Grain in the Bank

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Grain in the BankAuthor(s): Richard GilmoreSource: Foreign Policy, No. 38 (Spring, 1980), pp. 168-181Published by: Washingtonpost.Newsweek Interactive, LLCStable URL: http://www.jstor.org/stable/1148302 .

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GRAIN IN THE BANK

by Richard Gilmore

The world is beset by serious food shortages, and yet the United States is awash in surpluses. American agriculture depends on exports, but the U.S. government has ineffective, contradictory export policies. American farmers, the reputed heroes of U.S. agricultural effi- ciency, are suffering from the ever-increasing costs of farming and a dwindling return for their labors. Consumers in the United States face higher food bills compounded by high- cost energy and taxes to underwrite a $20 billion budget for agricultural programs.

Poor importing countries, whose popula- tions need additional food for their daily diets, cannot afford world prices. They cannot rely on food assistance because it is too unpredictable, and they cannot depend on the market because it rarely works in their favor. The U.S. government supervises a marketing system that it cannot control, as demonstrated by the inability to invoke the food weapon against Iran and the mishandling of the recent embargo on grain shipments to the USSR.

Agricultural production worldwide is up; the dollar is down. Grain can now be pur- chased from the United States, Canada, and other major producers for less than the cost of growing it in most regions. Five years ago the situation was just the reverse: Scarcity pre- vailed. During his 1976 presidential cam- paign, Jimmy Carter pledged never to embargo U.S. grain shipments because of the harmful effects on U.S. producers and foreign countries. Now he has ordered the most massive cancellation of grain contracts in history.

In the past decade, the world has expe- rienced wide swings in prices and cycles of food shortages and surpluses. In the United States alone, average farm prices for wheat more

RICHARD GILMORE, a senior associate at the Carnegie Endowment, is author of the forthcoming book, An Ever Normal Granary.

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than doubled in the six-month period from July 1973 to January 1974, only to drop precipitously the following year. The daily price movements were often even more irregu- lar. U.S. wheat stocks started in the 1950s at embarrassing highs only to dwindle to the peril point in 1973-1974 and climb again to over 1 billion bushels in 1977-1978.

World production and consumption trends have been punctuated by the same bubbles and bursts. During this period, weak international wheat agreements left importing and exporting countries to their own devices. Since 1945 the United States has emerged as the world's largest exporter of grains and oilseeds, but this evolution did not bring appre- ciably greater prosperity to the majority of American farmers. The 1972 Soviet deal left in its wake an extended period of inflation. Worst hit was the American consumer. Food aid recipients were also on the short end when the United States discovered its one inepti- tude, having oversold and underproduced.

Global agricultural policies are on a tread- mill, but major economic and political devel-

opments need immediate attention. The ques- tion is no longer how to improve production. These techniques are already available. One real problem is providing supplies at reasonable prices where there are shortages. Another is developing appropriate market tools to insure that producers and consumers obtain a fair deal. Governments must seek greater coordination for orderly marketing purposes.

Profiting from Uncertainty

Every country has different marketing systems to accommodate national economic and

political goals. The United States has, on the one hand, the most freely operating and, on the other, the most vulnerable system. Farm- ers receive minimal protection; consumers have no haven. After a harvest is placed on the market, an oligopoly of private grain trading firms takes over. These companies handle over 80 per cent of U.S. exports in grains and oilseeds. At least 50 per cent of U.S. wheat, corn, and oilseed production goes

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to foreign shores. As the world's largest supplier of food, the United States is in a position to be the international price setter and its companies to be the dominating vehicles for these huge export transactions.

The trading companies derive their profits from conditions of uncertainty. Whether prices go up or down is not important. What counts is how the grain giants cover their sales contracts in the United States and in other

supplying countries. The results are gyrating prices and supply fluctuations, making it far less profitable to farm than to buy and sell grain worldwide.

It will take years to recover from the economic and political consequences of the 1980 grain embargo against the Soviet Union.

If the market stabilized within a narrow band, the companies would have to count on sales commissions as their main source of revenues. But as long as wide price fluctuations occur, the grain wizards can position themselves to buy cheap and sell dear, or vice versa, and still come out ahead. They all avow that they lost money on the Soviet sale in 1972, but they fail to mention their profits from transactions with third countries. By the time the market registered skyrocketing prices in the aftermath of this massive deal, they had already covered themselves by buying grain at relatively cheap prices to sell later at high profit margins. When world demand slackens or surpluses mount, the companies can buy grain at bargain prices. Because of the size of their purchases, the net effect is higher sales prices.

