Good times for the grain trade
June 01, 1996
by Teresa Acklin
Grain companies must look beyond current situation to prepare for future.
The grain trade is enjoying one of its best years in the past decade or longer, but the outlook hinges on executives looking beyond current tight world grain supplies to ways to position their companies to thrive in a changing world marketplace, according to Morton I. Sosland, editor-in-chief, World Grain.
In a recent address to members of the North American Export Grain Association and the National Grain Trade Council at their annual joint meeting, Mr. Sosland said this marketplace was one in which the trade, with regard to its export activities, must develop close relationships with a growing number of private grain importers worldwide. He said it was a marketplace that required the trade to expand its international operations through investment in developing countries and emerging or re-emerging grain exporting nations. To achieve these ends, he said, the trade must reaffirm its commitment to "impeccable business conduct." It is important to analyze what went right this year and then judge it as either enduring or ephemeral, Mr. Sosland said.
"Right off, we have to acknowledge that much of what is positive about the grain trade this year is beyond the ability of individual companies to influence, and here is where we have a particularly tough task to determine what has a chance of continuing and what may quickly vanish," he said, adding that the performance of grain markets has been the most important ingredient in a successful 1995-96.
"One need only look at the rising trend of prices, with few interruptions on the upward path, to realize how different that is from prior years," he said.
At the same time, he cautioned that the upward trend may not continue.
"I'm not even going to try to predict whether this upward price sweep has a chance of continuing, for either the remainder of this season or into the next crop year," he said." Odds are not good this trend will continue."
The relatively small crops of wheat, maize and soybeans in 1995, on the heels of generous outturns the previous years, in some respects benefited the grain trade, Mr. Sosland said. Being able to draw on the fairly large maize carryover at the start of this season to supply needs into a year when production dropped 27% has created many merchandising opportunities, Mr. Sosland said. But gyrations in crop sizes also have created significant quality problems to the point that grain merchants have been able to create opportunities for profits that weren't there when supplies were abundant and buyers were less demanding, he said.
Unlike in most previous years when prices and grain profits were high, shortfall in supply, rather than a surprising surge in demand, has been the most important factor in 1995-96, Mr. Sosland said.
"It was escalating demand, primarily because of the entry of new buyers into the market or sharply increased takings by importers like the former Soviet Union or China, that drove past grain markets to produce results even similar to those of this year," he said.
Unlike those halcyon years, when a surge in demand caught many by surprise and propelled industry profitability to higher and higher ground, this year's market, as well as overall industry performance, may be credited primarily to supply deterioration.
"Sure, export grain demand is fairly good; sure, it is providing the impetus to a consistent business pace. Yes, elevations have improved on some coasts, due to demand gains and facility reductions. Yet, the total of U.S. grain exports in 1995-96 will be little different from the year before — not a very good season for the grain trade — and well below earlier records," Mr. Sosland noted.
In fact, world exports of wheat and coarse grains are forecast by the Foreign Agricultural Service at 184.6 million tonnes, the smallest level in a decade, he added.
"Except for several dismal years in the mid-1980s, world exports of wheat and coarse grains combined this year will be the smallest in nearly two decades," Mr. Sosland said. "Saying it another way, world grain exports first exceeded 200 million tonnes in 1980-81; they have barely repeated that six times in the past 15 years.
"Along that same line, we have tracked the role of exports in meeting grain demand over a long period of years. This reveals that trade has not kept pace with usage. Currently, world exports of wheat and coarse grains account for 13% of total use. The export share of disappearance reached its peak of 17% in 1980-81.
"If that 17% share had been maintained, rather than shrinking, global trade this year would have been 235 million tonnes — not 185 million — and the concept of demand providing the ‘fire' under current industry conditions would have been correct. Losing 50 million tonnes of trade potential, which is what these numbers indicate, is not usually associated with a good business year."
Those who have credited this year's grain trade showing to good export demand have been confused by the tight supply-demand balance and its impact on the state of business, Mr. Sosland said.
"Any list of factors responsible for this year's generally bright results in the U.S. grain business could not omit the global, and also national, perilously close balance between supply and demand," he said. "This reality is reflected in low stocks-to-use ratios that are cited as evidence not just of tightness, but also as the basis for claims the world is near a food crisis unlike anything seen before.
"Sounding alarms, as some have done about these numbers is, in my judgment, a misinterpretation. True, 1995 crops were small, and that's not good. But the markets are working well. While stresses and strains will continue to show up on account of small ending stocks at the close of the current season, I have every hope the transition from old to new crop will be achieved with minimal disruption.
"Confidence about working through that razor-edge prospect is to the credit of the grain trade, whose efficiency, commitment to infrastructure in storage and distribution, and tough restructuring in recent years have combined to prepare the industry better than ever before to deal with a situation that at one time might have been chaotic."
PROFIT THROUGH CHANGE.
