All Things Considered: A Political Agenda

For the last decade Canada, the United States, Europe and
every other grain exporting country had a problem. 

For the last decade Canada, the United States, Europe and
every other grain exporting country had a problem. 

Year after year they collectively produced more grain than the rest of the world was willing or able to buy.

The result was staggeringly low prices and the periodic appearance of grain mountains rising from flat fields.

In the 1960s and into the 1970s, they had the same problem. Better seeds, better machinery, more and better fertilizer and more productive farming practices had resulted in a quantum leap in yields and low prices and grain surpluses had become the norm.

So desperate were the Americans to get rid of grain then Secretary of State Henry Kissinger offered the Soviet Union a subsidized credit package if their Cold War enemy would take some grain off their hands. The Soviets hadn’t asked for the aid and initially turned it down.

But in the spring of 1972 everything started to change. But no one in the grain exporting countries saw what was happening until too late.

The Soviet Union was in the midst of a catastrophic crop failure. Its winter wheat crop staggered through a dry, snowless winter. Its spring wheat and corn was planted in dust. This came at a time when Soviet planners, heartened by several years of good crops, had increased livestock feeding and were moving rapidly to increase the protein content of the Soviet diet.

To fill the gap, Soviet grain buyers started placing orders with grain companies in Geneva, London, Minneapolis and with the Canadian and Australian wheat boards.
The U.S. was then running a two-price wheat system and had a couple of years earlier walked away from an international agreement that set minimum export prices for wheat. All exported wheat would be shipped offshore at $1.63 a bushel. If wheat prices within the U.S. rose above that level the U.S. government would cut a cheque to cover the difference between the price paid by the grain exporting companies and the U.S. domestic price.

After the Soviets had finished their buying spree and the U.S. government finally figured out what was going on the CIA calculated the Soviet Union had purchased 24.2 million tonnes of grain in 1972 for delivery in early 1973. This was an astounding volume. Since the Second World War grain trade for the entire world had grown slowly to 100 million tonnes a year.

In 1973 that jumped to more than 130 million tonnes and then jumped again in 1975 when the Soviet Union, facing another crisis, started buying again after a one- year lull.

In one year, from July 1972 to July 1973 U.S. wheat stocks fell from 23.5 million tonnes to seven million tonnes. World grain stocks fell by 40 million tonnes.
The impact on consumers was huge. While the U.S. government boasted about the $21.3 billion it earned from grain exports from 1972 to 1975, the cost of food for U.S. consumers rose $54 billion.

In January 1973 the cost of beef rose at an annual rate of 54 per cent, pork and chicken rose 62 per cent. This paralleled what was happening in Canada.
Now fast forward to 2006 and 2007. For almost 30 years Canada and the United States have wrestled with chronic grain surpluses, low grain prices and low farm incomes.

Then suddenly it all changed. Last winter corn prices jumped by almost $2 a bushel and then settled more than a dollar higher. Wheat prices surged through the spring and into the fall and now soybean prices have leaped.

Grain inventories everywhere are at or headed to near record lows. The USDA says in 2008 grain stocks worldwide will be the lowest since the great grain robbery of 1973.

This time the Russians didn’t raid the granary, but ethanol refineries did. The amount of corn turned into ethanol rose by about 40 million tonnes over the past two years. That is more than the Soviets took in 1973 and the result has been the same. Governments have been caught off guard and food prices are rising.

The difference is that in 1972/73 the Soviets shocked everyone. This time governments know exactly what is going on and, in the United States in particular, continue to promote and heavily subsidize corn-based ethanol.

This seems to be all about politics – the U.S. is headed for a presidential election and the Iowa caucuses are important. It can’t be about fuel security because even if every arable acre was turned into ethanol there wouldn’t be sufficient fuel. It can’t be about the environment because, as a recent OECD report points out, there are more effective and less expensive alternatives such as producing more fuel efficient vehicles. And it can’t be about economics – unless you’re a grain grower or an ethanol producer – because no matter how you juggle the numbers the cost to the economy is much greater than the benefit and consumers and taxpayers lose big time.

A really big mess is being created and this time we can’t blame the Soviets.