To be certain that prices do not stabilize, the oligopoly must maintain unpredictability on the supply side. The real challenge is when global surpluses exist in most grains. Govern- ments instinctively hold down production to keep prices up, but the companies can also influence the availability of supplies over the short term, just long enough to tickle price

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movements on the grain exchanges. By selling wheat from Argentina or soybean products from Brazil, they can drive down the price of American grains. Then reselling those contracts and buying American will put the shoe on the other foot. Helping big buyers like the Soviet Union or China conceal the size of their purchases through foreign subsidiaries is still another way to cloud the crystal ball.

Too many demands are currently placed on the U.S. marketing system. Internally, it is supposed to distribute the return from sales fairly evenly, but in fact producers and consumers gain less than the private group of grain firms. As American agricultural prosperity grows increasingly dependent on commercial exports, the six international grain houses that dominate the market assume the pivotal role. Farmers are now bystanders more than players in the marketplace. They have only marginal influence, notwithstanding the fact that their production determines the amount of grain available for export. Con- sumers can block exports in times of shortage but rarely benefit from the positive effects of an export push in terms of cutting inflation at the food store or taxes to pay for agricultural programs. They, too, are almost periph- eral to events in the center ring.

The market is, as a result, sending out the wrong signals. Price and supply are the keys to planning for producers and consumers, both at home and abroad. The farmer needs to get an accurate reading to make planting decisions and the consumer to plan purchases. As long as government monopolies and an existing oligopoly in the grain trade intervene in the process, the age-old barometers of supply and demand are subject to manipulation. Foreign countries also depend on the Amer- ican marketing system as the Grand Central Station of international grain transactions.

A Club of Corporations

When politics enters the fray, the market crumbles. It will take years to recover from the economic and political consequences of the 1980 grain embargo against the Soviet

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Union. Trading had to be halted on U.S.

commodity exchanges for two days to avoid the bankruptcy of individual firms holding contracts with the Soviets. They were caught short and would have had to accept delivery on extremely expensive grain contracts without having any buyers. The government offered to bail them out. To do so, the wheels of commerce had to be halted temporarily.

Any attempt to impose a comparable food cutoff against Iran would have proven futile. As the Iranian tragedy dragged on, the U.S.

government looked desperately for options short of a military response to obtain the release of the American hostages. A food embargo was high on the list of options. During the reign of Shah Mohammad Reza Pahlavi, the United States became the supplier of roughly 80 per cent of Iran's wheat and a substantial portion of its other food imports. In theory, Washington was in an ideal position to brandish the food weapon. Not only had Iran been a regular buyer of American grain, but wheat was an important part of the daily Iranian diet. The Longshoremen's Union helped turn the screws by issuing a boycott of shipments to Iran from the United States after the Americans were taken hostage.

Still, the United States could not have ex- ercised this option as a temporary political gesture without extreme embarrassment. While the longshoremen's boycott was effec- tive, subsidiaries of American grain com-

panies allegedly shipped Australian wheat and Canadian barley to Iran. Had these countries joined with the United States in a food embargo, Iran would in all likelihood have made cash purchases from Europe or clandes- tinely from the same subsidiaries. Nothing short of a naval blockade in the Persian Gulf against all commercial traffic, including foreign flag ships under charter from American and other international grain companies, could have sealed off Iran from food imports. But such action would have met with bitter

opposition from U.S. allies in the area, for they too would have been severely affected.

In the Soviet case, the United States has

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attempted to administer the embargo even- handedly so that the costs at home do not out- weigh the intended impact against the USSR. It has discovered, however, that cushioning the losses is a very expensive and futile prop- osition. The grain houses, which had rushed to make sales to the Soviet Union before the embargo was in place, received immediate compensation. Some undoubtedly were blessed with windfall profits as a result, notwithstanding the Carter administration's good intentions. The U.S. government sim- ply cannot untangle distortions in the market and devise an equitable solution.

Iran presented the reverse side of the same problem. The government could not with- hold food, in part because the commercial system prevented it. The United States bumped up against a club of corporations and foreign government monopolies, limiting its own lev- erage over international transactions.

