Book reviews Grain markets in turmoil 1. THE MERCHANTS OF GRAIN

by Dan Morgan

Weidenfeld and Nicholson, London, 1979

2. A POOR HARVEST: THE CLASH OF POLICIES AND INTERESTS IN THE GRAIN TRADE

by Richard Gilmore

Longman, London, 1983, 295 pp, f 18.00

3. GRAIN EXPORT CARTELS

by Andrew Schmitz, Alex F. McCalla, Donald 0. Mitchell and Colin A. Carter

Ballinger, Cambridge, Massachusetts, 1981

The large surpluses which opened and ended 1970-82 enclosed, perhaps, the most tempestuous peacetime period for world grain markets since the open- ing of Australia and the American mid- west to international trade, not only reflecting changing global or regional demand/supply balances but also major political actions of the two main pro- tagonists, the USA and the USSR. Thus, the dramatic fall in grain reserves in 1972173, which brought not only acute inflationary pressures but also fears of a massive Third World food shortage, resulted from the coinciden- tal shift of the USA to a ‘bare shelf’ stock policy and the Russian decision to maintain living standards through grain imports rather than cut livestock production in the face of domestic crop failure. Indeed, the USSR accounted for almost half of the upward trend in world grain imports during the 13 years and emerged as a free-rider in the system, sometimes stabilizing but at other times seriously destibilizing.

A number of key White House decisions were taken at times of great domestic political confusion or of inter- national tension against such back- grounds as Watergate, the general inflation of 1973-75, the Iran hostages

FOOD POLICY November 1983

and the invasion of Afghanistan. Principal among these decisions were a number of embargoes, either proving unnecessary or failing in their purpose. Temporary embargoes on all soyabean exports in 1973 and on grain to the USSR in 1975 arose from fears of domestic shortages, while the Russian invasion of Afghanistan produced President Carter’s action which, for a time, was given the reluctant support of other major grain exporters excepting Argentina. Finally, the USA faced increasing pressure from the domestic protection and export subsidies for grains of the EEC, reaching the point of open trade conflict by the end of 1972.

Given these various circumstances it is perhaps not surprising that since mid- 1972 there has been, in the USA, an intensive search first or a central cata- lytic agent, even a scapegoat, behind the various grain price gyrations and failures in the exercise of ‘food power’, and secondly for means of turning the US dominance in the world grain trade more to its economic advantage. The three books covered in this review together provide a comprehensive per- spective on the analysis which has gone into this search.

At the ctorm centre of the 13 years’ events has been a small group of extremely large and sophisticated businesses, operating under conditions of great risk, where both political and financial positioning can be critical to success or failure and requiring perhaps a wider range of skills and contacts than demanded even by international bank- ing. The merchants in The Merchants of Grain are an oligopoly dominated by Cargill, Continental Grain, Louis Dreyfus, Bunge and Andre - all privately owned companies and there- fore not required to publish financial or any other record of their performances. They have:

speed, mobility, instant communication across time zones, and superior infor- mation. These are the qualities that make

the multinational grain companies at one and the same time indispensable to almost every government in the world and yet rogue elephants in the global economy. (p 203)

Dan Morgan’s study has already received much richly deserved praise. It is an outstanding account of the his- torical origins of the major grain companies, their evolution through the 196Os, which saw their emerging trade links with the USSR, and their critical and highly controversial role in the world grain economy of 1970-79. The character studies of principal entrepreneurs and executives in the companies, the anecdotes and the day- to-day accounts of major events and decisions give far more insights into the contributions and limitations of the merchants of grain than more orthodox analysis has provided. The book is extremely open minded, doing as much to show the problems of the companies’ powers, real or apparent, and the basis for the suspicions which result, as it does to demonstrate their contri- butions. It is fascinating reading for generalist and specialist, and a mine of information for any economist seeking to appraise the performance of both grain traders and government policy makers.

