Grain trade in a changing world
February 01, 1998
by Teresa Acklin
Grain executive Raymond Cretegny offers his perspectives and advice on the new and often controversial issues confronting the industry.
As the millennium approaches, the grain industry faces challenges and issues unlike any in its history.
For example, when oil companies were sinking drilling platforms in the North Sea a few years ago, they experienced big problems with the environmental group Greenpeace. At the time, I said to myself how pleased I was to work for a company that never would have to face such a problem.
Now, my friends, even we had to deal with Greenpeace on the genetically modified organism issue; the group wanted to stop the discharge of (genetically modified grain from) one of our boats. This story illustrates that the grain industry must be alert to the evolution of our world in so many directions.
Uncertainties now cloud the outlook for the world economy, requiring a certain intellectual agility. After the collapse of communism, free economies and capitalism were the new paradigm. We did not consider that these changes could generate a global environment of deflation. Growth everywhere was the motto. Global competition, technological advances and increased productivity were the key elements that would knock down inflation and business cycles.
But these developments resulted in an excess of supply over demand, threatening the world with deflation and consequently, financial crisis and structural unemployment. The situation shows that we are fully interdependent, with individual countries less and less in control. We need stronger supranational institutions and stronger or revived business organizations.
Recent developments, including proposed reform of the E.U. Common Agricultural Policy and the unexpected failure of the “fast-track” treaty authority in the United States, also make us ponder the role of agriculture and how policies are pursued. A feeling still exists, rightly or wrongly, that the United States and the European Union continue to have difficulties of course for different reasons and on different topics in reaching consensus internally. Although we should think globally and act locally, as Peter Drucker used to say, we still have a lot to do to become “W.T.O. (World Trade Organization) compatible.”
I cannot resist asking the question, “Is the CAP the miraculous solution we are waiting for?” This question is particularly relevant as we study the proposed CAP 2000 reforms and prepare for the accession of several Eastern European countries. Liberalization can be successful, as seen in countries such as Argentina, Brazil and New Zealand just to name a few that are already producing and exporting at world parity prices.
According to the Organization for Economic Cooperation and Development, the CAP is costing an average family the equivalent of U.S.$1,500 per year in artificially sustained higher prices. Other studies point out that, under a direct support system, U.S.$10 out of every $100 paid by European taxpayers would go to administration and $90 to farmers. But under the CAP, only $40 of every $100 paid reaches the farmer, the rest being wasted in various storage, processing and huge administration costs.
The draft of the CAP 2000 raises numerous questions. Domestic prices will be lowered to be more in line with international prices. What about the management of the market, in a context of increasing liberalization shouldn't the import and export license system be abolished too?
Furthermore, in line with the first 1992 MacSharry reform, a de-coupling system has been introduced between prices and income, installing what could be called a “deficiency payment.” As a next step, should we not have a ceiling on these payments?
Should market forces dictate to the farmer which crop to plant between cereals and oilseeds? It may be a touchy issue, but it seems that the excess of bureaucracy in the European Union is encouraging fraud, a problem that should be eradicated.
While the European Union is struggling against its policy reform, the United States has liberalized its agricultural policy in a major way with the introduction of the FAIR Act in 1996. Now the big issue is the refusal of the U.S. Congress to allow the President use of the fast track procedure for treaty approval.
In terms of agricultural policy, this means the U.S. will wield less power in global negotiations. And we are likely to see more aggressive stands against any violations of specific trade commitments, and perhaps the renewal of U.S. credit guarantee programs.
Hence, the new W.T.O. is likely to see a rising number of disputes to settle in the future. Hopefully, these disputes won't divert too much energy from the W.T.O. goal of liberalizing world trade and other services, such as finance.
A great number of countries are waiting to become members of W.T.O., especially China and most of the countries in the Commonwealth of Independent States, and further liberalization in those countries will occur. At the same time, some of the big state trading agencies, such as the CanadianWheat Board and Australian Wheat Board, resist giving up their market power.
Markets in a changing world.
Trading during the 1980s was difficult because of overcapacity, overproduction and high stocks, sometimes resulting in high counter-margins, all amid a virtual trade war between the United States and the European Union, the two main players.
No doubt that environment provoked a radical change of attitude and a deep shake-up of the industry, including consolidation and vertical integration of several groups in search of economy of scale and specialization. This process is not yet completed.
European industries that work with imported raw materials, such as oilseeds, should not underestimate what is going on in the biggest origin countries the United States, Argentina and Brazil in particular. Increasingly, these raw materials as such will be exported less frequently, and instead, processed locally at origin.
The fall of the Berlin Wall also triggered a big question: How would the markets react without Russia, which was the biggest buyer and thus the main market factor during two decades?
A bit naively, we thought the newly opened countries could more rapidly organize themselves, especially in agriculture production, which would have added to the headache and vicious circle of overproduction in the West. But that did not happen, and markets have been firm and very volatile the past several years.
In the meantime, Russia has become a big importer of meat and chicken, especially from the United States. This could represent a trend we need to include in our strategies: producing countries exporting grains in the form of an end product with added value.
The transition in C.I.S. countries is slowly taking shape and should advance in the years ahead. Central and Eastern European countries will become net global exporters by 2005.
The growth in global grain demand has stemmed from strong economic growth in Southeast Asia and China. Can this growth survive the current financial crisis? We would venture to say yes. Imports will slow down to a certain degree, but the underlying trend will not change fundamentally.
Food is essential to the stability of these countries. Leaderships cannot afford to antagonize the social and political front, which is already sufficiently angered by the financial crisis. Also, these countries rapidly will become hyper-competitive with their exports.
