The changing face of global grain trading
October 01, 1995
by Teresa Acklin
Expanding privatization, increasingly free markets offer challenges and fresh opportunity.
BY DIANE MONTAGUE
The next five years will see huge changes in the structure of the world grain trade. Involvement by governments is decreasing, opening up new and exciting opportunities for the private trade, according to speakers at the International Grains Councils World Grain Conference in June in Helsinki, Finland.
As a result of political changes in many of the world's centrally controlled economies, 50% of grain importing business is already in private hands, a level speakers forecast would increase to 80% or 90% by the end of the century.
For Bill Power, president of Tradigrain S.A. of Geneva, Switzerland, the changes cannot come soon enough.
"There is a basis for growth in demand based on free economies such as the world has never known before," Mr. Power said.
He said despite the fact that the world was facing a period of dangerously low stocks and tight supplies, grain prices were still at historically low levels in real terms and interference by governments was preventing markets from reacting properly to the changing situation.
Earlier in the year, the world price of wheat fluctuated by more than U.S.$25 a tonne, and on any one day, trading prices could vary by U.S .$40 a tonne through the distortions caused by export subsidies and other special deals by governments, Mr. Power noted. The combination of different price levels and rapid price movements made it extremely difficult for private and state buyers around the world to formulate a buying policy.
"The international wheat marketing system is the only significant area of economic activity in the western world where it is considered appropriate that decisions on the pricing and allocation of supplies should be decided by governments and semi-government monopolies," Mr. Power said. "The result has been to destroy any notion of a world market in wheat."
But the world's grain business is moving steadily into private hands, according to Chris Goldthwait, general sales manager of the U.S . Department of Agriculture, and more and more countries are moving away from centralized purchasing.
To deal with budgetary constraints, countries such as Mexico and Egypt have decentralized their state-run buying operations, Mr. Goldthwait noted. Japan, as part of its commitment for rice under the Uruguay Round of the General Agreement on Tariffs and Trade, is opening up rice imports to the private sector, and South Africa's Maize Board is heading in that direction, he added.
As privatization spreads, the number of organizations involved in grain importing will increase, opening up exciting opportunities for exporters, Mr. Goldthwait said. Instead of a single buyer, there are now many in different parts of importing countrles.
"In the past, central buyers bought according to a single, fixed set of specifications-often just the cheapest grain available," Mr. Goldthwait said. "But today, buyers are asking for-and getting- different types and specifications of grain, reflecting diverse product and consumer needs."
Grain traders face a huge task of building up contacts with a large number of companies and individuals, and there are complications in terms of freight, logistics and finance, he said. But on the plus side, there are exciting opportunities for traders to add value.
"For farmers in the world's exporting countries, these changes mean that the country with the most flexible grain export marketing will be in the best position to serve the new customers and will probably score the biggest gain in volume and world market share," Mr. Goldthwait said.
The changes call for closer contact between farmers and grain traders so that production can be geared to the demands of the new diverse range of customers. One clear advantage, according to Mr. Goldthwait, is the shift from state to private trading, which will lead to more stable demand patterns. Once the private sector takes over, it is less likely that buying decisions will be recentralized.
Also optimistic about expanding opportunities in the world grain trade was Richard Krajeck, vice-president of the U.S. Feed Grains Council, an organization that works to develop export markets for U.S. coarse grains. He pointed to the changes in consumption patterns in China, which would probably mean the country would remain a net importer of coarse grains over the next few years. But he cautioned it was too early to predict that China would not re-enter the market as a significant exporter.
Apart from China, though, there are opportunities and expansion of demand in Southeast Asia-particularly Indonesia and Vietnam. These countries are becoming important markets of grain, not only for food and feed but for industrial uses, Mr. Krajeck said.
"From biodegradable plastic, to ethanol, to modified starches, to genetically engineered specialty maize and to barley malt, I see prospects for penetrating new markets with new uses for feed grains that will enhance traditional demand from the feed and livestock sectors," he predicted.
Mr. Krajeck also believes that Russia and the Central European countries will come back as large scale buyers before long. U.S. Feed Grains Council analysts think the decline in feed and livestock production in these areas has now bottomed out.
This has already happened in Poland and is beginning to develop in Russia, where livestock and mixed feed producers are starting to look at economic efficiencies. The skills of operating a business enterprise profitably are in their infancy, but are growing rapidly in Russia.
"I am very optimistic that this transformation, developing the new agricultural entrepreneur in Russia, is where future demand will develop Mr. Kraieck said.
The prospect of a much freer world grain market was welcomed by John Lawrenson, managing director of the Australian Wheat Board.
"I believe that as a result of GATT and other pressures at play, the next decade will see the international grain market transformed from one severely distorted by government intervention toward one which relies more closely on the market fundamentals underpinning international grain prices," he told the conference.
Given the importance of the international market, which takes 80% of Australia' s average production of 16 million tonnes of wheat, the A.W.B. has made considerable efforts in the past few years to anticipate changes and organize production and marketing to meet the new world situation, Mr. Lawrenson said. As government purchasing authorities move toward more decentralized methods of importing, there will be increasing demands for specific quality requirements, he said.
The Australian Wheat Board has tried to focus on these optimistic long term trends, putting in place the mechanisms to identify the specific and developing grain quality requirements of customers and reflecting these market signals back to growers.
"Australia' s key strength is its integrated marketing chain, which spans the A.W.B. at the marketing end, through to the wheat breeders, agronomists, growers and bulk handling authorities," Mr. Lawrenson said.
The A.W.B.' s main focus for the future is on markets least affected by the subsidy war, and especially on nearby customers in Asia. Mr. Lawrenson said the board had been moving closer to customers through investments with key business partners in downstream processing activities, including an investment in flour and feed milling projects in Southern China, opening a regional office in Hong Kong and moving staff to regions such as the Middle East.
Changes in the structure of the Australian grain industry are being made as a result of strategic planning that began five years ago, Mr. Lawrenson said. For the wheat industry, the planners recommended that the A.W.B. should be owned by growers, but that the single export desk should be retained. Grower ownership was recommended so that Australian wheat producers would have a share of the equity of the Board and therefore an interest in its operations.
The recommendation to operate a single export desk means the organization could be more market responsive and would be in a position to tailor production more closely to customer requirements through an integrated marketing chain, Mr. Lawrenson said.
Diane Montague owned and edited the U.K's leading agribusiness trade weekly, Agricultural Supply Industry, for 22 years. She sold ASI in 1992 and now concentrates on freelance writing and consulting.