“Study grain long enough and the world shrinks.” Dan Morgan
As some of you may know, I am currently working on a book that will look at the ways in which the grains markets have changed in the forty years since Dan Morgan wrote Merchants of Grain back in 1979.
At the time, Dan had already identified many of the trends that would drive the grain markets into the future. On the demand side, he wrote about population growth, rising incomes, changing diets, and in particular the increase in demand for meat protein. On the supply side, he foresaw that agricultural yields would continue to improve. He also foresaw the increase in international trade that would accompany globalisation.
But what didn’t he foresee? What have been the shifts in the past 40 years that have moulded the current grain trade? To help me answer that question I went to see Arnauld Petit, the Executive Director of the IGC, the International Grains Council, based in London.
By way of introduction, Arnauld told me that the IGC is an intergovernmental organisation that was formed post World War II in order to ensure an egalitarian distribution of wheat. Today, the IGC has 56 member countries, and its mission is to facilitate international cooperation in the grains trade; to promote openness and fairness in the grains sector; and to contribute to grain market stability and to enhance world food security. It does this by improving market transparency through information sharing, analysis and consultation on market and policy developments.
In 2012, the IGC joined the Secretariat of the Agricultural Market Information System (AMIS), an initiative established at the request of the Agriculture Ministers of the G20. AMIS covers four crops (wheat, maize, rice and soybeans) and aims to promote food market transparency and the coordination of policy action in response to market uncertainty.
The GTC holds an annual conference in London in June that brings together the public and private sector in the world of grain. Last year the conference attracted over 350 delegates from 60 countries. I made a note to myself to attend this year.
When I contacted Arnauld I told him about my book project, and I warned him that I would be asking him to list what he considered to have been the top five most significant shifts in the grain market in the last forty years. He had since given it some thought, and we got right into the heart of the matter.
“Number 1 on the list,” he told me, “must be the shift to Asia, particularly the economic take-off in China. Rising consumer incomes, combined with urbanisation, have had a relevant effect on diet and food demand. As the Chinese get richer they eat more meat and fish. This demand for meat has driven the huge increase in vegetable protein imports, and has been the driver behind the explosion in soybean production worldwide. Forty years ago, China imported only a marginal quantity of soybeans. In 2019 the country is expected to import 87.5 million mt, more than half of the total trade in soya.
“At the same time,” he added, “Asian people are eating more wheat products. This has in turn increased their demand for wheat.”
“And Number 2 on the list?” I prompted.
“Before the First World War, Russia was a major exporter of wheat, but by the 1960s the Soviet Union had turned around to become a major importer of grains. In 1979/80, the USSR imported 12 million mt of wheat and 14.5 million mt of corn; and in 1984/5, the bloc imported a massive 28 million mt of wheat and 20 million mt of corn. Now the situation is quite different: in 2018/19 Russia alone is expected to export more than 36 million mt of wheat and 3 million mt of corn. Meanwhile, Ukraine is expected to export over 16 million mt of wheat and 28 million mt of corn. That is an impressive turnaround that nobody would have been able to predict.”
“Do you think Russian exports will continue to grow,” I asked.
“Not necessarily,” he replied. “Most of the new production is in Siberia where it is too cold to plant winter wheat. The short Siberian summers leave farmers only a short window to plant and to harvest; production in the region depends very much on the weather.
“In the meantime, the Russian government is keen to move from grain production to livestock production, mainly pigs. They view this as a way to add value to their supply chain. If the Russian meat industry continues to expand then we could see a decline in grain exports. Some people are asking whether we have already seen peak exports.”
“And what would be third on your list of structural changes?” I asked.
“It would have to be the expansion of the biofuels industry. Forty percent of US corn is used for ethanol production while 50 percent of EU rapeseed is used for producing biodiesel.”
“Those figures are surprisingly high,” I interrupted. “Such a big diversion to biofuels must have had a big impact on prices.”
“Not really,” Arnaud replied. “When the US ethanol industry started to take off in the mid-2000s there was a big debate in the press as to whether corn should be used as fuel: the “food versus fuel” debate. Looking back, it is now evident that that debate was flawed. US ethanol production hasn’t seriously impacted either the price or the availability of corn for food or feed.”
“Why is that?” I asked.
“Because corn contains both protein and carbohydrates; you can use the protein for animal feed and use the calories to drive your car. When you make ethanol from corn you get a by-product called “Distillers’ Dried Grains with Solubles” (DDGS), which can be used as a feed ingredient for livestock. Each 56-pound bushel of corn used in dry-mill ethanol production generates about 17.4 pounds of DDGS.
“A similar situation exists in Europe with rapeseed: you use the oil for biodiesel and the high-protein rapeseed meal as feed for animals.
“But there is another reason why the whole fuel versus food debate of the early 2000s was flawed. People forget that in Europe after the Second World War, 70 percent of your acreage went to feeding (fuelling) your labour force, including feed for your horses. Today a rapeseed farmer will see only half of his production going for fuel! The debate was based on the assumption that the market is fixed, and that we have a choice between food, feed and fuel. That is incorrect.”
“But what about the negative environmental impact of using land to grow food for fuel? Aren’t we losing biodiversity?”
“Not in the EU or US at least,” Arnaud told me. “Arable Land has been falling as from 2008, while forestry and urbanisation has increased.”
“Is that because yields have increased?”
“We saw yield increases in Europe until about 2007, but these have now plateaued, particularly for wheat. Corn and soybean yields have continued to increase in the Americas because of GM technology and new breeding techniques. Remember there is no GM wheat anywhere. Wheat yields depend on the weather: sometimes good and sometimes less good.
“What is 4th structural shift on your list?” I asked.
“It is the development of the starch industry for sweeteners and food use. High Fructose Corn Syrup (HFCS) has taken a significant part of the market for sweeteners in both China and the US, largely because it is cheaper than sugar. Isoglucose, as HFCS is called in Europe, has had less impact in the EU, largely because production has been restricted through quotas. Those quotas have now been lifted, and we will be watching closely to see how the market develops.”
“And the last one on your list?” I asked Arnauld.
“Number 5 on the list has to be the big expansion of soybeans. In 1978/19, global soybean production was just 77 million mt, but is set to reach 363 million mt in 2018/19 according to our latest forecasts. This has been achieved through a heavy expansion of acreage around the world, and especially in the US, Brazil and Argentina. Demand and trade have also risen especially strongly and we have seen some significant shifts over the decades, with Brazil now by far the dominant exporter.
The question now is whether palm oil will follow the same path, and compete with soy oil in all its outlets: We are following this carefully. ”
“Thank you Arnauld. Your comments have been very helpful. Is there anything that you would like to add?”
“Only that I look forward to seeing you at our conference in June!”
Very interesting, especially the fuel versus food analysis. I had not really thought it through in that way.
One thing that did surprise. I would have thought GMO would have been one of the five points. It seems to have made some of the other points possible. Don’t you think that at some point GMO wheat will be accepted? Hungry people will eventually demand it.
Hello Rod, we did discuss GM crops but I at least view them as continuing the advances in seed technology that Dan Morgan had already discerned back in 1979. As such we put GM into “trends” rather than “shifts”. But it is debatable! All the best
Yes , good point. GMO is definitely part of seed technology. Maybe it’s the potential SPEED of that change which pushes it into the top five shift categories?
Regards.