Wider perspective

A Poor Harvest has a wider perspec- tive; its author Richard Gihnore is a Washington consultant, formerly a legislative assistant to Senator Hubert Humphrey and then a staff member of the Senate Foreign Relations Sub- Committee on Multinational Corporations.

After three chapters which briefly describe the US grain system and give a quite detailed account of the major and minor international grain trading companies, his book examines the

development of US farm policy since 1945, changes in the domestic grain- marketing system, the growth of US exports from their original dependence on PL480 to the dominating role of commercial shipments since around 1972, the embargoes and other means by which the US government has sought to use grain exports as political and economic weapons, a review of inter- national negotiations for grain agree-

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ments and related matters, and a brief account of the marketing systems of other major exporting countries and of the principal importers. His book con- cludes with an Agricultural Manifesto for a variety of reforms intended principally to strengthen the infor- mation base available to the US government, cooperatives and farmers in their dealings with foreign govem- ments, particularly the USSR, and with

build-up to the Agricultural Manifesto is seriously misnamed. The chapter on ‘The Rusting American Agricultural Chain’ covers no such phenomenon. Apart from some parts which would have been better placed in the dis- cussion of embargoes, the central theme concerns the continuing modernization of the US marketing system and the adverse effects which Richard Gilmore claims, but does not

munities’ Intervention Boards, for resale to the private companies whose total exports would be under its licens- ing controls. The proposals for an inter- national food bank envisage each member country holding specified quotas of grain reserves, with the bank operating a buffer stock scheme and arranging sales on favourable terms to the poorer nations.

the companies and to bring greater adequately demonstrate, result for the stability to both the US and inter- smaller and poorer farms.

Ad hoc improvements

national markets. A Poor Harvest is a The Agri&ltural Manifesto proposes The case for a more complete and open

reasoned statement of the radical an export licensing system for US grains system of information is hard to refute

interpretation of the US cereals sector to confirm the final destination of ship- although, as discussed more fully

and of the private agribusinesses serv- ments, the prime aim being to check below, the benefits may not be great.

ing it. USSR bargaining strength and ability The suggestion for cooperatives has

to evade embargoes, and a tightening merit, although it is not particularly

Concise and fascinating of reporting requirements reflecting critical. However, the grain banks are

the need for government to exercise its much more open to question. It is hard

The review of the sizes and diversified oversight responsibilities, working with the to see what a domestic bank could

activities, in and outside the grain exchanges to establish more reliable, achieve that could not be realized

trade, of the major and minor com- neutral price discovery and hedging mech- already within the existing administrat-

panies is a concise account which can anisms (including closer monitoring of cash markets). (p 238)

ive arrangements, acreage controls and

serve as an excellent introduction to the other support programmes of the

less structured but more detailed and, The manifesto also proposes that there USDA. The objective of short-tern

in the end, more fascinating and illumi- should be less liberal tax treatment of income parity between farmers and the

nating account in The Merchants of foreign earnings of the US-based grain rest of society is an impossible goal, as

Grain. Gihnore provides, moreover, a companies, although it is not at all clear we see currently. As regard the more

helpful balance through his discussion how legislation would differentiate ambitious international scheme, one

of the parastatal trading systems in between them and other US corpor- wonders how it could be successfully

other countries and of their relation- ations or between their trading in realized in the light of the total failure

ships with the private trading agricultural commodities and other of negotiations with more modest

companies. very diverse activities, and that objectives since 1971. Rather, one

The chapters on ‘me US Export American cooperatives should be made would look for more ad hoc improve-

Campaign’ and ‘The American Food the sole exporting agents for PL,480 ments such as enlargement of the Food

Weapon: A High Risk Strategy’ cover sales in order to give them a low-risk Facility of the IMF established in 1981,

the most important aspects of US inter- means of gaining experience in inter- increased stock holding by the EEC

national grain policies since the early national grain trading, where so far and the more populous developing

