Category Archives: North America

Strategic grain reserves

Posted by on June 3, 2011 No comments

The world economic crisis at the end of 2008 led to a profound distrust of financial markets, particularly among the developed countries that were impacted the most. Similarly, the twin price spikes that like bookends preceded the collapse and now accompany the global recovery, have caused political leaders in many developing countries to lose faith in grain and other commodity markets.

Many developing countries choosing to increase the size of their grain holdings during recent period of price volatility.

In December of 2010, Chief Industries UK of Essex, England, finished installing six steel silos with total storage capacity of 73,800 tonnes (12,300 tonnes each) that are 28.3 meters in diameter with an overall height of 29.4 meters at a facility in the Port of Qasim. Photo courtesy of Chief Industries.

After at least two decades of gradual withdrawal as part of an overall move toward free markets and economic liberalization, food price riots in 2008 and the recent unrest in many countries — sparked in part by renewed inflation — have prompted many governments to vigorously intervene in grain markets.

Outright bans, quotas or other restrictions on exports by Russia, Ukraine, Argentina, India, China and others are just one aspect of this trend.

Another is the policy decisions of many countries to increase the size of their strategic grain reserves whether composed of domestic or imported origin. The effects on world markets of these larger reserves have yet to be seen, but could make volatile markets even thinner as governments seek to hold, or as critics would say, hoard more grain. There are numerous examples from many parts of the world.

Middle East  

In the Middle East  , a region heavily dependent on grain imports, wealthy governments have decided to invest some of their immense cash surpluses in strategic grain holdings. Industry sources report that Saudi Arabia intends to increase its stock on hand of imported wheat to 1.5 million tonnes, which represents a six-month supply based on an annual milling wheat requirement of 3 million tonnes. A number of large grain storage facilities are expected to be built, particularly at Red Sea ports, as the country has rapidly phased out domestic wheat production due to aquifer depletion after nearly 30 years of costly self-sufficiency.

The effects on world markets of these larger reserves have yet to be seen, but could make volatile markets even thinner as governments seek to hold, or as critics would say, hoard more grain.

On April 18, the head of the Iraqi Grain Trading Company stated that his agency would up its wheat purchases from abroad this year to 3.25 million tonnes, equivalent to one year’s import supply plus a 1-million-tonne strategic reserve. Last year the country imported 1.9 million tonnes. Iraq will also increase rice imports to 1.5 million tonnes in part for reserve purposes.

Oman recently announced plans to construct a total of 300,000 tonnes of steel silo storage for government wheat reserves at two ports. The country’s two domestic milling companies will draw from the reserve in order to rotate the wheat in storage.

In the UAE, there have been recent press reports of a plan to build a very large grain storage complex at the port of Fujairah on the Indian Ocean with financing from Abu Dhabi, the richest of the seven emirates. The location, which already houses a strategic petroleum reserve, would ensure access to imported grain in case the Strait of Hormuz was ever blocked. Saudi Arabia’s emphasis on Red Sea storage facilities may reflect the same geopolitical worries.

In line with this theme, industry sources report that Qatar’s government is considering building a huge underground grain storage bunker that would protect a wheat reserve from radioactive fallout in case of a nuclear catastrophe in nearby Iran.

In Jordan, where the state is the monopoly importer, the wheat reserve will rise by one third thanks to the addition of a 100,000-tonne-capacity concrete grain elevator at the Red Sea port of Aqaba. However, it could be argued that this increase merely keeps up with population growth.

In Egypt, with the government accounting for 5 out of 7 million tonnes of total wheat imports along with 2.5 million tonnes of domestic purchasing, there is little room to increase its activity except to push holdings up to six months stock, the upper end of the reported target level.

Iran, which has achieved near self-sufficiency in wheat production in the last decade, has gone against the regional tide of greater state involvement in the last couple of years by deregulating most of its wheat sector and allowing private milling companies to buy directly most of the over 15 million tonnes per annum of wheat produced in the country.

