Chapter 17: Grains

After setting the framework for the study of food commodities, we are going to turn our attention to the most important group of agricultural commodities: grains.

Grains include cereals, oilseeds, soya beans[1] and rice. We will first discuss the physical characteristics of cereals and the production procedure, with the aim to understand how these attributes have a bearing on the economics of the different commodities. We will then look at supply and demand parameters, and the trade patterns of grains around the world.

Trading of grains in the physical markets is the next focus, and we will also look at how these markets are organised in the world’s largest market: the United States.

The futures markets in grains are the oldest in the world and still have an active and very important role today. We will look at their structure and how they function in conjunction with the physical markets, but this discussion is reserved for the last chapter in this textbook.

Physical characteristics

Grains are the fruits of relatively simple plants in the grass family. The importance of grains in the dietary requirements of all countries in the world cannot be overstated. Non-animal sources of food account for more than 60% of dietary energy requirements around the globe, with grains accounting for most of this share. However, even when grains are not consumed directly by humans, they are used as animal feedstuff, and hence enter the food chain indirectly too.

Grains are grown for their nutritional value and they are an important source of both carbohydrates and proteins. Carbohydrates provide energy in the diet, both for humans and animals. But while animals can make do with a range of alternative sources of carbohydrates, humans are limited to their tastes. The fact, however, remains that – at least for animal feedstuff – competition from non-grain fodder, like root crops, citrus pulp and fishmeal, does exist.

Grains are also an important source of proteins. These are complex foods, made up of carbon, oxygen, hydrogen, nitrogen and sometimes sulphur, and are particularly important for nutrition at times of rapid growth. However, while some animals can synthesise proteins in their stomachs, humans need to receive proteins ready-made. In developed countries proteins enter our diet mainly from animal products, while in developing countries they come mainly from grains.

Taxonomy

Grains are classified in three major groups: wheat and rice; coarse grains; and other oilseeds. Soya beans are also incorporated in the analysis of grains because they are often used as a substitute for the latter. Coarse grains include corn, barley, oats, rye, millet and sorghum. Of these, corn is the most important and it will be covered in more detail. Oilseeds include palm kernel, sunflower seed, rapeseed, cottonseed, coconut seed and other minor crops, which are used both for animal feedstuff and for oil and fats destined for direct human consumption.

Production specifics

There are several aspects of the process of growing grains and some of them are discussed under the individual grains later in the chapter. Some of the common production characteristics for all grains, however, are: soil preparation; variety selection and planting; feeding of the plant; protection from pests; and harvesting. The reader might wonder why so much detail is required for someone with no botanical interest in the subject. The coverage provided, however, is the minimum required for the understanding of the economics and pricing of the commodities.

Soil Preparation

An important element for the growth of grains is the soil’s characteristics and its adequate preparation. Soil has three main attributes: texture, which ranges from sand to clay; tilth, which is the way its particles are arranged; and its acidity or alkalinity. Wheat and barley, for example, require rich, grainy, and not too acidic soils to flourish. On the other hand, oats can grow on soils that are too acidic for wheat of barley, and rye can even survive on poor, light, acidic soils where other grains would fail. Before planting, soil has to be adequately prepared. This usually involves inverting, bursting and mixing the topsoil, and encouraging water absorption while also maintaining adequate drainage.

Variety Selection

Grains are usually distinguished by variety and class. A variety is described by the race and name of the cereal. Examples for wheat include ‘Avalon’, ‘Apollo’ and ‘Galahad’. Class, on the other hand, represents the quality of the grains, which has been officially certified for trading purposes. An example would be ‘Canadian Western Red Spring No.1’. These classes are extremely important for the standardisation of grains, which is a vital prerequisite for grains which are traded on commodity exchanges, such as wheat, barley and corn.

In recent decades, especially since the 1990s, variety production and selection has become a much more involved process, with changes taking place at the molecular level. We are of course referring to genetically modified (GM) crops, whereby the plants used have had their DNA changed using genetic modification techniques. The drivers behind the development of GM crops are several: improved shelf life, stress resistance[2], herbicide resistance[3] and pathogen resistance[4] are key.

Feeding

To synthesise their food, grains use oxygen and carbon from air, oxygen and hydrogen from water, and a range of other elements from the soil, like nitrogen, phosphorus, potassium, magnesium, calcium, and sulphur. One important attribute of the soil, which regulates the availability of such elements, is its acidity or alkalinity. Steps to rectify acidity may be required, together with proper manuring and fertilisation.

Pests and diseases

Good weather and soil conditions also promote the growth of weeds, which restrict the growth of the crop plants themselves. Control is achieved with adequate soil preparation, straw burning before sowing, weeding before and after sowing, or through the use of chemical herbicides. Pests pose another threat to satisfactory crop yields. Protection from pests is usually achieved through treatment of crop residues, rotational cropping, good drainage and ploughing, and the use of pesticides.

Finally, diseases are not infrequent and may seriously affect the quality and/or yields of crops. Crop rotation has been the traditional way of preventing the development of diseases, but more recent techniques include the breeding of seed varieties resistant to disease and adequate selection and mixture of different varieties.