1950s. The review of the various they have notbeensuccessful. countries, aid supported in the case of

attempts to use food as a political or the latter, and expansion of the Food

economic weapon, whether it be the Two grain banks

Aid Convention. Moreover, the exist-

export embargoes or the unsuccessful ing FAO food security forums provide

1975 efforts to swap Russian oil for The key element of the manifesto is an adequate basis for intergovem-

American grain, are covered in some two grain banks, one for the US and mental cooperation, if exporting

30 pages which have the particular one covering all international trade. nations are so minded, to arrange

advantage in taking the account further The domestic bank is envisaged as priority allocation of grains to needy

than could Dan Morgan, namely to the existing in competition with the private countries at either market or con-

1981 ending of the Afghanistan-related grain companies, with a mandate drawn cessional prices in the event of a major

embargo on shipments to the USSR. in favour of the smaller farmers to buy world market shortage. Richard

His account of the various international specified quantities of grain at a Gilmore does not consider any of these

wheat agreements and of the confused guaranteed minimum price ‘fixed at alternative approaches.

and unsuccessful negotiations over the regular intervals in conjunction with The special value of A Poor Harvest

past decade for a more comprehensive significant changes in international is its perspective on the international

international grains scheme, is perhaps prices and high enough to ensure a level grain companies, whether or not one is

overlong on the earlier history, but of income competitive with other inclined to agree. Dan Morgan’s con-

otherwise essential to his purpose. sectors of the economy’ (p 242), ie ‘luding words are’ The one remaining element in the much the same as the European Corn- The size of their organisations, their sudden,

FOOD POLICY November 1983

Book reviews

right collusion of a tacit cartel at the other. We are not given any pointers where the grain companies may be in this range. Dan Morgan, however, writes of a grain trade that was always ‘savagely competitive’ (p 326) and elsewhere that in an unsuccessful attempt to establish a grain cartel for trading with Russia ‘the old wariness and suspicions soon prevailed’ (p 114).

undoubtedly were. The grain trade requires the types of long-lasting physical equipment and buildings

Secondly, it is not sufficient to high- light a few years of exceptional profit- ability as, for example, 1972-75

unwelcome exposure to public scrutiny, and the new volatility of the market as the world entered a period of scarce basic resources must tax their ingenuity and make their ultimate survival at least questionable. If the experts are right, the companies will have to be more forthright and governments finally will have to pool their courage and their wisdom to tame the grain tiger - beginning with reforms needed in their own societies. But, until then, the merchants of grain are still the ring masters.

For Richard Gilmore they are not only masters of the ring. They seem to have built it. He acknowledges their operat- ing efficiency, but sees them, above all else, as an oligopoly damaging to the interests of the USA and other coun- tries, gaining through the instability of markets to the disadvantage of con- sumers and producers.

They are the ever recurring theme. On their mastery ‘of the arcane world of commerce which constitutes the international grain transport system’ (p 16) he writes:

These transactions do not improve the efficient handling of US grain exports, but they do help to assure companies of securing additional quantities of grain at prices they otherwise could not obtain. (p 16)

Then,

The question remains as to whether the current industry structure favours the exploitation of consumers and producers, and makes it all but inevitable that at least a portion of the Big Leagues traders’ profits are generated at the expense of these two groups The Big League is now in a position to dictate its own terms to pro- ducers and consumers, particularly with the assistance of the US and foreign govem- ments. (p 58)

As the American agricultural economy’s export dependence has grown, so has the reliance of government and producers on the private company dominating that sec- tor. The hold of the major firms on this position of the market has only been rein- forced by the benefits they have been able to reap from the arrays of government pro- grammes laid at their feet - PL480, barter, export subsidies, credits, insurance, and tax incentives. (p 82)

On the bilateral agreements between the US and other governments which have become increasingly important in recent years, we read:

Their tendency to reinforce the position of the grain traders oligopoly and distort the functions of the market to an even greater degree may, in fact, aggravate the American farm problem. (p 112)

The true beneficiaries of increased export volumes have not been producers but inter- mediaries. In a trade dominated by a few buyers and sellers - a combination of oli- gopsony (buyers) and an oligopoly (sellers) - the farmer is isolated from the market, and it the merchandisers who capture the largest share of the net gain derived from an increase in f.o.b. prices. (p 117)

In the past decade, three US grain embargoes against the USSR have failed. Why?

