserves are the lowest in 25 years, demand for grain remains robust. Economists caution that scarcer wheat will push up food prices and accelerate inflation. That scenario seems increasingly likely, as wheat futures hit a high of $7.59 this month on the Chicago Board of Trade. This represents a price increase of more than 50% in less than 3 months.

Top Ten Wheat Producers

1. China
2. India
3. United States
4. Russia
5. France
6. Canada
7. Australia
8. Germany
9. Pakistan
10. Turkey

The top 10 producers accounted for over two-thirds of global wheat harvests.

Top Wheat Exporters

1. United States
2. Australia
3. Canada
4. France
5. Argentina
6. Russia
7. Germany
8. United Kingdom
9. Kazakhstan
10. India

The top ten wheat exporting countries account for 80 percent of the world's soybean export. The United States held the largest share, marketing 30 percent of all wheat exports.

Food, Strategic Commodity

In an normal economic environment, demand for goods and services decreases if prices become too high. Buyers of U.S. grains (corn, soybeans and wheat) seem to be ignoring this economic principle as the U.S.'s grain stocks inventories are reaching critically low levels.

With global demand for grain at record levels and a weak U.S. dollar, foreign buyers are outbidding domestic buyers for American grains. While the higher agricultural commodity prices are good for crop agriculture, there are disconcerting downsides.
Global food consumers are going to have to pay more. U.S. ended 2007 with monthly inflation rate on food nearly 5% higher. It is estimated that the food inflation rate might be as much as 6% in 2008.

Also, discussions about food security in 2008 may become a paramount global issue as the discussions would address whether U.S. should allow the foreign sector to buy U.S.’s food. The main objective of the discussion would appear to be “Is food a strategic item that U.S. needs to keep in the U.S.?

For some U.S. crops, it's almost too late. The 2007 U.S. wheat crop is virtually sold out, while domestic soybean stocks soon will fall below a 20-day supply. Corn inventories are stronger, but with demand from export markets, the livestock industry, and ethanol plants, supplies also could be just as scarce for the 2008 crop. The condition could become more serious if adverse weather trims U.S. crop yields this summer and fall.

The situation is reminiscent of another run on U.S. grain one generation ago, and this is a very rare circumstance. The last time U.S. had this kind of uncertainty on food supplies was the early 1970s when the former Soviet Union became a major buyer of wheat in the U.S. In the fall of 1972 they were such aggressive buyers that they essentially bought the pantry out of U.S.’s available wheat supplies.
In 1973 U.S. also virtually ran out of soybeans. The U.S. Congress and president responded by saying U.S. cannot let the rest of the world have our strategic food supply, so they embargoed all foreign soybean shipments until U.S. could replenish the supply.

A similar export prohibition is not expected to occur this year, however, grain prices will have to keep climbing to slow the buying frenzy.

Despite the higher prices, wheat exports are 32% higher than one year ago; 33% of the U.S. soybean crop will be exported and corn exports this year are on pace to break the 1979-1980 record of 2.4 billion bushels.

For the grain importing countries, relationship of the U.S. dollar to importing country’s currencies exchange rate plays important role as the trading is based on U.S. dollar.

We've seen the relationship of the U.S. dollar to foreign currencies change substantially in the last few years. The European euro has increased in value relative to the U.S. dollar by 40%, this had resulted the increase of purchasing power by 40%. If importing country’s currency weakens, the situation is opposite i.e the purchasing power decreases, buy less for same amount of currency.
It might take another month of grain price increases to get users to cut back, and it is estimated that the soybean prices could top $15/bu. before all is said and done.

Farmland values and cash-rental rates should continue rising as producers look to expand their crop acreage to meet the grain demand. It is also expected that agribusinesses – especially those that offer seed, agrichemicals, fertilizer, machinery and financial capital – to benefit.

The challenge to satisfy the world's hunger for grain promises to make for an interesting year for 2008.

There is no doubt that the food is a security issue for every country of the world. World agriculture has been so productive in the past 60 years that general food shortages have been rare. With this long period of abundant food supplies, most of the world's consumers in developed countries have forgotten food's strategic nature. Given the world's appetite for basic crops, the hope for 2008 is for favorable yields throughout the globe that will give consumers and crop producers more time to adjust to this new high-demand era.

Conclusion

To the matter of facts, based on current grain market environments, the most viable/reliable grain export country without any doubt is defacto UNITED STATE of AMERICA. In addition to crude oil price increase, the grain price increase may dictate country’s economic growth, at least in near term until the grain price become under control. Under this circumstances, in order to sustain economic growth rates, a country must maintain stable Socio-Political-Economic environments in order to maintain the currency strength, inflation under control, and prevent rise of interest rate. Below a exapmle of a chart that explains economic impact a country may suffer if fail to do so.

Unstable Socio-Political-Economic situation would yield below economic conditions
(i.e. continued demonstration for unreasonable demand for the government policy and/or Korean government is force to re-negotiate the beef treaty and antagonize foremost trade partner US)


Overview