Harvesting

Harvesting is an important part of the production process, and its degree of mechanisation is the most visible criterion marking efficiency differences between various countries. In developed countries, specialised agricultural machinery is used to cut standing crops, but also to separate grains from straws, convey grains to a tank and then to a trailer, and discharge straws to the rear, or even chop them and tie them into bales. In developing countries, on the other hand, harvesting is very much dependent on the availability of ample and cheap labour, because machinery is too expensive to acquire, especially when the average farm size is too small to justify such an investment. In some cases, the production characteristics of a crop (e.g. rice grown in Asia) mean that the crop can only be harvested manually.

Supply of grains

From the analysis so far, the main supply determinants for grains have become evident. Over the last fifty years the production of grains has exhibited considerable volatility. When one looks more carefully, however, wheat and rice production have shown relative stability, which leaves much of the volatility to be accounted for by coarse grains.

Another characteristic of the sector is that while most of the increases in production before the Second World War came from increases in the areas cultivated, after the end of the War most gains came from increases in production yields. It has been estimated that in the period 1960-1983, 74% of production growth came from increases in yields.[5] On a regional basis, yields increased rapidly in the 1950s and the 1960s in developed countries, with little additional gains in subsequent decades. On the other hand, developing countries registered significant gains in productivity only after the 1970s, but even the highest yields in these countries are well below those in Western Europe and North America. Exhibit 3 shows the development of average cereal yields by region, while Exhibit 4 highlights the yield development of individual cereals over the same period.

Wheat

Wheat is the most tolerant grain. It can be planted from as south as Australia and South America to a latitude of 60° N. It can be planted at sea level, but also as high as 3 Km above it. Wheat grows in areas with rainfall between 25-180 cm per annum, and flourishes during long days with an average temperature of about 30°C. It is susceptible to frost and winterkill sets in at temperatures of -15°C to -20°C, if the ground is not covered with snow. Even if the temperature is as high as 10°C, winterkill is still a risk if the ground is frozen and strong winds prevail.

Wheat has a growing period of anything from 4 months for spring wheat to 8 months for winter wheat, and it goes through a number of distinct phases. These phases are recorded, usually on the basis of two similar scales: Zadoks and Feekes, see Exhibit 5. The former is a two-digit scale, which tends to be more accurate, as each of the ten digits it contains is further elaborated with a second digit, used to describe further intermediate stages in the growing process.

For winter wheat, the seed takes a few months to germinate, while for spring wheats the germination period is much shorter. In the spring, the head, which contains the kernels, develops at the tip of the stem while the stem is still very short [seedling growth and tillering]. The stem grows rapidly [stem elongation], pushing the head up [booting] and out of the top leaf sheath [ear emergence]. After the head emerges, [flowering] takes place and kernel development begins [milk development]. After the kernels have fully developed and filled [dough development], the leaves and stem lose their green colour [ripening], and the grain dries down quickly. When the grain dries down sufficiently (to 15 percent moisture or less), the fields are ready to harvest.

Climatic conditions affect all nodes on Zadoks scale, but it is mainly nodes 71 and 89 that determine the amount of protein that the plant will have. Depending on their protein content, wheat varieties are broadly classified in hard and soft wheats, with several refinements in between. An example of protein ranges for US wheat classes is given on the right panel of Exhibit 5.

Wheat is planted twice a year and the two varieties are known as winter and spring wheat. Winter wheat is planted in autumn, during September or October. It grows to a height of about 10-15 cm and can be grazed by cattle. During the winter the plant becomes dormant and should ideally be covered by snow to prevent winterkill. As soon as spring arrives, the plant resumes growth and is normally ready to harvest in July. Spring wheat, on the other hand, is planted as early as possible in the spring, matures over the summer and is ready for harvest in September. Because the harvesting season begins with winter wheat in July, the beginning of the crop year for accounting and statistical purposes is also set then.

Wheat is produced in most countries, but a handful of these account for the majority of production and exports. The EU, South and East Asia, Former Soviet Union and North America are the largest wheat producing regions (see Exhibit 6). On an individual basis, China tops the lists of largest producers, followed by India, Russia, USA, and Australia (see Exhibit 7). Within the EU, France, Germany and Poland are the largest producers.

Problems with extreme weather conditions are also faced in Canada, where the main type planted is spring wheat. This is sown in April/May and harvested in July/August, mainly in the regions of Manitoba, Alberta and Saskatchewan.

In the United States, both winter and spring wheat is grown. The latter is about a third of all US production, grown in a relatively narrow area in the states of North and South Dakota, Montana, Wyoming and Minnesota. Exhibit 9 highlights the production of winter and spring wheat.

The most common type of wheat in Western Europe is red winter wheat, which is planted between September and November. It is harvested between June and August. The interesting story behind the stable growth of wheat production in Western Europe is directly linked with the agricultural policies devised from 1967 onwards by the then European Economic Community. We will discuss this topic later in this chapter.

In China wheat is grown throughout the country, but yields are better in the east and south regions, where climatic and soil conditions are better. Wheat is mainly sown in autumn and harvested in the summer.

In Australia and Argentina, the two most important producers of the south hemisphere, both hard and soft wheat are sown in April/May (winter-time in south hemisphere) and harvested between November and January. Crops in Australia have manifested a great variability, mainly on account of drought seasons. In Exhibit 10 there are several examples of how Australian wheat production swings between extremes, as was the case in 1982, 1991, 1994, 2002 and 2006, when production was around 10 million tonnes. In contrast, during the bumper years of 1983, 1996, 1999, 2003, 2005, 2011, 2012, 2016, 2020, 2021 and 2022 production was well over 20 million tonnes.

