History is made by breaking the mold and by changing an industry's course.
Cargill's decision earlier this year to buy the worldwide grain and commodity marketing assets of Continental Grain Company doesn't deserve the history-making imprimatur, even though those who lived to see it happen will not forget. It is simply a continuation of the consolidation under way in the grain industry for a long time.
The Cargill-Continental merger may be the largest yet, but it doesn't plow any new ground. Now if Monsanto or DuPont had bought Cargill or Continental, that would have been historic. However, this transaction does define the dichotomy about where this industry is heading and what it may look like 10, 20, 50 and even 100 years from now.
That dichotomy does not hinge on any debate about future demand for grain. In analyzing prospects for aggregate grain demand on a global basis, it's difficult to be other than optimistic. Future demand for foods based on grain, whether grain-based foods like flour and bread or grain-fed foods like meat and poultry, is extremely positive. If your future depended solely on the ultimate demand for the products you handle, your outlook would not just be bright, but would be the envy of many other business sectors.
This industry is more strongly at the center of mankind's striving for a satisfying and nutritious diet than ever before. That grain trading is one of the oldest and most highly regarded commercial businesses is not happenstance and reflects the superb job the industry has done to keep most of humankind free of hunger.
In the more recent epoch, the industry's task shifted significantly to assuring that the distribution system fit the needs of a swiftly moving food industry, not just in the United States but in every corner of the world. This responsibility will only grow as the global economy changes.
Optimism about the future of grain-based food demand stems from two principal forces. One has to do with population and income projections pointing to continued growth, especially in areas where grain foods consumption is far from mature. The other positive force all too often neglected is the upward trend in consumption that has exceeded growth in population for half a century or longer.
Pot noodles in southeast Asia, wheat flour in North America, shrimp in Japan, broilers in many regions are examples of how food based on grain has the power to attract demand. The central message here, whether optimistic or cautionary, is that this industry has by far the finest and most positive base from which to capture consumer preferences.
Having described a world where grain demand not only has a good chance of growing, but of doing that at a rate in excess of population, it becomes necessary to understand how that will occur.
Will rising demand be met by expanding export flows from surplus-producing nations to countries that don't have the capacity to meet the rising demands? Will the world economy will develop in a rather conventional way, with competitive advantage winning the day, meaning that the world once again will have to look to North America as not just a residual, but preferred, supplier of grain? Will import needs expand in countries not geographically suited to grow their own grain?
Affirmative answers to these queries are the basis for hope about global trade in grain.
DISMAL PERFORMANCE. The two decades at the close of the 20th century — about the worst in industry history — saw world grain trade hit a stone wall. North American exports have borne the brunt in a dismal performance that can't help but raise questions about the future.
For instance, is the industry facing a new world order, where electronic technology, information-based skills and new science will be so overwhelming that industries like agriculture, trading, processing and manufacturing mean very little?
Our vision of how the world economy should be shaped grew out of the 19th century when agriculture comprised the principal output of the major nations and grain trade flourished. In the wake of World War I, agriculture lost out to manufacturing as the major factor driving gross domestic product.
As the 21st century nears, electronic commerce, mainly financial transactions unknown a short time ago, are all-powerful. The collapse of commodity markets this past year is an indication of how this sector's influence has been overwhelmed by technology. This is especially the case if the commodity price debacle is measured against the soaring values of internet companies.
It is tempting to describe the recent era with its disappointing trends in grain exporting as a cyclical downturn that will at some point be succeeded by an upswing that will make us all feel good again. Just hang in there and all will be right, an astute observer advised.
His belief in the sureness of recovery stemmed from his feeling that "China can't grow enough grain to feed itself for the long pull." During the 1960s, many believed India would forever need to import large quantities of wheat because of its food system failures. The same was true for the Former Soviet Union during the 1970s. Now, skepticism forces one to find little to mandate China as a leading grain buyer.
Over the years, many major markets have begun to disappear or shrink. Replacements often arise to fill those gaps. Grain demand grows around the world, but national production and national processing increasingly satisfy that demand. Economic chaos, such as that ruling in Russia and Asia, show how forces beyond control may even curtail the limited import demand for food.
If these grain import market losses could be blamed on unwise governmental intrusions or unfair trade barriers, it would be easy to be enthusiastic about the chances of regaining these outlets. But these counter-forces appear to stimulate production, increase domestic distribution efficiency and make what once were huge markets into minor buyers.
The numbers clearly show that exports, or trade, have come to play a lesser role in a world where aggregate grain consumption has been growing. Currently, exports of wheat and coarse grains account for less than 13% of world disappearance. That is down from the peak of 17% reached in 1980-81 and marks a return to the relatively low trade share ruling prior to the export explosion of the 1970s.
The last time export's share of world use was this low, the business was in the doldrums. It was reversed several decades ago when the Former Soviet Union made massive grain purchases. Uninformed observers called the Soviet's buying "the great grain robbery." Recalling that time makes one yearn for a return to those amazing days when the grain industry flexed its muscles and showed its ability to respond to unprecedented demand for food.
