Consequences from growing wheat in foreign countries
November 01, 2008
by Morton Sosland
Contract production is looming as one of the more controversial issues facing the global grain industry. Indeed, a sharp division has emerged between grains. Millers in developed nations producing a supply of wheat adequate to domestic demand dismiss the idea of contract production, which is typically an arrangement whereby a miller agrees to purchase the outturn of a specific farm. Prices are sometimes pre-determined but more often are negotiated at time of delivery. Millers in developed, surplus-producing nations see little advantage for securing supplies in this fashion, believing the domestic wheat crop offers a broad enough selection. At the same time, genetic modification of corn and soybeans in the United States (U.S.) has led to increasing contract production of these crops where processors desire assurances on specific qualities. Their need is meeting technical specifications, rather than solely assuring a supply. Yet, wheat hardly ever fits this need.
Even in the wake of the chaotic markets of the past year, has anyone seriously suggested that millers should consider contract growing as a way to hedge against repetition of such turmoil?
Often neglected in discussions about contract production are the numerous variations of what the term means. For instance, some millers, having identified growers keen on producing the quantities and qualities deemed desirable, seek long-term arrangements that assure first choice in purchasing. These arrangements typically leave price to negotiation at time of delivery. Almost no wheat is grown under the sort of detailed contract arrangement that first developed in U.S. chicken production, where the ultimate processor assumes responsibility for nearly every step. Yet, such broad coverage is creeping into U.S. corn and soybean production.
Overlooked in these doubts about whether contract production has any role to play in wheat is the totally different perspective arising internationally. In the wake of concerns over grain supply adequacy heard a few months ago, due to crop shortfalls as well as actions by some countries to limit or halt exporting, importing nations with sufficient resources are taking contract production in a totally new direction. Oil-rich importing countries like Saudi Arabia and the United Arab Emirates are seriously exploring the ultimate in contract production — leasing or purchasing fertile cropland in developing countries that is to be used to grow grains meant for export to the owning country.
Saudi Arabia is most active in seeking to establish production in other countries. That not just reflects the Saudi desire for securing its food supply, but also an internal decision to stop subsidizing irrigation of desert land. Having just made that decision a short time before the chaotic wheat markets of the past year, the Kingdom’s desire to control crop land in countries where water shortages and soil fertility are not a problem is understandable. That it is seeking to acquire cropland in countries like Sudan, Ethiopia, Kazakhstan and Libya in lots no smaller than 250,000 acres introduces a venture that is not as new as it might seem. In the early 1970s, when Richard Nixon was president of the U.S., soaring grain markets prompted him to impose an embargo on U.S. soybean shipments. This controversial move led Japan, as a major importer of U.S. soybeans, to foster production of this crop in Argentina and Brazil.
These efforts to end food insecurity by purchasing cropland in poor countries have stirred criticism. "Neo-colonialism" is how Jacques Diouf, director-general of the United Nations’ Food and Agriculture Organization, has greeted the threat of huge tracts of land in Africa and Asia being acquired by foreign buyers and their outturns exported, regardless of the diet where crops are grown. And while this latest version of contract production will probably not see the light of day in the U.S. or Europe, its potential for reshaping the agricultural economy needs careful examination. Investing to produce wheat and other crops in lands where they are not now grown raises revolutionary possibilities in trade flows and supply-demand balances.