Mr. Sosland said that structural changes within the trade also provided important clues to why 1995-96 had been a good year. He enumerated several changes in the way grain is traded:
• a shrinkage in the importance of governmental tenders and an increase in the number of private buyers, including a rising number of transactions that do not always involve competitive bids, but instead are one-on-one dealings;
• a reduction in the size of average transactions and increased emphasis on the quality of grain purchased; and
• a larger number of smaller buyers, meaning more c.&f. transactions and fewer f.o.b. purchases; the former provide opportunities for adding value via the freight market.
Mr. Sosland also outlined internal developments in the trade:
• a dramatic consolidation in the number of participants in the grain trade through mergers, acquisitions and withdrawal from the business;
• a restructuring in the sense of cutting back staffs, numbers of offices and corporate resources devoted to grain merchandising to the point where improvement in business translates into increased profitability;
• a fairly modest shrinkage in the physical plant devoted to U.S. domestic and export merchandising, along with closings of unproductive facilities and a reluctance to start up operations at the first sign of a turnaround;
• the impact of a string of bad years on boards of directors and top management to the point where the need to improve profitability has gained attention across the entire breadth of the industry; and
• a recognition of the need for specialization and the building of niche markets.
"Still another list would seek to detail developments at the government level that have impacted the global grain trade, mainly from a positive point of view," Mr. Sosland said. "The cessation of export subsidies has exerted a tremendously beneficial effect not just on the competitive pace of export business but on the economics of the grain trade itself. Eliminating the stultifying impact of daily subsidy decisions has lifted a weight from the industry's shoulders. The same may be said of (the U.S.) decisions not to impose acreage restrictions on 1996 crop plantings."
Looking forward, Mr. Sosland assessed the longevity of the forces that have combined for the current good times. "Having already seen a forecast that world wheat production this year, everything being equal, will increase to a point where stocks will rise says as much about the durability, or lack thereof, of short supplies. Yet, so much depends on the 1996 feed grain crop that even speculating on outturns is ill-advised."
The changes in the way business is conducted in foreign markets, driven by privatization of once-collective industries, will continue to be positive, Mr. Sosland said. But it is not certain how the trade will respond to the opportunities that circumstance offers.
"Much of the future of the grain trade depends on internal decisions about facilities, about distribution and about dealing with customers — yes, about how business is done," he said.
"Last fall, in addressing a grain conference in Brussels, one of your peers, Huub Spierings of Cargill in Geneva, observed that the opening up of grain markets around the world imposed increasing responsibility on the grain trade," Mr. Sosland said (see May 1996 World Grain, page 25). "His theme of individual and corporate responsibility is one that cannot be over-stressed. His plea for ‘impeccable business conduct' is one demanding repetition."
Mr. Sosland said he thought world production would keep up with demand in the future, but he emphasized that much of this demand would be satisfied by production in other countries.
"I count myself as an enthusiast when it comes to rising demand in places like Southeast Asia, whose ability to grow the wheat and maize it needs is restrained by soil and climate," he said. "At the same time, though, I'm just as enthusiastic about the production potential of central and Eastern Europe, as well as that of the former Soviet Union, and the promise (it's wrong to say ‘threat') of these nations emerging as major suppliers into global markets.
"Having a role in marketing grain from these origins ought to be among the principal subjects on your minds," he added, rivaling the desire to build marketing strength in populous regions where consumption has only begun to expand exponentially.
"Finally, I think it's important to own up to the reasons that the role of grain exports in supplying global demand has diminished in the past decade and a half," Mr. Sosland said. "You must ask whether it is possible that the ratio of global grain exports to consumption could decline further at a time when so much optimism has stemmed from the reforms hastened by the Uruguay Round along with other favorable developments in trade and agricultural supports around the world.
"Is it possible that trade growth will continue to lag what seems to be well-based optimism, even enthusiasm, about growth in total demand? I would answer yes to all that because a view of the future cannot be based on shortages of grain occurring continually in any major consuming area.
"I urge you to consider yourselves as parts of a new grain trade serving a new and different sort of market, domestically and globally," Mr. Sosland said. "Whether you prosper in this market largely depends on your decisions about where you invest your time, talent and money. Government and even market developments are in your favor, promising sizable, and perhaps even growing, export volumes. But you also must seek to build a domestic presence within increasingly prosperous developing nations."
Mr. Sosland also emphasized the importance of the value-added sector. "You must understand that bulk commodities offer only so much opportunity, that gains are best achieved by participating in processing, yes, in adding value," he continued. "Here, I mention the burgeoning export market in meat and poultry, which has come to represent exports of millions of tonnes of grain, in a different form."
Changes in the way grain is traded ...
• shrinkage in the importance of governmental tenders and an increase in the number of private buyers
• reduction in the size of average transactions and increased emphasis on the quality of grain
• larger number of smaller buyers
Internal developments in the trade:
• Dramatic consolidation in the grain trade through mergers, acquisitions and withdrawal from the business
• Restructuring of staffs and resources to grain merchandising
• Modest shrinkage in the physical plant devoted to U.S. domestic and export merchandising, along with closings of unproductive facilities and a reluctance to start up operations
• Impact of a string of bad years to the point where the need to improve profitability has gained attention across the entire breadth of the industry
• Recognition of the need for specialization and the building of niche markets