Sunday, January 15, 2012

Grain prices in 2012

The price of grain has risen dramatically the last few years. This matters a lot because the world's poor subsist largely on grain. Any increase in price means less calories per day, malnutrition and starvation. Emerging economies, where standards of living are rising quickly, are also hard hit. As a population becomes more prosperous, it demands more meat in its diet. All those cows and chickens eat grain - a lot of it - and so a rise in the price in grain translates to a rise in the price of meat.

With that in mind, at first I was happy to read that according to the Food and Agriculture organization of the United Nations (FAO), food prices started falling in the latter half of 2011. Sure, the food price index for 2011 was still the highest since the FAO started measuring it in 1990, but at least there seemed to be hope for the future.

Reading past the headline tempered my enthusiasm. As an economist, I should have known that the price of something will generally fall for one of two reasons (or a combination of the two): lower demand, or higher supply. If no one wants something, the seller of the good will have to lower its price if she plans to get rid of it. If the market is flooded with more of a good than people wish to buy, its price will fall as sellers scramble to be the lucky one that gets a sale.

Both of these have happened in the global grain market. Worldwide financial troubles, particularly in Europe, have lowered demand for grain. Workers in Greece, say, are worried not only about their own jobs and incomes, but about their government's ability to continue to provide basic services. Frightened about the future, they've cut down on spending. Not just spending on luxuries and treats, but spending on basic food (grains and meat). That's scary.

Meanwhile, a bunch of farmers around the world looked at record grain prices from 2008 to 2010 and decided they wanted a piece of the action. Fields that might have grown other crops were converted to grow rice, wheat and (to a lesser extent) corn, and now there's too much of the stuff. Thankfully, grain can be stored, but that does nothing for farmers who need to sell their harvest NOW in order to have the money to feed their family and continue farming.

This happened dramatically in the US states of Kansas, Oklahoma and Texas. There, three things combined to make farmers plant more wheat than they ever had before. First, a drought that had been making it difficult to grow anything in the region eased. Second, the drought had led to many failed crops, and now those fields were ripe for planting with winter wheat. Finally, the high price of wheat made planting it seem a winning proposition. The problem is, of course, that it's not just one farmer thinking this way - they all did, and since they couldn't coordinate with each other, too much wheat was planted. The price of the grain fell so far that at least one farmer believes he can make more money selling his wheat crop as hay than as a grain.

Speaking of farmers coordinating with each other... the Canadian Wheat Board is set to lose its monopoly of western Canadian wheat in August of 2012. Until then, if you farm wheat in western Canada, you must sell it to the Wheat Board, which uses its clout (20% of the world's export market for wheat) to negotiate high prices. The Board isn't being entirely dismantled, but participation will be optional from August onward. Some farmers will choose to negotiate their own deals with wheat buyers. Since individual farmers have less bargaining power than the monolithic Wheat Board, and since the Board itself will have less wheat to bargain with, this should lead to lower prices for wheat worldwide. It may also lead to less planting of wheat in Canada, since the reward for doing so may fall.

Now for rice. The big players in the rice export business are India, Thailand and Vietnam. Right now, India is beating its competitors on price. This is despite an increase in domestic Indian demand for rice after the New Year's holidays, and an increase in the price of Indian rice to anyone buying it in US dollars, due to a newly strong rupee. In Vietnam's case, the price of its rice is higher than India's due to a government-instituted price floor on rice. In an attempt to help rice farmers, rice cannot be sold for less than the floor price. Unfortunately, this floor price is higher than the price of Indian rice, which makes Vietnamese rice relatively unattractive for importers. (This is just one of many cases where price-fixing worsens the problem it was intended to solve.)

India's strong performance on the world rice market is a little surprising, given how recently it came to the party. For four years, India banned the export of rice. The ban was only lifted last year, and so far India has exported 1.2 million tonnes of rice. An enthusiastic take-up of rice exporting is set to lead to a bumper crop this year, which will add to India's already large stockpiles of rice.

That up there is an important thing to remember, by the way: even if you are a grain exporter, you should not forget to keep stockpiles of the grain at home, just in case. South Africa has learned this lesson the hard way. Last year, it had a huge surplus of maize. Much more was harvested than South Africans could possibly eat in a year. As a result, most of it was exported. And by 'most of it', I mean almost all of it. Grain silos were left nearly empty. This left South Africa unprepared for this year's disappointing crop. (It's not in the article, but it may be that the huge surplus lowered maize prices to the point where farmers switched to other crops, leading to a shortage this year.) Not enough maize was grown to feed the country (or its chickens - poultry producers are upset at the rise in the price of feed), and South Africa found itself having to import maize at 800 rand a ton. It had exported its maize at 600 rand a ton. I wouldn't be surprised if it turned out that it was buying its own grain back...

So there you have it. Grain prices in 2012 are likely to go down, both due to excess supply from farmers that wanted in on the action of 2011's high prices, and from depressingly low demand in the European Union and elsewhere.

No comments: