In his book Merchants of Grain (published in 1979), Dan Morgan describes the history of the grain trade and takes a look at what the future might hold for the five private companies—Cargill, Continental, Louis Dreyfus, Bunge and André—that at that time dominated the business.
The early 1970s had been exceptionally profitable for those five companies, and the seven families that controlled them. The Soviet Union was redirecting resources away from industrial production and towards consumers. Increasing meat supply was an integral part of that plan, but to do that the USSR had to import large amounts of protein and animal feed.
This coincided, in 1972, with the failure of the anchovy season off the west coast of South America (anchovies/fish meal was a significant source of animal feed at that time), as well as poor weather in the Black Earth region of the USSR.
The first wave of Soviet buying in 1972 came to be known as the “Great Grain Robbery”, and resulted in rising food prices and domestic inflation in the USA. It also began to focus political attention onto the grain trade, something that intensified when the Soviets came in for a second round of buying in 1975.
But that buying was a double-edged sword. As Dan Morgan writes, “Opportunities for big profits, which the companies had looked forward to in the doldrums of the 1950s and 1960s, certainly were present. But the enormous volumes and the volatility also created unprecedented risks.”
Continental Grain learnt this the hard way when they underestimated the depth of the second round of Soviet buying; the grain giant sold physical corn short, expecting to cover their sales when prices fell later in the year. But corn prices didn’t fall; they continued to climb and the company covered their shorts at the top of the market.
For Michel Fribourg, the owner of Continental Grain, this was a traumatic event, and he declined to offer any further tonnage when the Soviets came back for more in October 1975. A few months later he reorganized the company, firing traders and employing risk and business managers instead. As Dan Morgan writes, the risk in these big sales was just too big: “The glory days of the grand slams in the Russian trade were over.”
He continues,
“Continental was not the only company to experience trading troubles. Most of the companies now insisted that the Soviet Union share more of the risks. Louis Dreyfus, for its part, set up a system of compensating balance sheets with the Russians. In effect it worked for the Russians on a fixed commission; losses in any given transaction would have to be recovered in profits on subsequent transactions…”
At that time most commodity imports were handled by central government agencies within the importing country. Governments were generally assumed to be more reliable counter-parties than the private sector, but this belief was shaken when in early 1975 wheat prices fell and “Turkey’s wheat-importing agency cancelled the wheat import contracts it had concluded at higher prices with Continental, Bunge, and Cargill.”
At the same time, the state buying agencies in importing countries had begun to attract the US government’s attention in terms of the inducements and bribes that the grain companies paid to civil servants and politicians to get the business done. A new light was being shone on these practices. A new morality began to take hold within the US, leading to the Foreign Corrupt Practices Act that was passed in 1977.
A new light was also being shone on the shipping and transportation of the physical grain, leading to an FBI investigation in short-loading and falsified shipping documents at the Mississippi grain loading terminals. In 1975 a grand jury in New Orleans “issued a total of thirty-one indictments, covering 265 federal criminal violations against forty-eight individuals…All kinds of activities came to light that showed how company employees schemed to misgrade or diminish the quantities of grain destined for foreign countries.”
Meanwhile, anti-competitive practices were also being brought under the spotlight. “In December 1976, the Interstate Commerce Commission held hearings in Chicago to determine why some small grain elevators inland had been unable to obtain covered hopper cars and grain boxes to move their commodities…The hearings showed what a close relationship existed between certain railroad companies and the grain firms.”
Physical trading margins within the agricultural supply chain were almost as thin in the 1970s as they are now, and the big trading companies largely made their profits by speculating massively on the futures markets that they themselves dominated. But there again a new morality was beginning to take hold with the formation in April 1975 of the Commodities Futures Trading Commission, a new independent government agency to police the exchanges. It was formed “with fewer “policemen” than the Rockville, Maryland Police Department” and appeared to get off to a slow start, but it was a sign of things to come.
Perhaps more importantly, the big trading companies were already—in the 1970s—beginning to lose their domination of the agricultural futures markets. Large well-financed speculators were moving in. The most famous were the Hunt brothers who had made a fortune early in the decade by squeezing the silver market. The brothers entered the soybean market in 1976, accumulating “approximately a third of the total beans that forecasters thought would be left over when the new soybeans from the 1977 crop became available. This was not a corner, but it was getting near to one”.
Their buying pushed prices higher and helped speed the demise of the publicly quoted Cook Industries, a former cotton trader that by the mid 1970s had begun to rival the traditional grain companies. “Within a year the company that Ned Cook had built into one of the highest-flying grain companies in the world had all but disappeared”. Cook was forced to sell its US grain elevators, allowing the Japanese trade houses Mitsui and Marubeni their long-awaited opportunity to get a foothold into the US grain business.
Taking all this together it is perhaps possible to pinpoint the start of the decline of the traditional grain business as a reaction to the massive price volatility and subsequent general inflation that followed the Russian purchases of US grain in the 1970s.
The grain companies had been hoping for such an event all through the doldrums of the 1950s and 1960s, but the consequences were greater government intervention and increased transparency, as well as the entry of well-financed speculators into markets that had previously been quietly local.
Bring those elements into a sector that was already struggling to cope with higher volumes and greater counter-party risks and you can begin to see that the writing was already on the wall. The era of seat-of-the pants buccaneering trading was on the way out; professional risk management, cost control and a new morality were on the way in.
Photos from Pixabay under Creative Commons
