Stephanie Mercier - Evolution of World Grain Trade

8/10/2019 Stephanie Mercier - Evolution of World Grain Trade

http://slidepdf.com/reader/full/stephanie-mercier-evolution-of-world-grain-trade 1/13

Agricultural & Applied Economics Association

The Evolution of World Grain TradeAuthor(s): Stephanie MercierSource: Review of Agricultural Economics, Vol. 21, No. 1 (Spring - Summer, 1999), pp. 225-236Published by: Blackwell Publishing on behalf of Agricultural & Applied Economics AssociationStable URL: http://www.jstor.org/stable/1349982

Accessed: 26/10/2010 15:05

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at

http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless

you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you

may use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at

http://www.jstor.org/action/showPublisher?publisherCode=black .

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed

page of such transmission.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms

of scholarship. For more information about JSTOR, please contact [email protected].

Blackwell Publishing and Agricultural & Applied Economics Association are collaborating with JSTOR to

digitize, preserve and extend access to Review of Agricultural Economics.

http://www.jstor.org

http://www.jstor.org/action/showPublisher?publisherCode=black

http://www.jstor.org/action/showPublisher?publisherCode=aaea

http://www.jstor.org/stable/1349982?origin=JSTOR-pdf

http://www.jstor.org/page/info/about/policies/terms.jsp



http://www.jstor.org/page/info/about/policies/terms.jsp

http://www.jstor.org/stable/1349982?origin=JSTOR-pdf

http://www.jstor.org/action/showPublisher?publisherCode=aaea




Review

of

Agricultural

conomics

Volume

21,

Number

1-Pages

225-236

The Evolution

of

World Grain

Trade

Stephanie Mercier

Over

hecourse

of history,

world

rain

rade

as

developed

rom

he

stage

where

rain

was

only

shipped

s incidental

argo

o its status

today,

n

industry

n which

housands

f

tons

of

grain

move

daily.

As

a

share

f

total

onsumption,

raded

grain

has

risen

rom

ess

than

0.03%

n

the

eighteenth

century

o more han

10%

oday.

his

explosion

n trade

olume as

relied n

communication

nd

measurement

technology,

hich

has

made

nformation

bout

rain

availableo

buyers

nd

ellers.As

we enter he

wenty-first

entury,

he

nformation

omponent

f

demand

or

grain

will continueo

expand,herebyhreatening

o

overwhelm

he

current

nfrastructure.

The

grain

tradehas been

plied

acrossbordersand oceans

for

more than

3,000

years.

During

that

period

of

time,

it

has

shifted

significantly

n

character. ol-

lowing

the

coast as

they

went,

enterprising

Bronze-Age

merchants nd their sail-

ors

loaded

their flat-bottomed

oats

by

hand

with

available

ommodities

includ-

ing

grains)

and then sailed on to

the next

port

to

sell

their

wares.

In the

last

decade,

grain

trade has

become

extremely

pecialized, nvolving

transactions hat

are

arranged

hrough

satellitecommunications.

aid

grain

is

then

loaded onto

huge, increasinglyautomated ontainerships in orderto be deliveredaroundthe

world.

Up

until the

last

200-300

years,

internationally

raded

grain

accounted or

only

a small fractionof

grain

consumption,

nd

thus,

grain

trade

did not

require

a

separate rading

nfrastructure.

ernandBraudel

stimated

hat

traded

grain

ac-

counted

for

only

0.03%of

total

grain consumption

until

the

eighteenth

century

(Braudel).

Today, mports

make

up

more

than

10%

of

grain consumption

globally

(USDA/WAOB).

ome

countries n

Asia

(i.e.,

Japan)

are

nearlytotally dependent

on

grain

imports

other than rice.

A

reliable,

apid

means

of

transacting

or and

acquiringgrain

on a

global

basis is

essential

to

today's hriving

nternational

economy.

Grain

radehas

expandedrapidly

over

the

last

few

centuries,

hereby

expo-

nentially

ncreasing

he demand for information.The

information

ontentre-

*

Stephanie

Mercier s

an

economist

on the

Minority

Staff,

SenateCommittee

on

Agri-

culture,Nutrition,

and

Forestry.



Review

of Agricultural

conomics

quired

by

product

buyers

has evolved from

knowing

how

much

grain

is

required

to feed restless Romanplebeians o distinguishingbetweengraintypes in the

fifteenthand sixteenthcenturies o

issuing

tenders

for

specific

wheat classes be-

ginning

in the

twentieth

century.

As we

approach

he

next

millennium,

echno-

logical

advancesand

sophisticated

onsumerscould drive the market o

focus on

quality

characteristics,

s

is

already

the

case

in a small

but

growing

share of

to-

tal

transactions.

In

this

article,

will

examine he courseof

evolutionof

the

world

grain

trade

and will

discuss how these

developments

re

reflected

n

the

structure

of

the

world

economy

and even in the

language

that

is

spoken.

In

additionto a

histori-

cal

overview,

will look at

how these

changes

affect

the

relationship

etween

buyersand sellersand at the contextthatthisbackground reates orcontinued

changes

n the

structureof

the

world

grain

market.

History

of

Agricultural

Trade

The Phoenicians

(living

mostly

in

modem

Lebanon)

were

the

first

world-class

traders;

hey

conducted

a

flourishing

rade and

established

colonies

n

the Medi-

terranean

during

the

second

and

first millenniaB.C.E.

Their

access to trade

routes

came in

part

becauseof their

development

f

keel-hulledboats

(powered

by

both

oar and

sail).