Coarse grains

This broad category includes corn, sorghum, oats, rye and a few other minor grains. By far, the most important of them is corn, which accounts for ca. 80% of global production (see Exhibit 11). 

Corn is planted in latitudes between 58°N and 40°S, and from sea level to 4 Km above it. Rainfall should be at least 20 cm, but can be as high as 500 cm, per annum, with moisture levels adequately high during July and August (in the northern hemisphere). It is always planted in spring and has a growth period between 110 and 140 days. Corn flourishes in warm – but not hot – and sunny weather conditions, with temperatures between 20-30°C. Sunlight is in fact an important requirement and one of the reasons why it is not widely grown in northern Europe.

Weather conditions are also important for corn’s protein content, and, together with soil characteristics, affect the amount of gliadin and determine the final use of the crop. A special type of corn with a genetic deficiency to convert sugars to starch is known to us as sweetcorn, while another variety with a very hard endosperm is the familiar popcorn. These varieties, however, hardly account for more than 1.5% of total corn production. In the United States – the world’s largest producer and exporter of corn – about 99% of all corn production is dent corn, which is named from the indentation in the top part of the corn kernel caused by shrinkage of the starch.

Approximately 40% of global corn production is generated in the United States, (see Exhibit 13). Of this, about 80% is produced in the “Corn Belt” (see first slide of Exhibit 15), where it is planted in May – but sometimes as early as March – and harvested in October. Corn is classified as yellow, white and mixed. Yellow dominates the markets for livestock feed and for wet milling into sweeteners, starches and other products for human consumption and industrial uses. White corn is more suitable for dry corn milling for the production of flour, hominy, grits and also industrial uses. Finally, mixed corn is mostly used for animal feedstuff.

The aforementioned concentration in production in the Corn Belt also means that if adverse weather hits that region, the international market in corn will almost certainly also be affected. Atkin[6] gives an illustrative example of the effect of a shortfall in US corn production:

“Consider the drought of 1988, which hit the mid-western states of the US very hard. As a result, US coarse grain production fell from 217 to 150 million tonnes whereas in the rest of the world, production increased only marginally from 588 to 590 million tonnes. Therefore, world production fell from 805 to 740 million tonnes, a fall of 8% in global production simply because of adverse weather conditions in one region of the United States.”

Soya beans

Soya beans are botanically classified as a legume, but they are commercially classified as oilseeds and their importance in the grains market is such that they are normally examined alongside other grains. Like in the case of corn, soybeans are extensively grown in the US, which produces between a quarter and a third of global output per annum. The world’s largest producer, however, is Brazil with well over a third of world output. Other important producers include Argentina and China (see Exhibit 17). 

Rice

Rice is a member of the grass family and its botanical name is oryza. Rice has been cultivated since the 3rd millennium BC, originally in China, and from there to India and the rest of South and East Asia. Although over 100 countries worldwide produce rice, Asia accounts for approximately 90% of the world’s production and consumption. Rice is an extremely important crop; it is a basic diet for over 50% of the world’s population.

Two species, oryza sativa and oryza glaberrima, have emerged as the most popular cultivated rice. Of these two, oryza sativa is primarily cultivated and is divided into two categories, Indica and Japonica, both of which include glutinous and non-glutinous varieties. A third category, Javanica, refers to the bulu and gundil varieties of Indonesia.

Indica rices are characterised by tall weak stems, long droopy leaves and their sensitivity to low temperature and photoperiod (day length). They produce longer slender grains that usually remain separate when cooked. This variety developed in the monsoon climates of south and south east Asia where the soils were relatively infertile, fields were unevenly flooded, and radiation from the sun was low due to cloud cover during the rainy season. Moreover, the temperatures were high at the time of planting, day length declined as the season progressed and the weed competition was intense. Indica grains are divided into long grain (greater than 6mm) and medium grain (5 to 6 mm).

Japonica is a temperate-type plant, tolerant to lower temperatures, with short leaves and stems. It is sensitive to photoperiod and, therefore, fares poorly in the short-day tropics. The variety developed in the moderate climate of China where the temperatures were lower at the time of seeding, rainfall more evenly distributed, and the solar radiation was higher as a result of less cloud cover and longer days in summer. Moreover, the weed control was better, water depth more uniform and soil more fertile.

Japonicas produce shorter (4 to 5 mm in length), rounder and more translucent grains with low amylose content that makes the grain cohesive or sticky when cooked. They are also different in terms of taste and smell. Japonica is widely grown in China, Japan and Korea. The Javanica race is characterised by tall plants with thick stems and broad leaves with long panicles and large bold grains.

With the exception of Antarctica, rice is grown in every continent. It thrives in a wide range of altitudes, from sea level to about 3 Km above sea level, and in varying climates, from tropical to temperate. Moreover, rice is grown on different soil types and on a range of ecological environments. Currently, rice is grown in approximately 100 countries. Rice production requires both copious amounts of water and extensive sunshine and high temperatures.