Sub-Saharan Africa  

Despite its status as the earth’s least food secure region, governments in sub-Saharan Africa in recent decades have held only modest grain reserves, if at all. Above all, this has to do with financial constraints, since buying up domestic grain and rotating stocks can be a huge burden on national budgets, not to mention the cost of building proper storage facilities, the market risks of intervention, and problems of transparency and governance associated with such activity. Just as important, all but a few African governments have abandoned the socialist policies of the past, which often included state ownership of grain processing and storage facilities.

However, recently some countries, particularly cash-rich oil exporters, have begun laying the basis for greater intervention in grain markets. Nigeria has adopted a policy that 15% of the total annual grain harvest should be held in reserve. The National Food Reserve Agency (NFRA) will hold 5% as a core strategic grain reserve, and individual states are to hold another 10% as so-called “state buffer stocks.”

This policy initiative has already been backed by significant investment. In 2011, NFRA will complete the construction of steel silo storage capacity for over 1 million tonnes of grain, primarily maize, sorghum and millet, at 10 sites in key production areas. Existing NFRA storage capacity was 325,000 tonnes.

In Angola, the state also may divert some of its oil and gas export revenues to create a national grain reserve. The plan is for several hundred thousand tonnes of grain to be held in new government storage facilities under the Ministry of Agriculture. To date, just 45,000 tonnes capacity of steel silo storage has been built in five locations, thanks to development aid from the Spanish government. Despite 30 million hectares of unused arable land, Angola still imports much of its food. Guaranteed government purchases in order to build up a grain reserve could serve as an incentive to more investment in agriculture.

Kenya’s National Cereal and Produce Board has decided to double the reserves it stores from 4 million to 8 million sacks of 90 kg. The total of 720,000 tonnes will be almost entirely domestically purchased maize.

Zambia’s Food Reserve Agency, since about 2005, has become an active player in buying the maize surplus in the country, holding over 350,000 tonnes of maize, but in the process was subject to criticism for squeezing out private sector trade and contributing to overproduction and a 1-million-tonne surplus that could be neither adequately stored nor exported, resulting in a price collapse in 2010.

Sudan’s government, which operates a small reserve for domestic intervention in sorghum and millet, has largely stayed out of the wheat market since total deregulation of the sector in the late 1990s. However, recently it put out feelers for a tender purchase of 300,000 tonnes of wheat.

Ethiopia has operated an emergency grain reserve targeting a level of 400,000 tonnes for about 15 years. Thanks to economic reforms and outside investment, the country has experienced five years of GDP growth averaging 11%. Greater budget revenues should help the country realize a plan to increase the amount of grains held in reserve for both emergency relief and market stabilization.

South Asia  

Bangladesh’s Food Department is increasing its public stocks of wheat and rice to 1.5 million tonnes from a previous target level of 700,000 tonnes. Up until the early 1990s, the country held 2.2 million tonnes and was praised by international economists for reducing this by two-thirds.

Pakistan and India could be viewed as going counter to the trend of increased food reserves. Thanks to bountiful harvests in recent years, Pakistan is in the process of exporting hundreds of thousands of tonnes of wheat from government stores in order to make room for the current harvest with planned government purchases of 4 million tonnes just in Punjab state.

India’s harvest of grain and pulses at 235 million tonnes is at record levels for the second year running. Despite this, the country has banned wheat and rice exports since international prices started rising in 2007. Now many high-placed people are calling for the country to export some of its surplus wheat from a carryover stock that exceeds 17 million tonnes held by the Food Corporation of India, plus another 7 million tonnes in private hands. FCI needs to make room for targeted procurement of 26 million tonnes from the new harvest. There are fears of poorly stored grain rotting. One paradox of large government grain holdings is that due to lack of investment in modern storage facilities, the goal of food security is subverted by storage losses that can exceed 20% in many cases, though this is rarely officially recognized. Most government grain reserve record-keeping shows one bag going out for every bag coming in.