The

Phoenicians

were also the

first maritime

power

to

learn

how to

sail at night,using theirknowledgeof stellarpositions.Archeological nd limit-

ed

documentary

vidence

suggests

that their trade

goods

included

raw

and

pro-

cessed

agricultural

roducts,

ncluding

imber,horses,

grain,

wine,

olive

oil,

dye,

metals

(such

as

gold,

copper,

and

tin),

and

ceramicand

glass

(Remler).

Grain

was

not

a

priority

rade

tem for them

becauseof

the

space

limitationson

their

ships.

Often,

grain

was

only

loaded

if

more valuable

cargo

could not be

found at

a

port

(Casson).

The rise of

city-states

n Asia

Minorand

southern

Europe

and

the

concentra-

tion

of

the

population

within

city

walls led

to

increasing

demand

for

grain

grownoutside the immediatearea.Strongprevailingwinds on the Mediterra-

nean and BlackSea restricted

rade to the few

months in late

summerwhen

the

weather

allowed

passage.

The

larger

the

state

grew,

the

more reluctant he

citi-

zens were

to

depend

on an

irregular

upply

of

grain.

Roman

Grain-Trading

Patterns

The

inability

of

peasants,

who

often farmedon

rocky

or

infertile talian

soil,

to

feed their urban

population

ed,

in

part,

to the

expansion

of

Rome into

neigh-

boring

regions.

While

demographic

data from the

antiquities

are

lacking,

histori-

ans believe

that

by

the

age

of

Augustus(firstcentury

B.C.E.),

as

much as

one-

third

of

the

population

on the

Italian

peninsula

was

clustered

n

cities like

Rome

(Gamsey

and

Siller).

Beginning

n

the sixth

century

B.C.E.,

Rome was

engaging

n

regular

skirmish-

es with

neighboring

ribes n

order

to

maintain

control

of

the

nearby

TiberVal-

ley.

Rome'sdominationof

the Italian

peninsula

occurredover an

eighty-year

pe-

riod,

during

which

Romans

alternately

ought

alliancesand

conquered

erritory;

this

period

culminated

n

victory

n the

FourthSamniteWar n

243B.C.E..The

Romanscemented

heir

position

by establishing

ixteen

separateoutlying

colo-

226



Evolution

of

World

Grain Trade

nies. Theiraccumulation f both land and slaves

(a

result

of these

conquests)

al-

lowed for the establishment f largeestates.Cropsgrownon such estates were

shipped

to urbandealersfor sale

(Garsey

and

Siller).

This

same

patternapplied

for the next severalcenturies

until,

at its

zenith,

the

Roman

Empire

stretched rom Hadrian'sWall

n

northernBritain

o

Mesopota-

mia

(moder

Iraq).

n

some

regions,

the

Romans'

strategy

of

resettling

citizens

and

former

legionaries

n

overseas

agrarian

oloniesfailed because of the

remote-

ness

and/or

inhospitable

limatesof these colonies.

The

Romansthen resorted o

assembling

huge

government-controlled

states,

which

were

manned

by

hun-

dreds of slaves

who worked

expressly

o

grow

grain

for

shipment

o Rome

and

to frontier

military

encampments.

Egypt

was a

major

exporter

of

grain during

this

period;

between the accession

of

Ptolemy

the Great o

the throne

of

the

Pharaohs

n 323B.C.E.and

the

conquest

of

Egypt

by

Caesar

Augustus

n

30

B.C.E.,

the

government's

main

source of reve-

nue

was derivedfrom their controlof the

grain

trade.

The

government

main-

tained control

by

taxing

the

producers

of

surplus

grain,

which

they

held

in

state-

owned silos

in

Alexandria

and then

shipped

out on vessels from the island of

Rhodes.Rome

was a minor customer or

much

of

this

period,

but

by

the end

of

it,

the

Roman

navy

conqueredEgypt,

in

part

as a means of

denying

others

ac-

cess to

its

grain

(Casson).

Duringthe Imperialera,the Romannavypatrolled he seas not to conquer

new enemies

but to

protect

the merchant leet from

pirates.

The chief

route

it

protected

ran from Alexandria o Rome

(or

rather,

o

its

nearby

ports

of Pozzuoli

and

Ostia);

annually,

over

150,000

ons of

Egyptian

grain,

which accounted or

one-thirdof

Rome's

consumption

otals,

traveled his

route.The

ships

that

moved

the

grain

were built

expressly

o

carry

t,

and

they ranged

in size

up

to

1,200

tons

(Casson).

The remainder f

Rome's

importedgrain

came

from

Sicily

and

North

Africa.Most of

the

grain

from these routeswas not

purchased

by

the

gov-

ernmentor

by

private

dealers

but ratherconstituted

he

taxes remitted

o the

central

governmentby

its

provinces.

Of the

government-procured

rain,

much

was

initially

sold to citizensat subsidized

prices

and was later distributed ree of

charge.

When Constantine

shifted the seat of

power

to

Constantinople

n A.D.

330,

he diverted

the flow of

Egyptian

grain

away

from Rome

and toward

his

new

capitol.

After a series of attacks

by

barbarians

during

the fifth

century

A.D.,

the

Western

Empiredisintegrated,

nd

the

need

for an

organized

leet that

special-

ized

in

grain

trade

disappeared.

Medieval Grain Trading

Over the next several

centuries,

population

pressures

eased as waves

of

epi-

demics

struck

he

European

ontinent.Pirates

and other

maraudinggroups

(such

as the

Vikings)

emerged

after the

collapse

of the Western

Empire

and were

found

cruising

the

seas and

coastal

waters

around

most

of

Europe.

Maritime

trade was

hamperedby

the attacks

hat these

groups

launchedon coastal

villages

and

shipping

lanes.