Rice can be cultivated either as a dry land crop or, as is more common, in water. The varieties of seed differ according to the method of growth. When grown as a dry-land crop, it is sown and harvested as any other cereal crop. Water cultivation is a slightly more complicated method and demands preparation of land contours and control of irrigation. Both methods have their advantages and disadvantages, although the yield is usually higher when rice is cultivated in water.

The different ecologies and environments in which rice is grown are classified thus: irrigated, rain-fed or lowland, upland and deep-water. In irrigated ecology, rice is grown in standing water impounded by bunds or levees (small mud walls). Rainfall supplements irrigation water. In rain-fed lowland ecology the rice fields are generally submerged, or flooded, and the water depth can be up to 100cm for a considerable period during the cropping season. 

The average life cycle of the rice plant is between 110 and 115 days although the duration from sowing to harvest can vary from 100 to 210 days. In temperate climates the average duration is 130 to 150 days. The development of the rice plant, which can be divided into three phases, namely vegetative, reproductive and ripening, is affected by temperature and day length.

The quality of the rice at the time of the harvest is an important factor in the milling yield. Milling yield is the percentage of the crop that results in marketable whole grain rice. The moisture content of rice at the time of harvest ranges between 15 and 25%, much too high for quality storage. If rice is allowed to dry out more prior to the harvest, excessive kernel damage may occur during the harvest operation. 

The harvested rice must, therefore, be dried and the moisture content brought down between 12-14% in order to prevent spoilage. Although combine harvesters are the most efficient way of harvesting dry-land rice, hand harvesting is extensively carried out in Asia, where irrigated rice is predominant, with a sickle or a small sharp knife. Like other cereals, the rice harvest contains both straw and grains and the grains must be separated from the straw. This process is called threshing. Threshing can be performed by treading with the foot, beating sheaves against a ladder inside a tub, or by using machine powered threshers. The husk and bran must also be cleaned off. This process, called winnowing, is performed by tossing rice in the air from a bamboo tray or sieve. The grain falls on the floor and the chaff is carried away by the wind.

Rice that has been properly dried can be stored for long periods without appreciably losing quality. The construction of bins is extremely important in order to exclude moisture, insects, and rodents. High volume fans are often installed to provide temperature equalisation between the outside and the inside of the bin This helps prevent moisture condensation on the grain and possible deterioration as a result of rapid changes in the weather.

Rice usually remains in storage until it is needed to fill milled rice orders. The milling process begins by removing the outer inedible protective layer called hull or husk from the rough (paddy) rice. Rice with the hulls removed is called brown rice. The thin, brown, outer layer of the rice kernel after the hull has been removed is called rice bran. The familiar white rice is obtained by removing the bran using a process called polishing. Parboiled rice is rice that has been partially cooked before it is milled, i.e. the rough rice has gone through a steam pressure process before it is milled. Unlike some of the other traditional crops grown in developed countries where one crop per year is usual, rice can often produce two crops a year.

Agricultural policies

Extensive legislation regarding agriculture is common in most countries around the world. Atkin (1995) traces this tendency back to antiquity, when kings built large warehouses to store surplus production in years of prosperity, in order to use it in years of poor crops.

The obvious reason that drives governments to intervention is their desire to secure vital supplies of food. The same goal, one might say, could be achieved by securing adequate imports from more efficient producers abroad. Agriculture, however, has traditionally been a sector looked at with sympathy, especially in developed countries with a high degree of urbanisation. It may also be the case that rural populations exert considerable lobbying power to central government; power which is sometimes disproportionate to the number of people represented.

The fact remains, however, that government intervention creates distortions in prices, income distribution between producers and consumers and between countries themselves. Almost all countries have their own agricultural policies, interventionist to a greater or lesser extent. Among these policies we can distinguish four main cases: European Union; United States; smaller export-oriented producers, like Argentina and Australia; and Asian countries, both developing and developed. We will take a brief look at all of them.

European Union

The blueprints for the European Common Agricultural Policy (CAP) were being discussed soon after the signing of the Treaty of Rome in 1956. One of the aims of the Treaty is to ensure the security of food supplies to country-members, and wheat is of course central to this aspiration. It was not until 1967, however, that CAP came into force, with the aim to boost domestic production through a series of preferential measures: it raises prices to domestic producers, which are passed on to consumers who end up paying for the policy; restricts imports; and forces consumers, once more, to pay for the budgetary cost of the policy, as well. The price control system introduced by CAP was also notorious for its complexity, with a long list of terms, indicating different degrees of intervention. 

CAP and its effects have been a textbook case for the teaching of the costs and benefits of tariffs and customs unions to students of economics, while numerous studies have been made in order to assess the cost of so much intervention. The discrepancies between results from different studies are considerable, but all of them indicate that CAP results in an overall loss on the Community’s GDP.

What is more, CAP eroded the position of non-EU producers. First, imports of grains from efficient producers were substituted by more expensive domestic production; second, expensive grain surpluses were dumped in the international markets, eroding market shares of other producers.

As was expected, CAP became a hotly debated issue between the EU and other grain producers, particularly the United States. The latter threatened countervailing measures many a time and repeatedly pressed for the issue of protectionism in agriculture to become central in WTO negotiations.