Up to 75% of India’s food reserve wheat is still stored outdoors in jute bags piled on raised earthen platforms called plinths and covered with tarpaulins. Most of the rest is stored bagged in go-downs. Only about 650,000 tonnes of government wheat is stored in modern steel silo facilities built by private operator Adani Grain in the last decade. In Pakistan’s neighboring Punjab region, the storage practices are the same though a higher share of wheat purchased by the Punjab state government annually may be in go-downs.

Bangladesh is launching an ambitious project to build terminals for imported wheat and rice at a number of ports excluding Chittagong where grain terminals already exist. In other ports for lack of berths and ship unloaders, a couple of hundred laborers with shovels fill sacks in holds of vessels at anchor in the harbor for loading onto 1,500-tonne lighters and transport to mills up river. Handling and transport losses are thought to be significant.

East Asia and Southeast Asia  

Though the total is a state secret, China’s government wheat holdings are estimated to reach 55 to 60 million tonnes following the harvest with an annual carryover of at least 20 million tonnes. Grain production and consumption represent 20% of the world total, but the impact on international markets is relatively benign due to a sacred policy of 95% self-sufficiency in grain, excepting about 57 million tonnes per year of soybean imports. Most other governments in the region hold large rice reserves. South Korea’s hit a record level of 1.5 million tonnes in the last year. In Indonesia, the food reserve agency Bulog has a monopoly on rice imports as does its counterpart in the Philippines.

Conclusion  

In countries like Nigeria, increased grain reserves are mostly a domestic market phenomenon. But in the case of wheat, with some traditional exporters — particularly Russia and Ukraine — seeking to protect national stocks on the one hand while on the other hand governments in a number of importing
countries build infrastructure to increase their holdings, the implication could easily be less stable and less liquid markets over the medium term.

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Under attack

Posted by on April 1, 2007 No comments

The Canadian Wheat Board is in an intense battle to maintain its wheat and barley trading monopoly.

The Canadian prairie provinces of Alberta, Saskatchewan and Manitoba have been the source of 15% of all wheat, 55% of durum wheat and 10% of barley in world trade during the last 10 years. A single organization, the Canadian Wheat Board (CWB), is the sole supplier of these grains and can thus lay claim to being the biggest international seller of wheat and barley.

But like its counterpart, the Australian Wheat Board (AWB), the CWB has been under increasing attack, both domestically and internationally, as a single-desk monopolist. The pressure on the CWB has increased since Canada’s ruling Conservative Party came to power at the beginning of 2006 on a platform that included granting marketing choice to western Canadian grain growers (i.e., removing the legal obligation that they sell their entire non-feed wheat and barley production to the CWB).

To date, Prime Minister Stephen Harper has not made good on his campaign promise, but it has not been for lack of trying. The Conservative party, though exercising executive power, does not enjoy a majority in parliament and would need the support of one of the two main opposition parties to put through the necessary legislation. Both of these parties oppose elimination of the single desk.

In place of lawmaking, the government in Ottawa has used other tactics such as firing of the CWB’s chief executive officer and placing a gag order on the organization that prevents it from us- ing any of its funds to lobby for continuation of the single desk.

The latest development in this highly politicized struggle was the government’s announcement at the end of March that it will terminate the single desk for barley exports, effective Aug. 1 of this year. This came after a vote in favor of marketing choice for barley by Prairie farmers. The government-called plebiscite gave farmers three choices: continuation of the single desk system for barley; a dual marketing system with the right to sell outside the CWB; and elimination of the CWB role in barley. The second option received 48% of the vote from farmers, while 14% chose the third option. The government can argue that the Canadian Wheat Board Act gives it such administrative authority provided a majority of farmers express support for the change, but there are sure to be all sorts of legal challenges.