Those days will not likely be repeated, making for a very different business in the future. A trader with a good memory of those times recently commented on the food and grain shortages currently ruling in Russia. Had these same conditions prevailed in the 1970s or even in the 1980s, prices would have soared $1, $2 or $3 per bushel, he said. Instead, the market hardly deviated from its downward course.
STATIC EXPORTS. The static state of the export grain business today can be blamed on the restrictions imposed upon U.S. grain exports to the Former Soviet Union by President Jimmy Carter at the start of 1980. In reaction to the Soviet's intervention in Afghanistan, Mr. Carter and his State Department interrupted the flow of grain as a way of showing displeasure.
Considering the recent bombing of Iraq, those who question America's role as world enforcer might rank the grain embargo as the more moderate, even the preferred action. Yet, in looking at the terrible consequences of the 1980 embargo for U.S. agriculture and the grain business, it's tempting to declare the embargo as the more disastrous.
It was the Carter embargo, on top of actions by earlier Presidents to limit exports in the name of foreign policy, that finally convinced once large buyers of U.S. grain to do everything possible to end that reliance. As if that wasn't bad enough, efforts by the administration and the Congress to ease agriculture's pain only worsened the situation. The result was the worst agricultural recession since the 1930s.
The economic catastrophe that followed the grain embargo can be credited with finally convincing the U.S. government, after 60 long years of Washington interference and domination, to adopt a totally different farm support policy. The past 20 years has seen the rapid diminishment of governmental intrusion in the agricultural economy.
The 1996 farm act— the ultimate progeny of the embargo — is the single most important agricultural statute of this generation. Its shift of emphasis from directing what farmers produce to providing direct income aid stands at the center of the vast changes that have occurred in the business of grain.
When that legislation was being debated, attention was focused on how it would change federal programs for farmers. The grain trade, along with all of agribusiness, hesitated to claim the law as any great accomplishment, much less victory, preferring to focus on "freedom to farm" for producers.
Even as the Clinton administration cautioned about removing the "safety net" from under farmers, few paid attention to how the bill was going to revolutionize the government's relationship to the grain trade and grain processors. This law caused the near total restructuring of agriculture and agribusiness.
Not only have entities like the Commodity Credit Corp., which at one time dominated American grain trade, been neutered, but government support and inventory programs no longer ride roughshod over markets. At their peaks, these programs were just as much a part of the grain infrastructure as they were leaned on by farmers.
Export subsidies, which had played a key role in powering the erratic markets of the 1970s, were shut down. No longer were there programs tying farmers to producing specific crops. Giving farmers "freedom" eliminated an important element of supply assurance for storage and merchandising. What resulted was a fundamental transformation of the "rules" affecting the grain industry, both domestic merchandising and exporting.
Not only did the agricultural recession of the 1980s convince government of the need to reform domestic programs, it strengthened Washington's resolve to insist on agricultural trade liberalization in the Uruguay Round negotiations. There's no question that these trade reforms, while breaking new ground, did not go far enough. But they went a long way toward reducing the role of export subsidies and government supports as negatives for trade. The problem is that, even with these commendable changes, export grain volume has stymied.
No one may speak about grain's future without stressing the urgency of the U.S. government fiercely pursuing more agricultural trade negotiations. Its goal must be further liberalization of trade in grain to the point where the market holds sway at every level — nationally and globally.
From a budgetary point of view, the new farm legislation promises sharply reduced federal expenditures. Even with tinkering in the form of emergency aid, the act makes great financial and political sense. Although current farm prices raise the specter that the reforms of 1996 might be reversed, unless there's a total reversal of the national consensus, there is scant chance for doubling back on farm programs.
DIMINISHED GOVERNMENT ROLE. Two other major changes in the grain business during the past 20 years — increased transparency and greater distribution efficiency — go hand-in-hand with the diminished role for government. They account for significant industry change and will continue to do so.
Transparency reflects how data and news are gathered and disseminated. Technology, including the internet, means rapid evening out in market knowledge.
In effect, transparency has wiped out, or sharply diminished, what had been regarded as the classic core competency of a grain company — its superior ability to anticipate and deal with fast-moving grain markets.
Consider the effect of increased transparency and new trading platforms on the futures markets that have been central to the grain business. It may be said that this industry created the futures markets a century and a half ago, and that the futures markets created the grain trade that operated during much of the 20th century. For a long while, the relationship was so intertwined that one couldn't say "futures" without thinking "grain."
The near disappearance of cash grain trading from the grain exchanges is only one aspect of the diminished relationship that primarily stems from the startling growth of new financial contracts that use the exchanges in ways the industry's forebears would find unbelievable.
While aberrations in futures, due in part to new trading entities, have prompted self-examination and even searches for alternatives, nothing has replaced futures as the essential tool for the grain trade in minimizing and managing pricing risks.
When it comes to efficiency in distribution and handling of grain, any progress can be traced to the ability of both the United States and the world to handle with increasing ease transitions between crop years when the carryover is relatively low. For instance, it is likely that the global carryover of wheat at the close of the 1999-00 crop season will be near the lowest in history as a percentage of annual disappearance. Yet, that is regarded as a ho-hum experience.