With mounting pressure from both outside and inside, the EU Commission started revising CAP from the 1990s onwards. In the post-war, pre-1990 years, CAP was focused on boosting the production of certain agricultural commodities in order to achieve self-sufficiency. In the post-1990 years, the focus has shifted to boosting farming income, improving product quality and maintaining environmental sustainability. As a result, a new single payment scheme was introduced in 2003, which pays subsidies to each farm, on the basis of farm land maintained in an arable condition which adheres to stipulated environmental standards. This replaces the previous scheme which relied on payments per unit of commodity produced. Further reforms have been implemented and since 2005, EU CAP’s financing has been streamlined to two funds. The European Agricultural Guarantee Fund (EAGF) finances direct payments to farmers and measures to respond to market disturbances, such as private or public storage and export refunds. The European Agricultural Fund for Rural Development (EAFRD) finances the rural development programmes of the member states.

It is still too early to judge the effects of the new CAP: on EU farmers (including those from the new member countries of EU-27), other developed agricultural producers (such as the United States and Canada), on developing economies which still largely rely on agriculture, on EU consumers and, on the EU budget. The fact remains, however, that a subsidy system does exist, albeit with an altered agenda.

United States

The agricultural sector in the USA is not that large as a percentage of GDP; it remains, however, substantial because of its sheer size and the impact it has on international markets for grains, particularly coarse grains.  Atkin, Michael (1995) correctly observes that:

“The importance of the US to the world grain market is evident in two ways in particular that are relevant to a discussion of policy. The country is the largest exporter of grain, and large exporters typically find themselves with special responsibilities, as the examples of Saudi Arabia in the oil market and Brazil in the coffee market attest. Leading exporters often find it is in their interest to act as swing suppliers or important stockholders, trying to ensure that prices do not fall too low. Secondly, world market prices for grain are established in the US, precisely because it is the key marginal supplier.”

Current federal agricultural policy has remained fairly stable since the 1930s, when it was formulated as a reaction to the problems of economic depression. It has a three-prong approach; provide price support, make target price deficiency payments, and run efficiently production-control programmes.

The USDA has a different – if not unique – way of supporting prices. Instead of direct subsidies, there is a scheme of farm loans, funded by the Commodity Credit Corporation (CCC). Farmers place grain under loan for less than one year, with the loan rate set as a dollar amount per unit of the commodity. If the local cash price rises enough to pay back the loan and cover the interest cost, the loan is likely repaid and the farmer redeems the grain for sale in the cash market. If it is not redeemed, the CCC takes title to the grain and waives the interest on the loan. Thus, the loan rate is effectively the minimum acceptable price guaranteed by the government.

In the case of target price deficiency payments, a target price above the loan rate is established for each commodity. If the market price fails to reach the target, the difference between the target and the five-month average market price (or between the target price and the loan rate, whichever is less) is paid directly from the Treasury to the farmer. Linked to such payments is the stipulation that the farmer take out of production a designated number of acres of cropland.

This is one way of controlling production; the other way is through a ‘payment-in-kind’ (PIK) programme, which was passed in 1983 by Congress. To participate in the PIK programme, farmers were required to comply with the acreage-diversion programme and to set aside an additional percentage of acreage specified by the government. In return for not growing a particular crop, the government paid farmers in kind with government-owned stocks of grain or released the farmers’ stocks, which were held under loan, back to them.

As far as export markets are concerned, the government has initiated several export-type programmes with the aim to “help US farmers increase their competitiveness abroad”.[7] Among these are Public Law 480, and the Export Enhancing Programme.

Public Law 480 – or PL480 for short – was part of the Agricultural Trade Development and Assistance Act passed in 1954 just after the Korean War, and – although initiated as a short-term programme to help move growing surpluses of grain to foreign markets – has turned into a successful long-term programme in boosting US grain exports. PL480 provides for several types of possible government-to-government transactions, like barter, food aid shipments, and financing by long- or short-term US government loans.

A more recent feature of US agricultural policy is its export enhancing programme (EEP), which was passed as part of the 1985 Farm Bill. Under the EEP, the private sector is responsible for organising and implementing the entire trading transaction; when the details of the transactions are finalised, the prospective exporter can submit a bid to the USDA requesting a subsidy. The USDA makes a decision about the validity of the bid after reviewing other similar bids for exports to the same country to attest their competitiveness. The subsidy – or ‘bonus’ – is paid to the US exporter and covers the cost difference between the price of grain paid in the United States versus a significantly lower price the exporter must sell grain for in other countries to be cost competitive.

Argentina - Australia

Argentina and Australia have quite distinct approaches to agriculture, but they are similar in that they are both smaller but quite efficient producers, with a substantial part of their production destined for the export market.

In the market for grains, Argentina is frequently known as a cheap source of supply. Although this may not be always true, it is certain that Argentina is one of the most competitive producers in the world market. In fact, opposite to most countries, Argentina effectively penalises its agricultural sector by levying export taxes, restricting exports and under-pricing the products in the domestic market for the benefit of urban populations.[8]

In Australia the agriculture sector has lost the position it held in the 1950s as the country’s top export income earner. Manufacturing and minerals have since become much more important elements of the country’s exports, but export business is still key for the agricultural sector.

