Globalization a force in moderating grain prices
November 01, 2007
by Morton Sosland
It isn’t very often, if ever, that two Frenchmen have been quoted in a piece like this meant to awaken grain traders and processors to what they may be missing if they are tempted to question the opportunities inherent in globalization. After all, French politicians for years have been foremost among leaders of the developed world that have fought any intrusion into their national economy from outside interests. The French president, Nicolas Sarkozy, seems intent on ending these negative attitudes about wholehearted participation in liberalized trade. He recently declared, "We will not obtain growth if we don’t play the game of globalization collectively." Sarkozy made these remarks, strikingly different from his predecessors, in addressing a group of French businessmen.
Another Frenchman, Pascal Lamy, whose position as director general of the World Trade Organization should make him an advocate of globalization, has taken a step farther by his unrelenting push for opening trade into every corner of the world. Tying globalization to the internationalization of national economies — a process that far too many executives do not appreciate — Lamy has expanded his efforts in behalf of the Doha Round negotiations to center on steps to open markets globally while guarding against trade protectionism. He also is pressing for steps to assure the benefits of trade are distributed as evenly as possible among countries and then among populations within countries.
While gaining the support of Sarkozy and Lamy should be seen as favoring an accord in the current negotiating round, it also must be acknowledged that the strength recently exhibited by grain prices has raised globalization issues that were not present when the current round was launched. In developed nations like the United States (U.S.), where wheat futures markets reached all-time highs, questions have been asked about the fairness of offering open access to global buyers whose takings spurred the dramatic climb in prices. It is almost as if "the game of globalization" mentioned by Sarkozy means that America’s position makes the market especially sensitive to demand when only unusual tightness rules. Anyone blaming globalization for soaring U.S. wheat prices fails to understand that this has been the most international of markets for centuries.
Indeed, it is the globalization of the wheat market that holds out the likelihood of reversing recent price trends. It is going to be increased production or lesser demand among several of the major global players that will bring about an easing in what is now one of the tightest supply-demand balances ever witnessed in the bread grain. In the same way that the huge 2007 corn crop has created downward pressure on corn to unprecedented discounts under wheat, a surge in wheat production or even a cutback in purchasing will have the same effect on wheat, establishing once again, as has happened so often in the past, how a market like this benefits hugely from globalization.
Similarly, grain millers should be aware of how globalization has helped weaken the relationship between food prices and inflation. Awareness of this is important in response to headlines claiming once more the end of the era of cheap food. At the close of World War II, food prices accounted for 43% of the consumer cost of living index. By the mid-1970s, when both grain and oil prices were soaring similarly to recent action, food was about 25% of consumer prices. That share is currently 14%. The Financial Times recently pointed out how food’s role in overall prices differs considerably among countries and even among regions within a single nation. The role in different time periods also varies greatly, but on average over the past 60 years, food prices in the U.S. have been neutral as an inflationary force. The great debate currently is whether adding the fuel or ethanol dimension to demand will cause a fundamental structural change in these relationships. While that outcome might make sense in the context of government sponsorship of fuel made from grain and other crops, it would be ill-advised to overlook the power of globalization in bringing food prices back to earth.