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Senior Advisor

It's time for a global grain reserve

There are probably a few old timers here who remember that I was uneasy and tried to warn people we were in the 'danger zone' prior to the 2007 'wheat crisis', which was mainly confined to wheat but pulled other grains along price wise. I am more uneasy now than I was then. We are in the 'danger zone' now. One of my tenants back when was that the 'market' (futures) is a lagging indicator and won't/can't evaluate the physical risk in the market. It's one of the drawbacks to having futures largely divorced from physical consequences even though any theory will state that is a requirement for 'market integrity'. Another definition I related was the idea of 'Normal Production Variation' (global), and that the 'Danger Zone' was defined by whether the NPV could throw the market into crisis. Obviously the larger the global inventories the less likely this was to happen.

 

The threat of drought is now pushing further into the EU. There is no way to know all all these situations will work out ahead of time - which is what grain inventories are insurance for - but it's clear to me that drought in the Midwest (or rain, whatever) combined with drought in Europe would likely cause grain market crisis. We already are aware that the Black Sea region is hurting and SA has mild drought features. It's sort of the luck of the draw. None of these possibilities individually is surprising or unexpected (like the Russian drought a few years ago). We worry about the 1980's abundance returning but the tension in the market is because we know full well that we are winging it on a hope and a prayer every year because of global increased diet requirements and development and the influence of energy demand.

 

There are real problems developing a grain reserve. Like it or not China is the model for grain reserves, though they aren't part of any cooperative effort. Building grain reserves now means judging when to add to them w/o raising prices too high, and when to release the reserves to maintain stability w/o dicouraging production and investment in technological capacity. Reserves are viewed by farmers as both the loss of opportunity to have prices spike and sales opportunities - and as avoiding demand destruction and input inflation for meat and dairy products. Ag has to make peace with not ever being completely satisfied their interests will always be served in return for more stable global prices. I believe the priority for grain reserves needs serious and immediate investigation with the goal of implementation sooner rather than later if it has merit. If we wait it WILL be too late.

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Honored Advisor

Re: It's time for a global grain reserve

It is an interesting subject for thought.  

Palouser, your comment on the other thread about the world market being prominent over the north American market is appreciated.

I wonder what the response will be if we see a point when the local elevator denies sale of inventory to the local dairy or livestock feeder because his inventory is committed to export in the next few months.  Politicians haven't lost their ability to yield to complaints.  Like the gas lines of the 70's  ------we may trade on a different format, but dumb stuff can still happen.

 

Thanks for spending some time on this issue-----------I appreciate it. 

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Honored Advisor

Re: It's time for a global grain reserve

What you are talking about is starving one group in favor of another.

 

If we (the world) are as tight as some might expose, just where is this reserve going to come from?

 

I don't think the Fed can conjour one of those with their current printing presses.

 

Who doesn't eat now?

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Contributor

Re: It's time for a global grain reserve

Palouser, I value your input  greatly as I find it balanced and logical. I disagree with the idea of a government grain reserve however.

I believe it leads to many problems, possibly magnifying problems that already exist in what should be a free enterprise system.

I think you have proposed a solution previously, namely : allow delivery on futures contracts. Let the market give producers appropriate signals. America is not in danger of insufficient supply. Any blight on production incentives will be a disservice to producers in other areas. That is not to say that reserves should not be established by those who need them but I see nothing to indicate that governments can be trusted to operate with integrity. I also believe the market signal encourages producers to maximize profitability, as well as production. I worry that revenue insurance, not production insurance, is distorting ag inappropriately.

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Senior Reader

Re: It's time for a global grain reserve

If things get real bad, then ethanol  and all grain fuels will be dumped. Isnt this kind of flex in the system the politicians are working on. Food will always win over fuel. Or do you thinks its not enough?

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Senior Advisor

Re: It's time for a global grain reserve

Your concerns are valid. I don't think they are a major barrier.

 

As for CBOT producer/hedger contract delivery - it ain't going to happen. No way, no how. Even if it would assist the market generate more timely production signals. The CBOT/CFTC is so filled with rot and and corporate nepotism and so misguided by its 'good ol' boy' atmosphere that Eisenhower would probably have used it as an example, instead of the military/industrial complex, as the kind of national danger to be avoided. I still question whether, at best, the market can control the wild swings of markets and global instability when food demand and production are so closely matched. The industrial model of economics doesn't have the variable of 'natural' production variation. One ramps production or price up and down to make market adjustments. That isn't realistic in ag economics/markets in regard to food and civil stability. Demand destruction by pricing out poorer customers to balance supply/demand has consequences that are both unavoidable, conflict generating and immoral.