Australia suffers from notorious volatility in agricultural production and income. The federal government’s policy has been, therefore, to reduce this volatility through intervention.[9] For this purpose the Australian Wheat Board (AWB) was set up with the aim to co-ordinate production and exports. The Board was authorised to make ‘advance payments’ to farmers for their production and do its best to market their products in the export markets. This means that AWB is also heavily involved in the handling, storage and transportation of grains from farm gate to export terminals. An interesting aspect of AWB is the change it has gone through in the last 20 years. Although it began as a government body, in 1999 it was privatised, with the ownership taken over by Australian farmers. In 2010, AWB was acquired by Agrium[10] and in 2011 ownership passed on to Cargill.[11]

Asia

There is a wide range of policies across different countries in Asia, in particular east, southeast and south Asia. The main theme of all policies, however, is the aim to achieve self-sufficiency in rice. To achieve this, most countries employ a series of import-restricting measures, notably tariffs and quotas, and several incentive schemes to boost local production of grains. 

Southeast and south Asian countries feature as some of the heaviest importers of grains in the world. Particularly, China and Japan are among the largest importers of both wheat and coarse grains. In China, the government initiated a number of reforms in 1978, which had far-reaching effects in agriculture; yields in rice production improved with the use of high yield varieties and extensive irrigation, and so did yields in other grains like wheat. Since the meteoric rise of the country’s economy and the associated increase in average income, consumers have developed a taste for more wheat and meat in their diet, which is generating additional demand for imports of wheat (for direct human consumption) as well as coarse grains and soybeans (for animal feedstuff for meat production). 

Japan is a mature economy, and the Japanese have acquired a taste for wheat and meat products, but still resist fiercely the calls from the US to mediate their overly protective policies. These policies were initially formulated in the 1950s, in the aftermath of the Second World War and were understandably protective as the country was trying to reconstruct its economy. Progressively, policies became less restrictive, but the oil crisis in 1973 shook the Japanese administration, which felt threatened because of its dependence on other countries for both its food and its industrial raw materials and resumed its protective policies forthwith. The remaining countries of the Pacific Asia region have similar policies promoting self-sufficiency.

And finally...

At the time of writing the first edition of this book, agriculture was one of no less than forty items on the agenda of the Doha[12] Round of WTO negotiations. The agricultural mandate included topics such as “improving market access, eliminating export subsidies, reducing distorting domestic support, sorting out a range of developing country issues, and dealing with non-trade concerns such as food security and rural development” (WTO 2014). At the time of writing the current edition of this book, the Doha Round is still on-going and so are the negotiations on the agricultural agenda.

Demand for grains

As discussed earlier, grains are used both for direct consumption by humans and indirectly, as livestock feeds. A proportion of production is also reserved for industrial uses, some of which we will examine. The share of grains used for food, as opposed to that used for feeds, depends very much on consumer tastes and differ from country to country. As a rule of thumb, one would expect nations with lower income per capita to rely more on grains for direct human consumption, which are relatively cheaper; on the other hand, nations with more disposable income per capita can afford to switch to more expensive foods like meat and dairy products, implying a more extensive use of grains for livestock feeds.

Wheat

The prime use of wheat is for the production of bread and other bakery products. Flour mills are the main purchasers of wheat, in order to produce a large variety of flours for general and speciality uses.

Wheat has been ground into flour since early human history. The millstone is probably the most well-known tool to turn wheat into flour, and it is still in use in less developed parts of the world. The first improvement in milling technology was made when the millstones were set further apart in order to gradually reduce the wheat grain to its constituents: the endosperm and the bran.

The varieties of wheat, discussed above, are extremely important because they determine the type and uses of the final product, wheat flour. Hard wheat – like hard red winter wheat grown in Kansas, or hard red spring from North Dakota – is used to produce high-grade flour, which is in turn used in bread making.

Soft wheat flours, on the other hand, are low in protein and gluten and lack the raising property necessary for bread making; they are used instead for bakery goods with a tender, flaky or crispy texture, such as cakes, cookies, crackers or pastry. White wheat flour is the most typical example.

All-purpose flour is another type, which is made from a blend of hard and soft wheats and is not normally standardised. This is usually unsuitable for large bakeries, which require strictly controlled quality standards, but is quite acceptable for home baking.

The final category is durum wheat, the hardest of all wheats. This is milled differently than other wheats, resulting into a coarse golden amber product, known as semolina. This is then mixed with water into a dough that is used to produce pasta in different shapes. Mixed with a proportion of egg solids or yolk, the same dough is used to produce egg pasta and noodles.

Wheat is a staple part of the diet in all developed countries, and a desirable commodity to which many developing countries switch as their income increases. One would expect that income elasticities for wheat would be low – even negative in some cases – in high-income countries. Those in middle-income countries should be somewhat higher, as consumers slowly turn from wheat to meat and dairy products. 

Coarse grains

Coarse grains are primarily used for animal feed, although certain countries rely on them for direct human consumption. Parts of Africa, for example, use millet extensively, while corn is consumed heavily in Latin America. Because coarse grains are used heavily as an input in the production of meat and dairy goods, they are likely to be more affected by consumer income than by increases in population. This follows on from the fact that demand for meat products is more income-elastic, and so consequently will be the demand for their production inputs. In reality, such generalisations are not always discernible from hard facts and this is because non-feed uses of coarse grains complicate the study of demand patterns.

