And Joseph went out from the presence of Pharaoh, and went throughout all the land of Egypt. And in the seven plenteous years the earth brought forth by handfuls. And he gathered up all the food of the seven years, which were in the land of Egypt, and laid up the food in the cities: the food of the field, which was round about every city, laid he up in the same… And the seven years of plenteousness, that was in the land of Egypt, were ended. And the seven years of dearth began to come, according as Joseph had said: and the dearth was in all lands; but in all the land of Egypt there was bread. – Genesis 41
Luckily for the Egyptians, Joseph was not a grain trader of the modern ilk. Had he been, when called to interpret Pharaoh’s dream of thin cattle and thin kernels, he would have told him not to worry about storing so much grain for so long. If crops declined a bit, prices would rise, farmers would respond to “market signals,” and grow the extra grain required.
Joseph, however, knew perfectly well who was really in control of the main determinant of grain production – the weather. Or perhaps even the well-placed source who caused Pharaoh’s dream wasn’t in control either – he just had some intelligence that a drought was coming, and was sending a market signal that it might be wise to store some grain ahead of time.
We’re getting some pretty strong market signals these days too. After three straight years of running below consumption, world wheat production recovered last year, and analysts this month were calling for stocks to recover to 20 per cent of consumption if there’s a record crop. That’s a big if, and 20 per cent of consumption is 73 days’ worth, not seven years’.
Meanwhile, evidence for global warming and increased weather volatility grows ever stronger, and the past year showed us how markets can swing on small changes in supply. A year ago farmers were being told it was their moral imperative to grow more wheat for a hungry world. Thanks mainly to some help from the weather, they responded with a 12 per cent increase. They were rewarded with a two-thirds drop in price.
That is not a sign of an efficient market. There must be a better way. On one hand, consumers deserve security of supply. On the other, farmers deserve a decent price.
There are at least two better ways, one of which we have learned from the story in the Bible. The idea of a strategic world grain reserve was discussed by a group of farm leaders from the G-8 countries meeting in Rome this month. The idea is that exporters and importers would accumulate stocks in good years and release during poor ones. When prices fell below an agreed minimum, wheat would be pulled off the market and into the reserve. When prices reached an agreed maximum – presumably reflecting short supplies – stocks would be released.
Critics will tell you that such systems have been tried and failed before. They’re right. However, they worked for a while, and implicit in their criticism is that the current system is a success. Hardly. Surely this is worth another try.
The problem with a world grain reserve is ensuring both importers and exporters hold their fair share, and that they don’t cheat. Canada got burned in the late 60s when it ended up holding too much stock, necessitating Operation LIFT to restrict acreage. On the other hand, that reduction (Canada was holding almost three years’ supply) contributed to the explosion in prices a year later. And much of the grief in grain markets over the last 20 years has been due to the Americans feeling they were being taken advantage of with their grain production control and reserve system. The 1985 Farm Bill eliminated them in favour of an all-out production and export policy.
Which leads to a second way of improving the system for pricing grain, and wheat in particular. That’s getting rid of the U. S. futures markets in favour of one which truly reflects world markets.
U. S. futures have the greatest effect on world prices, but they tend to mainly reflect U. S. conditions. In a properly functioning market, every time a sale is made, the price should increase to reflect the lower supply that results. That’s not what happens. Daily futures reports often tell the story. If Canada or Europe or Australia make a sale, traders see that as one less sale for the U. S., and futures decline – for everyone.
Some Australians have recently raised a similar concern and proposed their own domestic contract, but now that futures markets can operate in cyberspace rather than on a trading floor, surely it’s time for a single contract to accurately reflect world conditions. As for the problem of where to make deliveries, how about into a co-ordinated world reserve?
It’s time to stop penalizing farmers for success in producing just a little bit more than required. If world food security is important – and it is – then it requires world solutions. It’s time for a wheat reserve.