The

Crusades'

ncreased

demands

on

Mediterranean

ship-

ping capacity

required

n

orderto move armies

and

equipment)

also limited

the

ability

of traders o move

goods consistently

on a

commercial

asis

(Braudel).

227



Review

of

Agricultural

conomics

The

trading

that did occur was conducted

largelyby

those medieval

city-states

thatoperated mall fleets. These fleets wereprivatelyowned and operated. n the

north,

trading

anes were dominated

by

the Hanseatic

League,

a loose

confedera-

tion

of

seventy-five

o

one

hundred

semi-independent

German owns.

In

the

south,

trade

was

handled

by ships

from

the coastalItaliancities of Genoa and

Venice.The holds of the

Hanseatic

ships

carried

grain

from

Germany,

Russia,

and Polandas well as iron

ore, cattle,

dried

herring,

and timber.These merchants

traded

wool

and cloth

with

England

via

exclusive icenses

granted

by

royal

fiat,

beginning

with Edward

II in

the fourteenth

century.

The Italian

ships

carried

products

derivedfrom more

hospitable

climates,

ncluding

wine, fruit,

olive

oil,

and

grain

(Morgan).

Althougha varietyof cerealcrops(wheat,rye,and oats)weregrownand

shipped

to

grain-deficit

ountries,

nformation

bout

the

quality

of the

grain

re-

ceived

in

a

particular hipment

was

often

lacking.

In

fact,

the

Germanword

korn

the

root for the

English

word

corn )

eferred

o

grain

as an

undifferen-

tiated

commodity.

Among

the documents

of

this

era,

most references

were

to

grain, although

a few did

refer

to

individual

grain

types

in

their

discussionof

trade

(Dollinger).

The

main Baltic

port

of

Danzig

handled,

on

average,

1

million

kilograms

of

grain annuallyduring

the fifteenth

through

he

seventeenth entu-

ries

(Dollinger).

Partof the motivationorEuropean ountries o establishoverseascolonies n

Africaand the

Americas

during

the

sixteenthand seventeenth

enturieswas

the

need to

fill the

grain

bins back

at

home.

Shifting

political

alliancesbetween coun-

tries made access to

surplus

eastern

Europeangrain

uncertain

or

England,

France,

Spain,

and

Portugal, herebydriving

these countries

o look for alterna-

tive sources.

Once

colonies

were

established,

both

the

laws of

comparative

d-

vantage

and customs

regulations

et

by

the

mothercountriesdictated hat

trade

flows consist of

grain

and

other

raw

commodities,

which were

moving

east

to

Europe

(or

north,

n

the case of African

colonies),

with

finished

productsmoving

westward.

The

legal

restrictions n

colonies

that were

selling

their

goods gave

merchantsn the homecountriesmonopsonisticpower,therebyallowingthem to

keep

offer

prices

for

commodities,

uch

as

wheat,

rice,

tobacco,

naval

stores,

spic-

es,

and

dyes,

static.Forthe

first

time,

contracts

were transacted or

specific

com-

modities,

and

producers

made

planting

decisions

based

on the

prices

that Euro-

pean

merchants

were

offering.

Ultimately,

he

disparity

n

market

power

that the

North American

planters

suffered

was

one

of

many

factors

contributing

o the

AmericanRevolution

n the

1770s.

The Industrialization

of

the Grain Trade

Industrialization

n

the nineteenth

century

can be tracedto the establishment

of commercial

grain-trading

irms.

Coincidentally,

his

occurred

during

the

same

period

that

majorgrain-surplus

reas

n

the

Western

Hemisphere,

uch as the

United

States,

Argentina,

and

Brazil,

gained

independence

1776,

1816,

and

1822,

respectively).

Russia,

except during

periods

in

which circumstancesimited ac-

cess to

Baltic

Sea

ports

(i.e.,

the

Napoleonic

Wars),

ontinuedas

a

major

source

of

grain

until the RussianRevolution

n 1914

(Goodwin

and

Grennes).

The

emer-

gence

of

a

middle

class

in

western

Europe

created

demand

for a

steady supply

228



Evolution

f

World

GrainTrade

of

bread-quality

wheat,

a

supply

that

could not be met within the

continent.

Since these countriesno longer possessedthe politicalor militaryabilityto com-

pel

formercolonial

regions

to

ship

it,

the

grain

had

to be

purchased

at

negotiat-

ed

prices.

Once

the

protectionist

Corn

Laws

in

England

were

repealed

n

1846,

an infra-

structure

began

to arise that would make this trade feasible.The London

Corn

Exchange,

which had

operated

since

1749,

formed

the

backboneof the

emerging

international

rade.Over the next

fifty

years,

several

amilies

began grain

busi-

nesses

that would one

day

dominate

he

world

market. n

Europe,

he

Fribourgs

(Continental

Grain),

Louis-Dreyfus,

Bunge,

and Andre all

emerged,

while the

Pillsburies,

Peaveys,

and

Cargillsbegan

their

milling

and

grain-handling pera-

tions

in the United States

(Morgan).

The first effortto devise

a

uniform

set of

contracts

began

with

the

founding

of

the

London

Corn

Trade

Association

n

1878

(Barty-King).1

hese contracts

ncludedthe

provision

of standard

sample

sets for

grain

of a

certain

origin.

At

the

same

time,

railroad

systems

and

steamship

ines

capable

of

moving

the

grain

were

developed

n

the United

States

and,

to

a

lesser

extent,

n

Argentina

and

Australia.

By

the end

of

the

century,

hese countrieses-

tablished heir

own

commodity

exchanges

n

order

to

facilitate

he

movementof

grain,

and

the

modem

grain-distribution

ystem

was born

(Morgan).