Discarding the Chaff

Under these circumstances, there is a press- ing need to realign private sector operations with public objectives. The United States should begin by establishing a domestic food bank as a substitute for the present hydra of agricultural programs. Each administration since World War II has inherited a commit- ment to support a minimum income for farming families. To minimize the cost, they have all encouraged exports.

The idea was eminently successful, and the United States emerged as the world's cornu- copia. It now accounts for roughly 45 per cent of global wheat exports and 65 per cent of coarse grains and soybean exports. Foreign consumption, however, could not always be counted on to bail out overly productive American agriculture. Whenever exports slackened, U.S. government programs rushed in to fill the breach. This year American agricultural exports are at an all-time high. Still, government expenditures sustaining a legacy of farm supports absorb over 30 per cent of the record earnings. This cost alone argues in favor of a new approach.

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A domestic food bank has more to offer than budgetary savings. It could pool the best parts of current policies and discard the chaff. Secretary of Agriculture Bob Bergland noted in the course of an official national dialogue on the future of American farming that current price support loan rates and subsidies benefit large farmers more than small ones.

Many experts are worried about the effects this trend will have on efficient production. Others are apprehensive about the social im-

plications of displacing more families from their farms, particularly when they already represent less than 4 per cent of the popula- tion. Another concern is that export sales have reinforced concentration in the private sector, allowing international grain trading houses to absorb the greatest share of the gain. When sales returns reach growers and tax- payers, the trickle down is barely a drop.

Setting up a semiautonomous bank for wheat is one plausible way of redressing these serious imbalances. As a banking institution, it would function on the basis of wheat de-

posits, thereby building a national agricultural program that would turn fixed reserves into both active and stable financial resources. The Domestic Food Bank (DFB) would be empowered to acquire and release wheat stocks to insure the availability of supply at stable prices. Reserves are the bank's assets.

When a participating farmer came to a branch of the federal bank, he would have the choice of receiving direct payment for his wheat deposit based on a set price range for different quality crops or of accepting a DFB- backed wheat certificate in exchange for this deposit. The advantage of the financial in- strument as opposed to cash is that the farmer could earn tax-exempt interest, or he could sell the certificate at a premium to any inter- ested buyer. He could improve his earnings at a minimum risk, because the wheat currency would have a par value-a minimum fixed price-established by the federal bank's own board of governors, composed of a broad spectrum of interest groups from producers to cooperatives, private firms, and consumers.

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There would be a limit on the amount of cash or the value of certificates a farmer could receive, corresponding to the maximum amount of wheat and flour the bank would

buy. This ceiling on individual reserve pay- ments would insure that larger farmers did not get a disproportionate share of the bene- fits. Furthermore, this would limit the level of reserves the government could acquire. Main-

taining excessive stock levels would only en-

courage inefficient production and consumption patterns.

Foreign consumption [cannot] always be counted on to bail out overly productive American agriculture.

The wheat grower would not limit his options by participating in the bank system. If his harvest were greater than the quota for his

deposit, he could do just what he does now. He could sell the remainder on the open, private market. Alternatively, he could store it in a facility of his own choice in the expecta- tion that he would receive a better price in the near future or that the bank would accept more deposits at a price competitive with bids from the private sector. He could also deal only with buyers outside the banking system.

In many respects the bank would be built on a mandate already written for the Com- modity Credit Corporation (CCc), a New Deal remnant. CCC responsibilities are suffi- ciently broad based to include major government programs in agriculture ranging from storing to selling grain. But it is a master plan to service domestic agricultural programs, rather than an autonomous policy and enforcement agency. The DFB, on the other hand, would put flesh on the ccc skeleton.

A singular oversight in bureaucratic reform has been to leave untouched the marriage of export controls and trade promotion activities in the Departments of Agriculture and Com- merce. The bank would separate these functions and would assume the duties of moni-

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toring wheat exports. An integrated production, reserve, commercial export, and food aid system would permit full coordination of export and domestic programs.

Food assistance would become part and parcel of the DFB-administered reserve system. Currently, food assistance represents less than 6 per cent of the total international assistance portion of the U.S. budget and suffers from jurisdictional fragmentation within the bureaucracy. In addition, the level of food commitments is unpredictable, depending upon the availability of domestic supplies and fre- quently on shifting political objectives.