With the ballot issue limited to barley, the government may have had an easier time getting a majority of farmers to vote for marketing choice. Barley represents only 12% of the grain handled by the CWB, so farmers have less at stake. Furthermore, farmers already are in the habit of selling their feed barley and feed wheat on the open market, while domestic wheat sales are still under the CWB monopoly.

Proponents of further reform hope the single desk for wheat can then be dismantled by Aug. 1, 2008, either based on a subsequent farmers’ plebiscite, this time on wheat, or thanks to new parliamentary elections yielding a Conservative Party majority.

Pros and cons

Both sides provide compelling arguments for their positions. The federal government’s case is true to its pro-business orientation and is based on classic free trade ideology. This makes sense for a country whose economy thrives on access to overseas markets. The Conservatives see no need for a governmentowned company, which was founded in the Great Depression of the 1930s and received its monopoly powers during World War II, to market Canada’s grain when private companies could do it more efficiently. The mere existence of the CWB as a state trading enterprise has made Canada vulnerable to repeated trade actions from the U.S., including a ban on some wheat exports from Canada to the U.S. that was lifted at the beginning of 2006.

It is unclear whether a majority of western Canadian grain growers also want to see the CWB wheat monopoly ended. Those near the U.S. generally favor marketing choice, since they would like the option to truck their grain to elevators south of the border when prices are better there. Under the CWB’s single desk, grain growers must rely on the Canadian railroads to get their grain to ocean ports. But there is a long history of railroad strikes, including some this year, that have caused congestion and delays, making farmers wish for the option to deliver grain to northern-tier elevators in the U.S. that have lower transportation costs to port. Opponents of the single desk often argue that western Canadian farmers are “held hostage” by an expensive and inefficient transportation system.

Farmers in Alberta are thought to support marketing choice more than their brethren in the two Prairie states further east. As noted, they plant more barley and are already used to selling on their own. Being closer to the Pacific Ocean perhaps makes them more open to the options that would be presented by freer trade. In Saskatchewan and Manitoba, which are further inland and where mainly wheat is grown, support for the CWB is stronger among farmers. This is reflected in the makeup of the two provincial governments, as they support the single desk while Alberta’s government opposes it.

The CWB argues that its sole mission is to serve the interests of western Canadian grain growers. Its goal is to generate the highest possible return in domestic and international markets on the sale of their wheat and barley. All revenues, after subtracting marketing costs, are distributed to the farmers at the end of the year. There are no retained earnings.

The CWB, based in Winnipeg, Manitoba, has a lean staff of about 400 to manage an average turnover of nearly 20 million tonnes of grain per year. It does this by owning few assets beyond its own office buildings and computer systems, and by contracting with transport and grain storage companies to handle the entire crop.

In marketing Canadian grain domestically and to 70 countries, the CWB’s special status presents certain advantages to Canadian farmers. One is that its borrowings are guaranteed by the Canadian government, ensuring lowest possible interest rates to finance grain inventories and to carry receivables. Another is that the initial payment they receive from the CWB, normally about 75% of the total payment, is guaranteed by the government, even if world grain markets suddenly collapse.

The CWB also enjoys government guarantees of overseas credit risk, freeing it of the need to write off bad debt. The CWB carries on its books about U.S.$1.7 billion of sovereign debt from a group of eight nations that have rescheduled their payments over five- to 25-year terms through the Paris Club. These long-term credits are a major source of income for the CWB, since it collects interest payments while obtaining funding at lower rates. However, this income has fallen sharply from C$92 million (U.S.$75 million) five years ago to C$36 million in 2005-06, as some countries have been rapidly paying down this old debt. In August 2006, Russia prepaid its remaining U.S.$827 million. Over the same period, CWB’s administrative costs have risen from C$50 million to C$70 million.