Underthis

system,

merchantsno

longer

put grain

on

a

ship

without

knowing

whatpriceit would receiveupon delivery.Despitespeculativeactivityand fre-

quent

attempts

o

manipulate

he

market,

price

discovery

did occur

in the

com-

modity

exchanges.

As

telegraphs

and

telephonesdeveloped,

hat

price

informa-

tion

was used

as the basis for

formulating

ontracts.

As the

majorgrain tradingcompanies

established

relationships

with

their

counterparts

n

other

countries,

grain processors

had

some discretionabout

their

source

of

grain.

With a more reliable low of

product

rom

the

international

is-

tribution

system

processorsbegan

to view

purchased

grains

as

regular nputs

in

a

production

process.

In the same

way

that

grain

had been divided

into

grain

types

in

the seventeenth

and

eighteenth

centuries,

he

grains

were

now

increas-

ingly

differentiated.

n the

case

of

wheat,

buyers

early

in

this

century

expressed

their

preference

or

soft versus hard

wheat

based

on the source

country.

Muchof the

market

power

came to

reside in

those

grain-trading

irms

that

were

much

larger

than

eitherthe

crop producers

or most of the

processors,

o

early

effortsto

establish

uniformity

of contractsand the

quality

of

the

grain

shipped

met with failure.Traders

were

unwilling

to surrender

any ground.

Con-

sequently,

most

exporting

countries ook action

n the first

part

of the twentieth

century,

nforcing

a set of standards

or the assessmentof

grain.

The GrainStandards

Act of 1916 established

he

first

grain grades

and stan-

dardsin the UnitedStates.Underthis act,all grainand oilseed thatis designat-

ed for

export

must

be

submitted or

inspection

and

graded

on the basis

of

a set

of standard

physical

characteristics

Hill).

The

Canadian

approach

was to estab-

lish a state

trading

agency,

he Canadian

Wheat

Board

(CWB),

whose anteced-

ents

date from

the

FirstWorld

War. n

its role as

a marketer f all

grain

that is

for

export,

the CWBalso establishes

quality

criteria or

grain

that is

accepted

from

farmers.Enforcement

s

conducted

by

restricting

he

grain

varieties

ap-

proved

for

delivery

nto

export

channels.

Though

ts wheat board is of later

vin-

tage

(1939),

he

Australian

government

ollows

an

approach

imilar

to that

229



Review

of Agricultural

Economics

adoptedby

Canada.

All

of these institutions

disseminate nformation

boutthe

grain being transported,ncluding(1)knowledgeaboutthe physicaltransferof

grain

and the

handling

services

nvolved;

2)

the flow of information

boutthe

grain,

ncludingprice

and related actors

such

as credit

terms);

and

(3)

descrip-

tions

of the

physical

and intrinsiccharacteristics

f the

grain

contained

n

ship-

ments.

The

Interaction Between

Grain

Buyers

and Sellers

In

grain

markets

today,

contracts

negotiated

between

buyers

and

sellers

reflect

the conditions

under

which trade will be conducted

n

terms of both the

physical

and informationalracks.Forthe majorityof transactions,he physicalaspectof

the

grain

trade dominates.

The

structureof these contracts

allows

buyers

to sub-

stitute attributes

hat ensure the

highest

profitability.

Automated

technology

of

modem flour

mills leads

many

wheat

buyers

to

make their

purchasing

decisions

based on

the

gluten

contentof

the

flour

they

intend to

produce.

This involves

mixing

and

matching

wheat of differentclasses

in

orderto

get

the desired

gluten

content

within

narrow olerances.

Similarly,

cientificadvances

n

livestock

man-

agement

have

given producers

he

ability

to evaluate he metabolizable

energy

contained

n the

grain

in

orderto create hose feed rationsbest suited to their

animals.The value of the grainis thereforebased on its nutritivecontent.This

constitutes

a

considerable hift

in the

concept

of

substitutability

n

marketing,

which

previously

relied

largely

on

the

prices

of

grain

relative

o

the

most abun-

dant

grain

(i.e.,

corn

in

livestock

feeding

or

hard red winter wheat in the

wheat

market).

Organization

of

Grain and Oilseed Markets

Over

the

centuries,

ransactions

n

grain

and oilseeds have occurred n several

sets of

markets,

ets which sometimes

overlap.

Even

today,

he

majority

of

deals

are transactedn localand regionalmarkets.Grain-deficitregions,whichstem

from dense

population

oncentration

nd/or

inadequate

arable

and,

obtain

sup-

plies

from other

parts

of the same

country

or from across nternational

orders,

depending

on

grain availability

nd

transportationapacity

within a

given

coun-

try.

In

terms of the

importance

f

trade n

use,

the

world

rice market

s the most

thinly

traded

(at

less

than

5%),

with the wheat marketat the other end of the

spectrum

with

exportsaccounting

or

19%

of

total

consumption

n

1996-97)

(USDA1998).

Operating

n

parallel

with these

physical

markets,

nformation n

grain

characteristics

nd

preferences

lows

between

buyers

and sellers as well.

Local

and

regional

markets

Even

in

the

complex

world

marketwe

now

face,

a considerable mountof

grain

does not move far from the fields

in which it

was

produced.

For

nstance,

in the

United

States,

between

30%

and

40%

of corn

produced

s held back for on-

farm

feeding,

seed

use,

or

stocks,

and about

10%

of

wheat

(Heid,

data

updated

from

Leath,

Meyer,

and

Hill).