This new-found capacity to get along with less and less in the way of stocks, with its direct effect on the well-being of the grain business, is not solely due to what has happened in America. If the U.S. has undergone a transformation in agricultural programs and thus in its grain business, similar events in other countries are more sweeping.
It is the result of the rapid industry privatization that has swept the former communist bloc nations and many other countries since the fall of the Berlin Wall in 1990. Nothing has changed the world grain business more dramatically than the disappearance of entities like Exportkhleb in Russia, Ceroilfood in China, Bulog in Indonesia, Conasupo in Mexico and the Commodity Credit Corp. in the United States. Only the European Commission, the Japanese Food Agency and the Australian and Canadian Wheat Boards remain. Here, too, the handwriting on the wall points to the ultimate demise of these remnants of a bygone era.
In North America and Europe, the diminished role of governments not only spurred consolidation but, even more importantly, prompted a large measure of integration. The initial momentum came from processing companies that felt the need to protect their supplies of grain — their originations — as their investments in processing grew. The lessened role of government as an "easy" supply source spurred this, and still does.
But the principal driver was larger capacity. These behemoths find it easy to justify investments aimed at assuring supplies, while capturing savings by cutting the middle-man grain merchants.
Periodic bursts of market strength and sharply increased price volatility prompted by concerns over crop shortfalls and the rising frequency of transportation breakdowns exacerbate worry over the reliability of a supply system that is consolidating. A processor that relied for years on independent grain merchants to supply its needs suddenly has awakened to a different landscape. The Staggers Act of 1980 and its freeing of railroads from the deadweight of regulation exacerbates worries about a transformed distribution system.
Pressures from customers also make processors keenly aware of the need to be able to originate grain of desired qualities. Many of those same pressures, including the rush of integration, provides a favorable environment for the nimble, independent grain merchant able to position itself to serve the fast-changing needs of processors.
There's a bit of a chicken and egg dilemma in deciding how this started and where it may be heading. Integration by processors into grain origination has been accompanied by a rush of grain merchants into processing.
It's difficult to identify a grain merchant of size that hasn't engaged in integration. The advantages of integrating grain origination with processing has become a greater influence for many than the desire to avoid putting all their eggs into one basket of grain merchandising and storage.
LOOKING AHEAD. There's every reason to believe consolidation and integration will continue as powerful forces into the next century. The industry has reached a point where proudly independent companies, either processors or grain merchants, reflect concern about the survival of either their suppliers or their customers, as well as themselves.
Hardly anything symbolizes this better than how the farmer-owned cooperatives have chosen combination as well as processing. Like the earlier diversification by private companies, farmer cooperatives first saw processing as portfolio balancing. More recently, the new focus is on "adding value."
Integration when combined with consolidation dramatically affects the grain trade by making its shape and structure different from what it was for most of the 20th century. Unlike previous forecasts of revolution that fizzled, integration is not just sticking; it is gaining power. The dual impact of consolidation and integration is felt in the shrinking number of processor-customers for non-integrating grain merchants, just as non-integrating processors fret about reliable grain suppliers.
Integration within grain has been fairly circumscribed, prompting a measure of speculation about whether or how these bounds will be broken. Controlling grain origination has not yet been translated into ownership of grain production, although observers see control of production as the likely ultimate outcome of integration. Similarly, integration into grain processing has largely halted at ingredient manufacturing. Making branded products for consumers is still out of bounds for all but a very few, but for how long?
It's hard to imagine a totally integrated business, from field to retail shelf. Yet, those limits will continue to be tested in the next century.
It is important to point to a force in the global food industry that receives precious little attention from the grain trade: the food retailers with consolidation and global expansion as their basic strategy. Groups like Wal-Mart, Ahold, Carrefour, Tesco and a few others are hell-bent on bringing supermarket and hypermarket retail food marketing to distant corners of the world. Their globe-circling ambitions challenge those of the most ambitious global grain enterprise.
While heeding local differences, these groups prefer partnerships with manufacturers of similar global ambitions. The linchpin is a shared vision of food retailing and food quality that cannot help but influence how grain trading, processing and food manufacturing evolve in developing nations.
If anything has the power to move this industry beyond the relatively limited grain-to-processing paradigm, it will likely relate to how biotechnology changes the kernel of grain.
It is a marvelous chronological coincidence that we are on the verge of a biotechnology-driven revolution as the new century and new millennium approach. The promise is of many wonders:
Grains of increased production requiring less chemical inputs.
Yield potentials that could further diminish export trade by elevating grain production to new levels and new lands.
Grains with tailored quality characteristics for both food and industrial uses of specificity beyond our imagination.
New power bases stemming from control of the supply, the marketing and the processing of such grains.
A totally different environment for grain created by companies that must recoup a return from billions invested.
The companies that will conduct and finance the research leading to new grain have, except where alliances have been made, little or no knowledge of grain marketing or processing. Inventing a new grain is one thing. Bringing it to market is another. Here the industry has the advantage that ought to make the new century a period of great growth.