There are two main milling processes for corn; the wet and the dry. In wet milling, the corn – after a first cleaning stage – is steeped or soaked in a solution of warm water and sulphur dioxide to retard undesirable fermentation and to aid in the extraction of soluble materials from the corn. 

The solution goes through several stages, whereby the constituents of corn kernels are separated to produce oil, gluten feed, gluten meal and starch. These are then used in a multitude of applications, both edible and industrial.

Dry corn milling is similar to wheat milling, but the main difference is that while in wheat milling we are interested in extracting as much flour as possible, in corn milling we are more interested in the intermediate products, such as crude oil, germ cake, brewers’ grits and hominy feed. Flaking grits are sold to cornflake manufacturers, while the final and finest product of dry milling is corn flour. 

The world’s biggest consumers of corn are the US and China, followed at some distance by the EU (see Exhibit 25).

Oats

Oats are used mainly for cattle feed, but are also popular for human consumption, especially in regions with wet and cool conditions that favour their production. The most well-known use of oats for human consumption is hot oatmeal porridge, but it is also used in multi-grain breakfast cereals and in many baked goods.

Barley

Like oats, barley is primarily used for animal feedstuff. The most well-known secondary use is in the brewing and distilling industries. The brewing industry uses barley malt, a product obtained by germinating moistened barley under controlled conditions. Malt is then mixed with water and heated under controlled conditions (mashing). After mashing, the liquid portion (wort) is separated from unconverted malt and yeast is added to initiate fermentation that turns the mixture into beer. Finally, hops are added to the wort for flavour.

Soya beans

Soya beans are among the oldest cultivated crops in the world. They became popular in the United States after the 1920s and the country now has a position in the soybean market almost as dominant as that in the corn market. In more recent years this dominance has been eroded by the ascent of Brazil, who is currently the world’s largest soya bean producer.

Soya beans are used in their original form and are also processed into two main subordinate products; soya oil and soya meal. Soya meal is a prime feedstuff for cattle, pigs and poultry.  Soya flour, a product similar to meal, is used in the food, cosmetics, pharmaceutical and chemical industries. Soya oil is a rich source of lecithin and is used in foods and medical goods, but also has a variety of technical uses in other areas. In fact, soya bean products are found practically everywhere. Edible uses of soya oil include coffee creamers, cooking oils, margarine, mayonnaise, salad dressings, chocolate coatings, and pharmaceuticals. Technical uses include: antifoam agent in alcohol and yeast; anti-spattering agent in margarine; dispersing agent in paint, ink, insecticides and rubber; epoxies; fungicides; plasticisers, vinyl plastics; waterproof cement; putty; antistatic agents; anticorrosion agents; and many more. In addition, soya oil can be one of the feedstock oils used for the production of biofuels.

Rice

Rice is divided into short-, medium- and long-grain varieties. Long-grain rice has a long slender kernel that is four times longer than it is wide. When cooked, the grains are separate, light and fluffy. Medium-grain rice is two to three time longer than it is wide. The cooked grains tend to be moist, tender and slightly clingy. The short-grain rice kernel is almost round and the grains cling together when cooked.

Rice is mostly used for human consumption. It is the staple food for almost two thirds of the world’s population. Very little rice is used as animal feed. Rice is a complex carbohydrate and rice protein is one of the highest quality proteins, containing all of the eight essential amino acids. Rice has no fat, no cholesterol and no sodium. Rice has to be cooked before the human body can absorb the starch, which is the major component of milled rice. Rice bran is a good source of thiamine, niacin, phosphorus, iron, potassium, magnesium, vitamin B-6 and fibre and is used as an ingredient in cereals and mixes and vitamin concentrates. It is also used to feed livestock. Rice bran can also be refined to produce a fine, clear oil which is low in fatty acids and is good for cooking and for protecting machinery from rust.

Rice flour is used to thicken sweets and sauces. Being non-allergenic, it can replace wheat flour in diets of people who are allergic to gluten and wheat flour products. Rice flours are used to make pasta, chips, cakes and other snacks as well as breakfast cereals. Rice husks are used as fuel in rural areas and as insulation. They are also used for making lightweight bricks and as packing material. Broken rice is used to make liquors such as sake and arrack. Rice is also used to make beer.

The main factors that affect the growth in demand for staple grains are: (1) per capita income; (2) the growth rate of population; and (3) the change in prices relative to substitute crops. Rice is considered a luxury at low income levels, when meeting the energy needs is a major concern. As incomes increase, people tend to substitute low cost sources of energy such as coarse grains, cassava and sweet potato for rice. However, at high levels of income rice becomes an inferior good. As incomes rise further, people consume diversified diets and prefer higher cost and quality foods such as vegetables, fish, bread and meat, which contain more protein and vitamins. Moreover, the changes in food habits and the practice of eating outside which have come about as a result of urbanisation, which itself is a consequence of economic growth, lead to further reduction in the per capita rice consumption. Japan, S. Korea and Taiwan are economies that have already passed these phases and have experienced a decline in the per capita rice consumption.