Of

the

grain

marketed,

0%

s

typically

delivered

into

the

country

elevator

system

and

transported

y

truckover

county

roads. Be-

cause

moving

raw

grain

is

relatively ostly

compared

o the

grain's mplicit

value,

230



Evolution

f

World

GrainTrade

processors

and subterminal

levators end to clusterwithin

easy

reachof

major

productionareas.Ninetypercentof the springwheat milled or assembled or ex-

port

in

Minneapolis,

MN,

comes

from

within

450 miles of

that

city.

Within hese

regions,grain

transactions re

generally

governedby

a few

key

factors.

The

overall

supply

of

grain generated

by

producersdepends

on the

rela-

tive

price

incentives

they

detect at the time

the

fields

are

cultivatedand the

weather

patterns

hat

prevail

n the

region

over the course of the

growing

season.

How

that

grain

is marketed

depends

on the

accessibility

o

elevatorsand the ex-

tent

of

the

farmer's

wn

livestock

operations

and

operations

on

neighboring

farms.

Local

and

regional

demand for

grain

is

determined

by consumption

e-

quirements

f

the area's

population

human

and

animal)

and

by

existing

relation-

shipsbetweenproducers,handlers,and processors.

When

a

processor

n a

grain-abundant

egion

must

meet

tight requirements

n

orderto

produce

a

specific

grain-based

product,

he

buyer

typically

relies

on in-

formal

relationships

nd

past experience

with

the

quality

of

grain

receivedfrom

various

country

elevators o

locate

a

specificgrain.

In a few

instances,

he

uni-

form

quality

of that raw

grain

is

so crucial o

the

productionprocess

that the

company

inds it

necessary

o assure

its

supply by contracting

with

individual

producers.

These detailed contracts

specify

the varieties hat

producers

must

plant

and

restrict heir

cultivation

practices.

This

level

of control s

exerted

most

oftenby food-processing ompanies,and it accounted orless than2%of feed

grain

marketed

and

for less

than

1%

of food

grain (chiefly

wheat)

marketed

n

the United

States

n

1993.Such

production

ontracting

s

more

prevalent

n

horti-

cultural

and livestock

processing,reaching

99%

n the

sugar-beet

ector

and

85%

for broilers

n

the same

year

(Manchester).

For

the

majority

of

grain

moved from the farm

to the

elevator,

prices

are de-

termined

by

the

schedules

posted

on a

daily

basis

at

the local

elevators

and are

adjustedby

discountsor

premiums

assessed

for

quality

factors hat

depart

from

the norm.

Since elevators'

ability

to measure

quality

s limited

to

a few tests

con-

ducted

as the

grain

is

weighed

and unloaded

from

trucks nto

storage

bins,

those

discounts/premiums

do not

apply

to a wide

range

of characteristicsnd

during peak

delivery

time

may

not be

applied

at all.

Posted

prices

are

generally

driven

by

the

prevailingprices

for

the

grain

at

the relevant

cash

exchanges.

On

average,

10%

of

grain

and

oilseeds

delivered s

priced

n

advance

through

u-

tures-driven orward

contracts

Manchester).

National

and international

markets

At this

level,

individual

producers

do

not

play

a

significant

role. The

supply

side of transactionss in the hands of the nationaland multinational rain-trad-

ing

firms and of the

large-scale

armer-owned

cooperatives

who

own

the subter-

minal and terminal

elevators. n some

countries,

uch as Canadaand

Australia,

the actual

decisionsare made

by

exporting

state

tradingagencies,

who hold the

monopoly

n

purchasingauthority

over

domestic

producers), lthough

he

physi-

cal transactions

re

often handled

by

private

parties.

On the

demand

side,

trade

is conducted

by

large-scale

millers and

processors

who own

the facilities

and

by

private

and state

trading

entities

n

importing

countries.

In

general,

price

formation

ccurs at

the

major

grain

exchanges,

uch

as the

231



Review

of Agricultural

conomics

Chicago

Board

of

Tradeand

the

Minneapolis

Grain

Exchange.

Pricing

variations

occurbecause

of

transportationosts,

use of

export

subsidies and

importtariffs,

and

variety

and

quality

differences rom

the benchmark

raded

grain.

While

Ar-

gentine Trigo

Pan wheat does not have the

same

quality

characteristicss the

hard red winter wheat traded

n

Chicago

and Kansas

City,

the two

wheats

are

nonetheless ufficient

ubstitutes

or

most

end-userssuch

that a

price change

n

one

will

affect

the

other.

Market

for information

The

flow

of information ccurs

n

parallel

with the two marketsdescribed

above,although he infrastructureor its disseminations not as well developed

as is the

networkof

inland elevators

and

port

facilitiesand

rail,

barge,

and

ship-

ping

lines

that

actually

moves

the

product.

While the

physical

radehas

been

go-

ing

on for several

millennia,

he information low has been

important

or

less

than a

century.

Approximately

0%

of world bulk

grain

transactions re based on a

set of

standardcontracts stablished

by

the Grainand

Feed

Trade

Association

GAFTA)

in

London,

an

associationof

grain

traders,

brokers,

and

processors

n

seventy-six

countries

hat was founded

n

1971.

GAFTA

ombines he

functionsof

the

Lon-

don CornTradeAssociationand the LondonCattleFeed TradeAssociationn or-

der to

promote

nternationalrade n

grains,

animal

foodstuffs,

pulses,

and rice

(Barty-King).

AFTAmaintainsand

updates

the

language

n

contracts

or more

than

100

types

of

transactions,

ommodities,

and

countriesof

origin

and it

serves

to arbitrate ontract

disputes.

Contracts

or

grain

that is to be traded

internationally

ypically

require

hat

execution

of the contract nclude

transmission f

an

inspection

certificate,

which

is issued

by

an official

agency

of

the

exportingcountry.