 

There is a common mythology that the 80's was an example of why governments can't manage grain reserves. In fact it was a good example that government can manage inventories of grain. The grain reserve wasn't responsible for inventories. That was a result of policies that locked farmers into growing a commodity or losing their base (for the future - and it limited expansion of acres) and too high of minimum price support for grain. In fact, the government had a 5 year grain reserve that was separate from the inventories they received from farmers who forfeited grain to pay off loans - and it operated just fine (paying storage fees to farmers for keeping it). The forfeit price for wheat (which is what I am familiar with) was higher than the real price of wheat today. AND the government moved all that wheat at the same time. We forget that the globe needed that wheat and mainly the government did a masterful job of selling when grain was high, which evened out the price in those days. Later there were some questionable issues related to auctions and the PIK program, but that was later. The ONLY positive part of F2F was the decoupling of acres from the remaining direct subsidies which allowed farmers to produce for the market instead of for maintaining base acre history.

 

I do have concerns regarding the 'creative' subsidized grain insurance programs. This is Congress's fault IMO. And it is clearly a biPartisan problem.

 

There are pitfalls to any kind of grain reserve paln. But I now think it is the only responsible thing to do.

 

There is the issue of how to begin accumulating reserves in the future. Ideally, we should already have them. We would have to 'compete' for them on them market and the strategy will just have to be a matter of timing and/or implementation. My guess is to give farmers an option to store for 3-5 years. If the market is very high then the farmer would be likely to continue to move grain into the market to meet the needs. If the price droppedd the farmers would be more likely to move wheat into storage. it may take an agreement for a minimum price in the future (one idea), or not. At this point I don't believe we can sequester grain very quickly but, I think we have to start. Any way you look at it we are really too late for an ideal economic situation to do this. All the more reason to make a start. There will be benefits and costs for the farmer - which will exist with or w/o a reserve.

 

Let's call it the 'Palouse Option'  Smiley Wink

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Senior Advisor

WE ALREADY HAVE...........

a grain reserve................its called ethanol..................pretty simple...............it may not be global, but yet it is.............ethanol has forced us to realize our capacity and stretch it................but if things get bad enough on supply, they will pull the plug............its not perfect, but pulling halfway thru a year would free up 2.5B.............pulling it near harvest might not add much to the immediate system, but it would as soon as harvest hit and add 5B........................

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Honored Advisor

Re: It's time for a global grain reserve

Palouser,

3 questions,

Does currency manipulation distort the market values competition between foreign and domestic bidders for US produced grain?

How badly would a global inventory idea be screwed up by the UN??  And who gets to hold the pot??

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Last one is not really a question

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IMO ----1)-we certainly cannot do something on a global scale that we cannot do nationally.

2) your last paragraph----concerning a reserve type. ----------------Most of the storage built in the last few years is farmer owned.  My feeling is that we are probably close to having(or the potential of having) a farmer owned reserve similar to what you describe.

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We are fortunate to have most international trade based on the dollar. I just wish it was a stable currency.

 

thanks again

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Senior Advisor

Re: It's time for a global grain reserve

IMO a reserve must be sequestered from the market. There needs to be an understood process for releasing it, or having the farmer release it by 'buying it back', which usually involves repaying any govt payments for storage, etc. I don't remember the exact rules involved when there was a 5 year reserve but, I remember them not being unreasonable. Stocks could be rotated, etc. The conditions for a government release need to be understood but, they need to be flexible. It would be a farmer's choice to participate. 

 

A global reserve doesn't need to be centrally controlled. In this day and age it might make sense to have some agreements or a way to communicate and coordinate to make it more efficient - location, commodity, transport distance and cost and so on. When it hits the fan - and I think it's destined to in the medium term, then grain will be there. The less desirable plan would be to have governments purchase, though that would probably prop up lower price periods and lower the extreme prices when demand is such the markets might seize up anyway. 

 

There's no perfect solution. There are pros and cons. But there is also the idea of being responsible. Making it up as we go along when the crisis hits is not responsible. We're in a favored situation by historical and geographic advantages. As are others. It's time. Past time really. Maybe too late. But there is no way to know for sure. But, having recognized the issue I think we need to address it.

 

The typical American economic answer today might be to say 'screw if it it causes any question about margins in the next quarter or six months', even if it might relieve a lot of pain down the road for all concerned. I hope that mindset isn't a dominate and permanent feature of economic thought in the US, though there is certainly evidence of it. That's what i would call 'concrete' thinking.

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Senior Advisor

In addition

A reserve need to be identifiable as being a separate line item from ending inventories. Even if farmers have more storage it isn't a reserve if it can't be identified as 'not available' to the market. The fact that there are questions of whether the pipeline might run dry under certain circumstances means we have no reserves, like the Strategic Pertroleum Reserve.

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