Bloomberg published an interesting opinion piece last week on the resurgence of government in our daily lives.
Since the Reagan / Thatcher era, government has been seen as `the problem not the solution`, particularly in terms of the economy. Over the past 40 years, privatisation and other market liberalising measures have reduced the role of government, leaving space for `market-based solutions`.
The international commodity trade benefited from this trend. When I started in the commodity business in the late 1970s, it was dominated by state agencies. Prodintorg was the monopoly importer in the USSR, as was COFCO in China and BULOG in Indonesia, along with a host of other government agencies in many other countries. If you wanted to buy sugar from Brazil you could only buy it from the IAA, a stage agency. And if you wanted to buy sugar from Australia you had to deal with QSC, a quasi-state agency.
Most of these agencies were dismantled during the 1980s and 1990s as governments withdrew from the international agricultural commodity trade; our business was effectively privatised.
If the Bloomberg opinion writer is correct, the pendulum is now swinging the other way. Governments now have the support of voters to be increasingly interventionist.
Once again, international agricultural commodity markets are not immune from this trend. The Chinese government, through COFCO, is an increasingly important player in managing China’s food imports. The Russian government, through VTB, is becoming an increasingly important player in Russian grain exports. Meanwhile, other countries are becoming more interventionist in imposing tariffs and other trade barriers.
What effect might this have on our business?
First, politics could become more important than price as a market driver. Although not perfect, markets do a reasonable job of sending the right signals to producers and consumers, importers and exporters. When governments interfere, these market signals become distorted: farmers end up growing the wrong crops while importers import the wrong quantities or the wrong commodities. Markets are better than government committees at balancing supply and demand all along the food supply chain.
Second, the trade in food could be weaponized. Less democratic governments have sometimes used food supplies as leverage to gain power over dissenting groups, using starvation and famine as a political weapon. More solid democracies happily no longer do that, but they do use food as a weapon in their international relations. Look at Russia’s ban on food imports from the EU, or China’s import tariffs on agricultural imports from the US. These types of intervention can distort markets and lead to an inefficient allocation of resources.
Third, we may see the return of corruption, both institutional and local. Putting a poorly-paid government bureaucrat in charge of a country’s food imports could lead him to favour one supplier over another – or to grant an import licence to a ‘friend or relation’.
Localised corruption is rare in advanced democracies, but institutionalised corruption is widespread. If governments become more involved in our business, the power of the lobbyists will grow. It will be increasingly worthwhile, and profitable, to lobby for or against a tariff, or for or against an import or export ban. Politicians need money to get elected even in the most transparent democracies.
If the Bloomberg article is right, it could become even harder for the world’s grain and agricultural commodity traders to make a living.
First, trading companies got out of the business of bribing government officials long ago, and for both ethical and good business reasons they won’t want to get back into it.
Second, western agricultural trade houses may be handicapped if government-owned competitors trade for political rather than price reasons.
Third, politics increases risk. Throughout 2019, for example, the price differential between Brazilian and US soybeans could – and did – change at the click of a tweet. Traders like volatility as long as it is not political.
If the world wants to feed the estimated almost 10 billion people that will be will living on this planet in 2050, then it will need international free trade in agriculture. Let’s hope that the pendulum doesn’t swing too far in the wrong direction.
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