The certificatemust as-

sure

buyers

that

grain

loaded at the

export

facility

meets or exceeds the

contract

quality

requirements.

hese

quality

requirements epresent

hose contained n

the officialgradesand standardsof the country. n addition,manycontractsm-

pose

minimumor maximum imits on factorsnot coveredunder the

official

grade,

such as moisturecontentor

dockage

(in

the case of U.S.

wheat)

(Mercier

1993).

In the

past,

these

additional

provisions

have

focused on

physical

grain

at-

tributes,

because

measurement f

these attributes

an be

accomplished

t rela-

tively

low cost

during

loading

or

unloading

at

elevators,

while tests for intrinsic

characteristics

usually requireexpensiveequipment

and/or

considerable ime to

process

results.

Over the last several

years,

buyers

have

increasingly

xpressed

nterest

n

the

intrinsiccharacteristicsf the grain,becausethese factorsarebetterthanphysical

factors or

predicting

he

grain's

inal

performance.

n

most

countries,

uch

infor-

mation s not

included

among

the

factors

hat make

up

official

grades.

However,

the

variety

release

regulations

mposed

in

some countries

i.e.,

Canadaand Aus-

tralia)

serve

as

a reasonable ubstitute.

Under

these

rules,

a

grain

variety

s not

releasedfor

public

use unless

it

equals

or exceeds

the

performance

haracteristics

of

the benchmark

variety

for its class

(U.S.

Congress).

For

buyers

seeking

grain

in

countries

without

such

tight

restrictions,

hey

have

recourse o

buy

on

an identi-

ty-preserved

asis,

but that can

add

considerable ost to the transaction.The

232



Evolution

of

World

GrainTrade

grain-distributionystems

in

these countriesare

designed

for efficient

movement

of standard-qualityrain,which calls forbulkhandlingandblendingof grains

of different

quality

n

orderto

meet

contractual

requirements.

hese features

make it

costly

to

segregate

grain

throughout

he

system, especially

when

the

grain

is destined

for

export.

For

example, hipping

overseas

by

container ather

than

by

bulk

carrier

n

order

to maintain he

identity

of

a lot of

high-quality

grain

can

raise

transportation

osts

by

a factorof at least three to one

(Interna-

tional

Grain

Council).

In

most

countries,

official

inspections

are not

required

or

grain

moved

within

domestic

channels,

but

nonetheless,

buyers

have

ways

of

evaluating

he

quality

of

grain

available or

purchase.

While

some local

jurisdictions

ffer

grain testing

at

low cost,mostprocessorsand millersrelyon theirknowledgeof past quality

variations

within their

buying

region

and

on

long-standing

elationships

with

lo-

cal elevators o locate

needed

grain.

In

addition,

he

presence

of in-house abora-

tories

gives

the

buyers

the

ability

to

performpostdelivery esting

and to

dispose

of

grain

in

less

discriminating

utlets

f it fails

to

meet their

expectations.

The

transaction osts of

such

sifting

of

quality

nformation

re

relatively

ow at

the

local

level,

because

the need for

segregation

during handling

s minimal.On the

other

hand,

the costs to

foreignbuyers

of

acquiring

and

acting

on such

detailed

information

re

prohibitively

igh

in

many

cases,

becauseuse of

segregation

practices

n

international

ransactions f

high-quality

grain

is essential

for suc-

cessful

completion

of such a contract.A handful of

importers

such

as the Tai-

wan Flour

Milling

Association)

end

agents

on

highly publicized

ours

of

U.S.

wheat-producing egions

in orderto

identify

the

specific

wheat to be

purchased,

but the volumes

purchased

as

a

result of such activities

account or

only

a small

share of total

trade.

The central

pricing

mechanismsat

the

majorgrain exchanges

discussed

above)

reflect he trade for

the bulk of the market

domestic

and

international),

n

which

grain

is differentiated

only by

class,

grade,

and

protein

content

or some

classes of

wheat.

In

fact,

for

a

grain

like

corn,

which is

largely

destined for feed

use, there is little differentiationby classin the compositionof exports.Between

1986-91,

nearly

70%

of U.S.

export

corn

was tradedas U.S. number3

or

better,

with

only

moisture

maximumsotherwise

specified

(Mercier

994).

This elaborate et

of

mechanisms,

ombined

with

public

dissemination f the

resultingprice

data on a

regular

basis,

has

reducedthe

cost of

arranging

ransac-

tions

for

standard-quality

rain

but

may

have

increased

he

cost of transactions

for

grain

with

quality

attributes

utside

the standard

et,

especially

or

foreign

buyers.

Since such

grain

will not

receive

premiumprices

or

segregatedhandling

if

sold

into the

general

market,

buyers

and

sellers

must

work

within

informal,

secondary

channels,

n

which

pricing

practices

are less

transparent.

n a

series of

studies conductedby the EconomicResearchService n the early1990s, mport-

ing

countries

uch as

Japan,

Taiwan,Korea,

taly,

he

Netherlands,

Venezuela,

Brazil,

and the

Philippines,

were identified

as

exhibiting

moderate o

high

sensi-

tivity

to the

quality

of

their

importedgrains

and oilseeds and were

willing

to

seek such

grains

in some

if

not

all

transactions

Mercier

993, 1994,

1995).

Context

for Continued Market Evolution

Within

he

local-regional

nd

national-international

arkets

described

above,

the

pressure

on

the

informationalnfrastructure

ill increase.