The DFB, on the other hand, would calcu- late the amount of reserve deposits it would be willing to accept in terms of producer income, price stability, and a liberal assessment of food requirements from less developed countries that still rely on foreign supplies for sub- sistence. It could issue separate food aid bonds that would be exchangeable for wheat or the equivalent wheat flour at par value. They would be held by qualified recipient countries or an international food bank, convertible at any time into food aid.

The DFB would be designed to integrate concessional and commercial grain exports but would not be a national monopoly for selling wheat abroad. On the contrary, it would operate side by side with the private market, infusing more competition into the system.

The grain trade oligopoly would suffer most if the DFB attracted enough participants to make it worthwhile, because they would have to compete with the DFB. Moreover, their ability to toy with the market would be restricted by the bank's new enforcement powers.

All export companies would have to regis- ter with the bank in order to conduct transactions involving U.S. grain under general licenses. Should they choose to handle contracts for the bank, they would in addition require authorization from the DFB to serve as its agents. These procedures would centralize information and provide the government

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with appropriate machinery to maintain a well-coordinated agricultural export policy. Unlike the series of ad hoc embargoes against the Soviets-1974, 1975, and 1980-a registration system would reduce any harmful fallout at home or abroad from politically in- spired export controls. Assured supplies would avert sudden export cutoffs in response to temporary supply shortages.

Food Security

An International Food Bank (IFB) would be part of the same puzzle. In the late 1970s many food-importing countries shared responsibility with the United States for the food crisis that occurred. Caught by surprise, their massive purchases, sometimes in the form of paper transactions, overloaded the market domestically and internationally. The international grain companies were also deep- ly involved. The IFB would cover transna- tional territory and could deal with problems that spill over national borders.

The IFB would redirect conflicting national agricultural policies into one mutually bene- ficial scheme to stabilize supplies through the accumulation of nationally held reserves; to establish a floor and ceiling for wheat prices; to introduce greater equality in distribution by modifying procurement practices; and to establish a reliable, internationally coordinated food assistance program. Each member's subscription would be in the form of a food reserve quota. For donors, there would be an additional quota to cover food aid allo- cations. DFB reserve and food aid certificates would fulfill U.S. participation requirements.

The bank's assets would be member quo- tas, its liabilities the subscriptions themselves, which would serve as claims on the bank's reserves and aid commitments. Like the DFB, the international bank would guarantee a par value for its reserve and aid certificates. As a result, it too would operate on the basis of a minimum and maximum price for the wheat and wheat flour it would receive. Like any buffer stock mechanism, the IFB would acquire and release reserves in the open market

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to keep prices within an agreed upon band. A consensus of all members would be required to dip below the minimum subscription level and raise the price.

Food aid certificates would be redeemable. Countries that qualified for such assistance would hold the certificates. They would cash them in to compensate for a shortfall in production or to increase their level of imports for other welfare considerations. Alternative- ly, they could trade their certificates at a premium, increasing their foreign currency position, which might be more valuable than the promise of food assistance.

For recipient countries, the appeal of an IFB-type plan lies in the range of choices and in the assurance of food security. No one suffers more from the vagaries of the market or the politics of current bilateral aid programs than the recipients. Under an IFB, the planning and responsibility is left to them.

The incentive for importers to join such a system is that they would secure a hedge against the lean years. Even wealthy buyers strapped by energy import requirements would appreciate stabilized, noninflationary prices in terms of their own prosperity. Ex- porting countries would gain from a system that pegs prices above their own.

Generally, American grain prices are below those of other producers, and therefore an international price band needs to cover a price range wide enough to appeal to the world's principal suppliers. Also, the DFB would sell its wheat above its own purchase cost, thereby establishing a closer, more stable alignment of export prices. Exporting countries prefer an assured return to none at all or to the cost of storing grain and cutting back production unilaterally.

What about nonparticipants? Should the Soviets, for instance, refuse to join, they could no longer count on the United States or other IFB members to sell them grain under bilateral agreements. Access to supply would be severely restricted if world production were tight, leaving IFB reserves as the main source of relief. Even if the global bin were over-

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filled, the spigot of cheap wheat would be turned off for nonmembers, assuming enough influential countries observe the new rules.