It is such underwriting by the government that is cited as an unfair trade practice in the negotiations for liberalized trade in agriculture products at the struggling Doha Round of the World Trade Organization. In an attempt to revive the talks, both the U.S. and E.U. have put on the table offers to dramatically reduce their farm subsidies, but on the condition that both Canada and Australia terminate their single desks.

International pressures aside, the current government says it seeks reform of the single desk structure for purely domestic reasons, the most important being to give farmers the freedom to sell their grain in any way they please by putting in place a dual marketing structure. Farmers would have the option to either commit their grain to the CWB operated pools, or they could choose to sell to traders outside the CWB system.

The CWB counters that a dual marketing system is a false concept, since, without its single desk powers, the CWB could not exist as the kind of entity it is today, selling grains “on behalf of ” Canadian grain growers.

Life after the single desk

Despite its network of grain suppliers and overseas customers, the CWB would have to overcome several major obstacles to convert itself into a viable grain trading company.

Perhaps its biggest drawback is its lack of grain storage and transportation assets. In a free market, it would suddenly have to start competing with the same grain companies with whom it contracts for services now.

Another problem is the lack of a capital base. Through 70 years of existence, the CWB has returned all of its trading profits to its farmer constituents year in and year out, and has only a small amount of equity capital compared to the revenues it generates. Government guarantees on borrowing and overseas receivables means the CWB can operate on nearly 100% debt financing, but reform of the system would also mean withdrawal of these guarantees and require it to raise nearly U.S.$2.5 billion in operating funds through other means.

Though there are some parallels between the CWB and AWB, the Canadian organization is more dependent on its single desk. At its founding, the CWB was modeled after the AWB, but it has remained purely a state trading enterprise. The AWB has evolved a couple of stages beyond, having first made the transition to a farmer-owned corporation about 10 years ago, followed by a public share offering in 2002. These two moves provided the legal and financial basis for the AWB to diversify horizontally and vertically, such that the bulk of its revenues come from operations other than management of Australia’s wheat pool. These include the supply of all kinds of inputs and services to farmers, and even the trading of non-Australian grains.

The most important reform of the CWB was in 1998, when farmers were granted the right to elect 10 of the 15 seats on the CWB board of directors. The remaining five, including the chief executive officer, are selected in Ottawa. Previously the CWB functioned as an agent of the Crown, with all govern- ment-appointed commissioners.

Prior to the accession of the Conservative Party, the CWB had its own plans to transform itself somewhat along the lines of the AWB, in order to move into higher-margin processed products, so that farmers could share in the profits of some of the value-added activities that international grain companies often specialize in. However, just as the AWB depended on the single desk as a basis for its public share offering and entry into synergistic areas, the CWB’s retention of its monopoly is a prerequisite for planning any such transformation.

With the single desk in doubt, the CWB has begun a series of management reforms to better track its performance as part of an undeclared campaign to convince farmers that it does indeed operate efficiently, even in the absence of competition from other buyers.

The future of the CWB monopoly is of particular interest to the biggest users of Canadian wheat. Canada’s 10-year export average is 15.8 million tonnes, and the world’s largest wheat exporter, the U.S., has been Canada’s biggest customer in that period, taking 10% of the total. The second-biggest customer is Japan, with an average of 1.4 million tonnes per year, and Iran is the third largest at 1.2 million tonnes per year. However, Iran’s purchases peaked at 3.5 million tonnes in 2000-01, the most by any country in 10 years, and have fallen dramatically since.

It is notable that a number of the largest customers for Canadian wheat, with the U.S. being the main exception, are countries with government wheat import monopolies like Japan and Iran. Algeria, in theory, has liberalized wheat imports, but its state grain company acts as a de facto single desk for durum imports. Such large government-to-government contracts are naturally a prime target for an organization like the CWB, which must move almost 16 million tonnes of wheat per year. But with so many non-commercial factors at play, the question Canada’s farmers must ask themselves is whether they truly are getting the best possible deal enough of the time.

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