A

numberof fac-

233



Review

ofAgricultural

conomics

tors

will

likely

contribute

o this

pressure,

uch as the

increasingly ophisticated

tastes of higher ncome consumersand advances n processing echnology.Re-

sponses

from

both

the

private

and

public

sectors

will be

required

n order

to

al-

leviatethis

pressure.

Basis

for

Competition

The broad

competition

between

various

exporters

s

largelyprice

driven,

al-

though

that

motivating

actor

has lessened since the commitments

f

the Uru-

guay

Round

Agreement

of GATT

UR

Agreement).

High

world

prices

in

the mid

1990s reduced

the

use

of

export

subsidies,

particularly

n the

world wheat mar-

ket.The shareof wheatsold under subsidies declinedfrom51% n 1991-92to

less

than

16%

n

1996-97.2

These

subsidies

helped exporters

egment

their

mar-

kets,

and

for

the

60-70%

of

eligible mporting

countries,

he

availability

f

dis-

counted

prices

from some

exporters

greatly

overshadowed he

quality

of the

grain

offered.On this

macro,

partly policy-driven

evel,

the

competition

occurs

between

homogeneous

ommodities.

To some

degree,

such

homogeneouscompetition

also dominates

he

transac-

tional

level of the

feed-grain

market,

as feed

processors

ormulate he

rations

they

will offer

for

sale

based on

the

energy

contentof the

grain

available or

purchase.

However, ven withinthe feed market, ulturalpreferences nd livestockphysiol-

ogy

constrain

buyers'

choices

between

grains.

For

example,

consumers n

Japan

and Venezuela

prefer

brightly

colored

egg yolks,

so feed

processors

who serve

the

layer ndustrybuy

more

Argentine

han

U.S.

corn,

becausetheir flintcorn

lends a

brighter

olor

to the

eggs

(Mercier

994).

The

food

and

industrial-use

market

segment

has

demonstrated ven more of a

propensity

o differentiate

pur-

chases,

both

in

terms

of

quality

and trade

servicing

attributes.

Environment

for

Transactions

The

majority

of

grain

and oilseed transactions ccur within the

local-regional

market

segment,

with little reference

o other

segments

except

for

price-discovery

purposes.

Informationransmittedbetween them

typically

reflectsrelative

prices

and

transportation

nd

handling

margins

for standard

commodities,

i.e.,

the

benchmark

product

raded

on the

grain

exchanges

ike

U.S.

number

2

yellow

corn).

Quality-sensitive uyers

within

local-regional

marketscan

rely

on

infor-

mal channels o

augment

his information

et,

becausethe cost

of

diverting

a

shipment

hat does not meet their

expectations

s

relatively

ow.

Buyers

with sim-

ilar

preferences

n the

internationalmarketabsorbconsiderable

osts

in

orderto

ensurethe acceptability f theirgrain shipments,becausebeingwrongwould be

very

expensive.

Despite

these

costs,

some

buyers'requirements

or

high-qualitygrain

cannot

be met within their

local-regional

markets,

which

forces

these

buyers

to search

acrossmarket

segments

n

orderto

locate

adequate

ources.

In

most

years,

these

cross-market

buyers

are selected millers n

Europe

and

East

Asia,

soybean

food

processors

n

Asia,

and

corn industrial

processors

n

both

regions.

In

years

when

wheat

crops

have

lower-than-averagerotein,export

elevator

operators

re forced

to

compete

with inland wheat

processors

or

good-quality

hard

wheats,

which

234



Evolution

of

World

GrainTrade

increases

price.

These

types

of

deals

are

characterized

by

the

need for more de-

tailedqualityandhandling nformationhanis the norm.

Prospects

for

the Future

The demand for

high-quality

grain

and oilseed is

likely

to increase

over tle

next

few

decades,

thereby

training

he

system's

ability

to transmit

he

necessary

detailed nformation.

This

growth

in demand stems from

three factors:

1)

in-

creasing

per

capita

ncome,

especially

n

grain-deficient

Asian

countries;

2)

the

liberalization f

grain

trade,

especially

ncreased

privatization

f

trading;

and

(3)

the spreadof moresophisticatedmilling, processing,andbakingtechnologies.

While world economic

growth

is

expected

to increaseat

a

3.2%

rate over the

next

decade,

growth

in

Asia

will

be

even

stronger

n the

long

term,

at more than

6%

a

year

(USDA

1996).

Such

growth

will

lead to

a

burgeoning

middle class

in

these

countries,

a

class that

possesses

increasingly ophisticated

astes

in

terms of

food

consumption.Especially

n East

Asia,

minimal

arable

and in

these coun-

tries

will necessitate ncreased

imports

n

orderto

supply

these

expanding

con-

sumption

needs.

Trade iberalization

n

agriculture

under

the

UR

Agreement

s

expected

to

in-

creasethe volume of grainand oilseed tradedworldwideby about4%by the

year

2005

(USDA

1994).

In

additionto multilateral

iberalization,

many

countries

have

recently

decided

to

dissolve

or reform heir state

agricultural

rading

enti-

ties

(STEs).

While this

may

not increase

he volume

of

trade,

t should lead to a

greater

demand

for

quality

grains

and

oilseeds,

because

private

raders

n

the

past

have

shown

more

responsiveness

o

quality

preferences

f end-users

han

have

importing

state

tradingagencies.

STEs

often

place

constraints n

spending

or

policy

objectives,

with little concern or

satisfying

consumers.

In

addition

to

its

agricultural

rovisions,

which will

provide mpetus

for

in-

creased

agricultural

rade,

he

overall

UR

Agreement

had

separate

accords hat

were

designed

to

encourage

rade in servicesand

intellectual-property

ights.