Any such system is bound to affect the private sector as well. To handle IFB wheat transactions, grain merchants would need an export license. A licensing and registration process applies to all companies-government as well as private--dealing with the bank. The purpose would be to correct a fundamental flaw in all international wheat agreements to date: the lack of a means to coordi- nate related commercial activities.

The IFB would be conducive to harmoniz- ing national marketing systems and food policies. Moreover, grain handlers and ship- pers would be obliged to work closely with the bank even if they did not become registered agents. The greater the number of participants, the less opportunity would exist for commercial enterprises to play one country off against the other. Both banks would impose an orderly marketing system for wheat.

Correcting the volatility that has long been a prominent feature of the international food market through a bank-like scheme is not heresy. Every government is at the moment steeped at least knee-deep in the agricultural sector from production to marketing. The United States is no different, notwithstanding official disclaimers.

Both former Secretary of Agriculture Earl Butz and his successor Bergland endorse international wheat agreements with some pricing mechanism. The success of any plan depends upon the role of government and its ability to manage its own agricultural economy. An in- visible hand does not determine prices, export subsidies, or loan rates for American growers. They bear the imprint of government. Even the United States has a managed agricultural economy. Other countries have varying de- grees of government intervention to the point of total monopolies.

Spigots and Clamps

Fears that a food bank would merely represent yet another layer of bureaucracy are un-

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founded. The DFB would actually strip away some of the excess. The international bank is new, but it would assume some functions of existing international organizations. The bank proposals are not a great leap in terms of American agriculture and, in fact, fall far short of existing controls in other countries. In some respects, this type of internationally coordinated system would do more to whittle away at current protectionist policies in some countries and at the same time would offer the security of available supplies at reasonable prices.

There are other ways to achieve these same objectives, but the banks would build on existing institutions and programs. Groups with vested interests in sustaining the status quo would put up a fight and likely win over the short term. Inevitably, it would take a crisis to put out the flame. Before then, inter- vals of minibreakdowns might inspire half measures. In the event that no meaningful adjustments are made, the system would have to run its course. One crisis would generate another.

The sister banks are by no means a panacea. One major problem is that wheat would be isolated from other feed grains in the start-up phase. As a result, market distortions might be shifted to other commodities, and the fundamental structural problem would re- main unsolved. Coarse grains and oilseeds could, however, be included at the outset if necessary to induce greater price stability across the board. Certainly there are easier ways to manage an international food weapon strategy in extreme political situations, such as the cases of Iran and Afghanistan. Even the food bank does not insure that other producing countries would go along with a U.S.-imposed embargo. But the bank would help cushion the domestic and international costs of an embargo.

The United States groped for a way to re- spond to the Soviet invasion of Afghanistan and landed on the food weapon. To imple- ment the embargo, it took steps to bolster the position of individual grain companies, but

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it undermined the income security of producers and raised the prospect of fueling the fires of inflation.

It is virtually impossible to turn the spigot off. The DFB and its licensing board would insulate the United States and other pur- chasers in such circumstances. The export houses could not make wheat shipments without a license, even if the wheat were pur- chased from the private sector. The clamps could be put on in American ports without the assistance of the longshoremen.

The purpose of the banks is to provide even management for orderly marketing in a commodity that is virtually a public resource. It is not to enhance the use of food for political purposes. Yet economic sanctions are welcome in some cases as a far more acceptable response than military action. The international bank could have provided the United States with an acceptable forum to gain consensus among its members in support of a food embargo. Moreover, major government participation would have kept private sellers under lock and key because of the IFB's enforcement power.

In the case of Cambodia, U.S. food assistance has been late in coming, ostensibly because of Vietnam's opposition. Suspicion has been rife on all sides concerning the ultimate purposes of American food shipments. An international organization for food aid, such as the IFB, could have cleared the air by ap- proving emergency transfers under its auspices or at least through better coordination among donors. Food assistance, which is readily available, could have stood a better chance of getting to those who need it most.

The banks are a divorce from the usual politics of food as well as a departure from current government and commercial practices. Opposition to these proposals will be formi- dable. Gross inadequacies in current policies and programs, however, argue in their favor. At the very least, the prospect of worse times ahead warrants full-scale consideration of the structural problems that the banks are designed to resolve.

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Grain in the Bank

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