Government’s inability td control that behaviour. And the Government’s lack of regulatory capability is in turn largely a function of inadeauate information.

A large part of the answer is to be found in the behaviour of grain companies and the

The Big League : continue to hold a which, in association with a particular monopoly on information, which remains the key to their success. (pp 169-174)

pattern of trading conditions, can pro-

duce long-term cycles in investment

Around 50% of US grain and oilseed and profitability. This, indeed, seems

are extorted: to have been the case. The generally

The vulnerability in this situation lies in the very profitable 1970s must be set against

fact that major buyers such as Japan, the the low returns of the late 1950s and the

EEC, or the USSR, can create havoc 1960s indicated by Dan Morgan. (p 162)’ through adverse purchasing strategies or

overly protectionist agricultural policies. The Big League can in many respects distort market conditions through its own oper- ations so as to siphon off profits from growers as well as other sectors, and confuse Washington into taking inappropriate, frequently harmful action. (pp 201-202)

And, as a final example,

firmed vehicle to carry out these transfers,

US food production and that of a satellite group of supplying countries is now essential to satisfying basic global food consumption requirements. The Big League is the con-

Film-star earnings

If this last consideration is not sufficient

. white-collar benefit than the film-star

to at least largely dispel concerns over profitability, another point remains. Where have the actual or potential excessive long-run gains gone? They have certainly not been dissipated in operating inefficiencies. If important, thev would have vielded much more

having gradually displaced growers as an influential market force. The mode of oper-

levels of earnings obtained in some

ation of these firms reinforced bv the actions years by a few which Dan Morgan

of monopolies, state-run orga&ations, has reduced the significance of traditional market indicators and transformed the trade arena. (p 233)

These are strong and for the most part contentious conclusions, requiring a more detailed examination and a longer time perspective than given in A Poor Harvest.

Big League

First, the evidence of the market power of the Big League oligopoly is not demonstrated. Both applied and theoretical economists have long shown that oligopoly is a condition of market structure which can yield any- thing from a state of aggressive competition at one extreme to the out-

describes (pp 18 and 160). Hundreds of senior US grain executives would have been living lifestyles far in excess of what is normal for their level of expert- ise in American business, which does not appear to be the case. It would not only have been Cargill, with head- quarters built as an imitation French chateau, but a very large number of its senior employees also.

Finally, the companies’ advantages over the US government in market information may be very much less than Richard Gilmore suggests. Certainly, they know the importance of timely and detailed market intelligence. They can afford to meet the heavy expenses involved, and they are not hampered by bureaucratic salary scales and pro- motion rules in getting the talent for

FOOD POLICY November 1983 339

Book reviews

the job. But, government has compen- turn to Grain Export Cartels for a much

sations, notably its intelligence services more complete analysis. As the dust

and, although a more recent develop- jacket states, ment, satellites observing world-wide crop conditions.

Culpability

Dan Morgan’s survey of the circum- stances surrounding the ‘USSR great grain robbery’ of 1972 acknowledges the culpability of the grain companies in misreporting their futures trading. However, he stresses that by mid-July or early August at the latest the White House had a full inkling of what was happening, including CIA intelligence. The White House was hell-bent on

OPEC’s recent success in enhancing export earnings and dictating - in many cases - the policies of oil-dependent nations has made fashionable among grain exporters the idea of an export cartel (which) would increase the individual exporter’s power by jointly determining levels of output, prices and profits Despite a growing depen- dence on North American grain exports, the exporters themselves have been unable to maintain a stable market for their product. Instead, amazingly enough, their customers are exerting enormous power. A grain cartel can correct this anomaly by consolidating resources and by eliminating competition.