These

agreements

have

in

part spurred

an

explosion

n

foreign

direct

investment

(FDI)

by

multinational

irms,

particularly

n

food

processing.Among

U.S.-based

firms

alone,

food

processing

FDI

nearly

tripled

between 1984

and

1994,

ntroduc-

ing

state-of-the-art

technology

worldwide

(Handy

et

al.).

High-quality

aw

grains

and

oilseeds

are

likely

to increase

n

demand as

new

western-style

ood

products

are introduced nto

foreign

markets.

More

detailed discussion

of the

current ituation

n

the domesticand interna-

tional

grain

markets

and

possible approaches

o

dealing

with the

overtaxed nfor-

mational nfrastructurean be foundin the companionpiecesto this article.

Endnotes

1

In

1906,

a

separate

London Cattle Feed

Trade

Association was

founded in

order to cover trade

in

animal feeds

and

proteins.

2

The

subsidized amount of

wheat for 1991-92 includes

wheat

exported

by

Canada

(because

of

their

Western Grain

Transportation

subsidies,

which

ended

in

1995),

the

United

States,

and

the Euro-

pean

Union

(EU).

In

1996-97,

only

the EU utilized

export

subsidies

(Ackerman,

Smith,

and

Suarez;

USDA

1997).

235



Review

of Agricultural

Economics

References

Ackerman,K.Z., M.E. Smith, and N.R. Suarez. AgriculturalExportPrograms:Backgroundfor995 Farm

Legislation.Washington

DC: U.S.

Department

of

Agriculture,

Economic Research

Service

Report

No.

AER-716,

1995.

Barty-King,

H. Food

for

Man and

Beast:

The

Story of

the

LondonCorn Trade

Association,

he

London

Cattle

Feed

Trade

Association,

nd the

Grain

and

Feed Trade

Association,

878-1978. London: Hutchinson

Benham,

1978.

Braudel,

F

A

History of

Civilizations.Translated

by

Richard

Mayne.

New York:A.

Lane,

1994.

Casson,

L.

TheAncientMariners.New York:

Macmillan,

1959.

Dollinger,

P

The GermanHansa. London:

Macmillan,

1964.

Gamsey,

P.,

and R. Siller. The Roman

Empire:

Economy, ociety,

and

Culture.London:

Duckworth,

1987.

Goodwin, B.K.,

and

T.J.

Grennes. Russian

Agriculture

and World

Grain Trade: Lessons from the

Past

and

Implications

for the

Future.

Proceedings

of the

Economics of World Wheat Markets:

Implica-

tions

for North America.

Montana State

University,

October 1997.

Handy,

C.,

C.

Balling,

P.

Kaufman,

S.

Martinez,

C.

Price,

and

D.

Henderson.

Foreign

Direct Invest-

ment

in

the Processed

Food Sector. Globalization

of

the

ProcessedFoodsMarket.D.R.

Henderson,

C.R.

Handy,

and

S.A.

Neff,

eds. U.S.

Department

of

Agriculture,

Economic Research

Service Re-

port

No.

742,

1996.

Heid,

WG.,

Jr.

US. Wheat

Industry.

U.S.

Department

of

Agriculture,

Economic Research

Service

Report

No.

AER-432,

1980.

Hill,

L.D.

Grain Grades nd

Standards:

Historical

ssues

Shaping

he

Future.Urbana IL:

University

of Illi-

nois

Press,

1990.

International Grain Council.

Monthly

Grain

Report.

London,

1997.

Leath,

M.N.,

L.H.

Meyer,

and

L.D.

Hill.

US. Corn

Industry.

U.S.

Department

of

Agriculture,

Economic

Research Service

Report

No.

AER-479,

1982.

Manchester,

A.

Coordinating

roduction nd

Marketing

n

US.

Agriculture.Forthcoming

Agricultural

Eco-

nomics Report, U.S. Department of Agriculture,Economic Research Service Report, 1998.

Mercier,

S.A. The

Role

of

Quality

in

Corn

ImportDecisionmaking.

U.S.

Department

of

Agriculture,

Eco-

nomic

Research

Service

Report

No.

AER-684,

1994.

-

.

The Role

of Quality

in

Soybean mport

Decisionmaking.

U.S.

Department

of

Agriculture,

Economic

Research

Service

Report

No.

AER-722,

1995.

-.

The Role

of

Quality

in Wheat

ImportDecisionmaking.

U.S.

Department

of

Agriculture,

Economic

Re-

search Service

Report

No.

AER-670,

1993.

Morgan,

D.

Merchants

of

Grain.New

York:

Viking

Press,

1979.

Remler,

P.

History

and

Religion:

Phoenicians

Developed

Commerce.

Sadigh Gallery

of Ancient

Art,

New

York,

Internet

site

text,

1997.

U.S.

Congress.

Office

of

Technology

Assessment. Grain

Quality

in

International rade:

A

Comparison

f

Major

US.

Competitors.

Washington

DC:

U.S.

Government

Printing

Office,

1989.

U.S.

Department

of

Agriculture.

Economic Research Service.

Long

Term

Projections

or

International

Agri-

cultureto 2005. Staff

Report

AGES9612. Commercial

Agriculture

Division,

August

1996.

.

Foreign

Agricultural

Service.

Grain:

WorldMarketsand Trade.

FG-2.

February

1997.

.

Office

of

Economics.

Effects

of

the

Uruguay

Round

Agreement

n US.

Agricultural

Commodities.

March

1994.

.

World

Agricultural

Outlook Board. World

Agricultural

Supply

and Demand

Estimates.WASDE-341.

August

1998.

236

Stephanie Mercier - Evolution of World Grain Trade

Documents

Transcript of Stephanie Mercier - Evolution of World Grain Trade