China has become an essential swing factor in the market, although it is very difficult to read and to grasp its management of internal supply and demand. The export of maize from China has left a lot of traders at odds with their fundamental analysis.
Again, politically and socially, China needs to be watched carefully. China has not devalued its currency and has not yet benefited from the devaluation, as is the case for its neighbors. China has also been the main exporter of deflation to the region.
World population today is approaching nearly 6 billion. It is growing by around 100 million per year, adding approximately 1 billion for each decade. About 45% of the population is concentrated in Southeast Asia and India/China. About 20% is in Africa, which is slowly coming up and can offer interesting opportunities.
World production is predicted to grow at 1.7% per year for wheat and 2.4% per year for maize in the next decade. World trade could grow at 2.7% annually for wheat, well above the level of the 1980s, and at 3.6% for coarse grains. Growth in gross domestic product worldwide will no doubt be a big boost for trade.
World trade in general is growing by 8%, but growth has reached 10 % in Asia and South America, which confirms globalization. As a point of interest, between 1990-95, trade growth outpaced production growth, and the latter, according to W.T.O., has for the first time recently outpaced trade. The change is another effect of globalization and “delocalization” of production.
Despite notable exceptions, world trading of agricultural products is more transparent than ever, with trade dependent on the market and less and less on governments.
Grain stocks are and will remain lower than in the 1980s. Hand-to-mouth buying will be the game, and the grain trading industry will have to adjust to “just in time” delivery, as is done in other consumer markets.
Also, with accelerated growth and free trade, we are in a world that will incorporate more people in the consuming society, changing consumption habits. Urbanization and mega-cities are big problems facing developing countries and make up another factor influencing food patterns. We believe this is a strong trend for years to come that will boost grain trading to Asia tremendously.
Some United Nations experts are forecasting that a greater demand for food will spur agricultural innovation, as has always been the case in the past. They predict that farmers will increase the area of land under cultivation by 27% over the next 18 years. We don't buy the gloomy picture predicting future starvation as put forward by some scientists, Lester Brown in particular.
Furthermore, the grain industry must be extremely careful with the psychological maneuvering of the market by outsiders. Large outside investors are blamed by some Asian government officials for the financial crisis. In a similar way, investment and hedge funds are driving our markets away from fundamental analysis.
We must return to the basic roots of the grain profession: trade cash commodities, serve end users in a new way, add value to what we do and be less overtaken by speculation. We should definitively resist the psychology of the financial markets.
We are a different breed from the financial markets because we are closely and inextricably linked to the underlying markets. But this does not mean that we should disregard financial markets.
Our markets no doubt have become more technical and sophisticated. New futures trading tools are invented all the time. They should be used cleverly, with discipline backed by the necessary technological support, always having a sound balance between futures contracts and the cash market. We must grow, build up well-being and wealth and manage our companies.
Defending grain interests.
A few issues are especially important to the grain industry and offer examples of how we should better defend our interests.
By 2020, we will need to feed 8 billion people. Although it is too early to determine the real impact of genetically modified crops, biotechnology could be a very important factor, a new type of Green Revolution.
The lobby against G.M.O.s represents a new situation for the grain industry, and it demonstrates the need to keep the interests of the final consumer in mind constantly. This situation also illustrates once more the differences in cultures and in fundamental approaches between the United States and Europe.
In the U.S., the Food and Drug Administration is the centralized organization that arrives at a scientific consensus to rule on products. Culturally, the U.S. displays a bit of an attitude that what is good for the U.S. is good for the rest of the world; manufacturers could have a slightly less arrogant attitude in imposing their products on the world.
Conversely, in Europe, every country, every scientific body, tends to have its own opinion, dictating its own rules. No efficient coordination exists among traders, manufacturers and consumers.
Deep-seated European attitudes towards genetic manipulation, touching upon the essence of life and species, have created an ethical problem. In this context, the G.M.O. issue shows how difficult it is to act globally at the European level.
Without clear definition of this kind of problem, we can again foresee distortion in the market and advantage-taking in the gray areas. Then we will again spend a lot of money to control the uncontrollable.
In the face of these challenges, the grain industry needs to develop the means to better anticipate issues and to act not, as too often, just react. Let us be more cohesive.
In some ways, globalization is weakening the international role of some of our founding institutions, such as the Grain and Feed Trade Association. Our institutions are tending to pull back and spend more time on local or national issues.
When we need to defend our industry interests on broader international topics, we look quite disbanded. Here are some examples.
We are big users of ships around the world; but as charterers, we have no institution defending our interests as the ship owners have.
Some of our basic contracts are no longer used, even within our own companies. Many countries in the developing world will not abide by the rules that have been the foundation of our industry for decades and that have enabled the prevention of misunderstandings.
The grain industry is not adapting fast enough to new biotechnology. The situation requires developing scientific knowledge, anticipating issues and engaging in dialogue.
We need to set up standard quality criteria with more sophisticated analytical value. This represents a large field of action. Many developed countries tend to misuse scientific standards, sometimes lacking the necessary knowledge and creating so-called (non-tariff) trade barriers.
In the future, I dream of a supranatural body for the grain industry, one that could independently advise us, governments and other interest groups about the big issues and challenges that we will face in a more complex, more competitive future.
This article is adapted from a presentation made by Mr. Cretegny at the fourth annual World Grain conference in Brussels, Belgium, sponsored by Agra Europe and Sosland Publishing, publishers of World Grain. Mr. Cretegny is a board member and head of trading for Andre & Cie S.A. Lausanne, Switzerland.