These possibilities take us beyond

getting rid of surpluses, not to mention assessment of the grain companies. the Nixon Administration’s ‘first ner- Their own direct interests are in a much vous responses to the bugging incident more liberal trading arrangement, at at the Watergate’ (Dan Morgan, p 153). least as far as the USA is concerned,

It also probably forswore an embargo but become an influential consider- in the interests of the ‘politics of ation only on the implausible basis that detente’. Inadequate information their advocates can override White seems to have been a minor House analysis and objectives, not to

consideration. mention the farm lobbies working in Or again, in the case of the failure of the Congress. The necessary US

President Carter’s embargo on ship- government measures in support of any ments to the USSR following the cartel arrangements, principally acre- invasion of Afghanistan, Richard age controls and export licences, would Gilmore’s own analysis makes plain be perfectly compatible with a that there were large forward purchases competitively organized US marketing by the USSR (presumably anticipating system. the US reaction), the honouring of existing contracts by Canada and Australia, the refusal of the Argentines

Trade wars

to participate in any joint action and The ‘food power’ of market-sharing poor analysis by the CIA and USDA of among the principal exporters, or the the consequences of an embargo for alternative of trade wars among them, the USSR. The failure of official analy- is likely to become an increasingly sis probably owed far more, in my important issue in the foreseeable opinion, to the overestimate of USSR future. There is the self-evident severe economic problems which character- confrontation between the EEC and ized CIA analysis from the mid-1970s the USA as witnessed recently by the to 1982 than to inadequate market aggressively subsidized sale of information of a kind available to the American flour to Egypt. A further companies. threat to the exporters is the prospect

In terms of operating performance, that the trend of USSR net grain efficiency and levels of profits, the imports will either flatten after a decade international grain companies deserve of very large rises or, which is more a much better rating than Richard likely, decline in the face of some Gilmore gives them. Moreover, they domestic agricultural improvement do not seem to have been an important and of foreign exchange shortages.2 factor in the various failures of US The world grain markets of the 1980s ‘food power’ in 1972-81. will bring more gains to either the

There is, however, another aspect of discriminating monopsonist or the ‘food power’ which Richard Gilmore discriminating monopolist, although

clearly recognizes, but for which we not to both, than to those who trade for

whatever reason by less mercantilist standards.

Grain Export Cartels examines a large number of scenarios for cartels embracing the main wheat and feed- grain exporters in various degrees, and ranging from the more limited objec- tives of greater price and supply stability in their domestic markets and some improvement in their terms of trade to a more extreme OPEC-type approach. It considers schemes which would ensure different distributions of the cartel gains between their grain producers, livestock fatteners and consumers.

Buyer’s market

The most interesting conclusions are that the international grain trade usually operates in a buyer’s market and that a government cartel in wheat and feedgrains would easily yield the export nations together benefits of more than $15 billion annually and, moreover, would force importers (including Japan, Western Europe and the USSR) to bear a greater share of the costs of carrying stocks.

One may have doubts whether the critical long-run demand and supply elasticities will be as low, and therefore the cartel gains as high, as the authors have judged or whether they have fully appreciated the prospective excess capacity in grain production standing in the way of a successful scheme. Even so, Grain Export Cartels is an extremely valuable analysis, exploring a major aspect of the world grain economy which has been less fully treated in A Poor Harvest and hardly touched in The Merchants of Grain.

George Allen Barnstaple Devon, UK

‘Dan Huber of the Commodity Marketing Division of Cargill stated in March 1983: ‘Forty percent of the U.S. agricultural expdrtirig system’s capacity today stands idle. Transportation and handling facilities could haidle another 50 million tons annually. In all probability that capacity won’t be needed until the 1990’s. (Cargil Bulletin, March 1983) %.ee George Allen, ‘The crisis of Soviet food production’, Big farm Management, May 1983, London.

FOOD POLICY November 1983