Trade in grains

Grains are one of the five major bulk commodities traded internationally today, but the history of trade in grains goes back to the beginning of civilisation, when grains were among the first commodities to be traded between local communities. With the advent and expansion of agriculture in the Fertile Crescent in Mesopotamia, the first surpluses of grains were exchanged for ‘industrial’ goods, such as pottery. Apart from such limited exchanges between communities, there did not seem to be any sizeable movement of grains, except perhaps for cases of famine due to severe crop failures.

Ancient Greeks in Athens built their external policies around the need of securing regular shipments of grains from the Black Sea. They saw the development of a strong naval base as the key to controlling and protecting the grain route from the Crimea, through the Hellespont across the Aegean to Piraeus. Even more pressing a problem was the import of grains in ancient Rome. The task of providing grains to Roman citizens was one of the greatest responsibilities of the central administration. Imports of grains were sourced from several regions around the Mediterranean, with Egypt as the principal supplier.

During the eras of Italian, German and Dutch domination of world trade in the early modern period, grains were never a much-favoured cargo, due to their low value compared to their volume. Instead, high value/low volume goods (such as spices and silk) were sought after, which would be sold at premium prices to the moneyed classes. Grain trade became important again after the repeal of Britain’s Corn Laws in 1846. The surge in British imports made the transport of large – for the time – shipments of grains justifiable. Initially imports originated from Odessa, across the Mediterranean, and from the Baltic ports across the North Sea. Later on, changed political and economic conditions both in Britain and the United States favoured imports from California and the Great Plains, across the Atlantic, to Liverpool.

In the modern era the political economy of international grain trade circles around three notorious sources of turmoil: the dispute between US and EU over the latter’s Common Agricultural Policy; an equally long-standing dispute between the US and Japan; and the ‘special’ relation between the US and Russia after the 1970s.

Probably the most complicated source of conflict was the dispute between the US and the EU, which nearly cost the successful completion of the Uruguay Round of GATT negotiations.[13] Since the initiation of CAP in 1967, the US has been squeezed out of a very important market, and in addition they had to compete with substantial amounts of expensive surplus grains dumped in the international market by EU countries. 

The dispute between the US and Japan over rice is still at the negotiating table, with the former asking the latter to lift some of the very considerable import restrictions as a goodwill gesture towards an American administration that is increasingly tempted to take countervailing measures.

The relation between Russia and US was initiated in the 1970s, when the then Soviet administration decided to stop passing the shortfalls in grains production – especially wheat – directly to the consumers. Starting with the ‘Great Grain Robbery’ in the early 1970s, the FSU has been in the past a regular importer of US grains, going through several peaks and troughs, due to bad Soviet crops, lack of hard currency for imports, and a failed attempt by the Americans to impose a food embargo on the Soviets because of the latter’s invasion of Afghanistan in 1979.

Finally, a small portion of international trade flows of grain are in the framework of the World Food Programme and other food aid programmes, administered primarily by the International Grains Council.[14]

Wheat and coarse grains

On a regional basis, Africa (north and sub-Saharan) emerges as the largest importer of wheat (see Exhibit 29), whereas East Asia is the largest importing region for coarse grains (see Exhibit 31), each commanding just under 30% of the respective markets. The most important wheat importers are North Africa, the Middle East, Southeast Asia and Sub-Saharan Africa (see Exhibit 30).  In East Asia, Japan, China and South Korea ere the most prominent coarse grain importers (see Exhibit 32). All three countries have built their agricultural policies around the goal of self-sufficiency in rice. However, as the economies of these countries mature, their consumers have acquired a taste for wheat and meat products, necessitating imports of both wheat and coarse grains.

The rest of southeast and south Asian countries base their diets on rice, with an increasing taste for wheat in emerging economies experiencing high growth rates in their economies. The Middle East, on the other hand, has traditionally been a deficit area, necessitating grain imports to satisfy most of their consumption requirements.

Africa is a net importer of grains, with several less developed countries receiving most of their grain as part of the World Food Programme. The only exception is South Africa, which is a minor exporter of grain, particularly to Western Europe. Some African countries feature in the list top importers for both wheat and coarse grains. Notably, Egypt was the world’s second largest importer of wheat in 2023/24, with Algeria and Morocco also in the list of top ten importers for the same commodity.

The former Soviet Union was a very important, and volatile, importer of grains, particularly wheat. Before the 1970s the policy of the central government was to pass any shortfalls in production directly to the consumers, in the form of rationing or long queues for bread and meat products. After the 1970s, when fears of a potential civil unrest on account of the discontent with the food situation increased, the Soviet administration decided to top up the country’s needs with imports. The obvious supplier was North America, and a ‘special’ relation was initiated between the US and USSR, which was frequently forgotten by the general public, due to the more visible political antagonism between them. Even when the US administration decided to impose an embargo on grain exports to USSR as a reaction to the latter’s invasion of Afghanistan, the restriction was only on excess imports; the baseline agreement remained intact. After the collapse of the Soviet Union the picture is much changed. Nowadays, Russia features at the top of the list of wheat exporters, with over fifty million tonnes leaving the country in 2023/24. The other important wheat exporter is Ukraine, which has traditionally produced a substantial part of the FSU’s grains. Currently it is the world’s fifth largest wheat exporter and the fourth largest coarse grain exporter, with most of its exports accounted for by corn and barley.

The development of EU’s role in international grain trade can be seen through the development of the Common Agricultural Policy, discussed earlier. The main result is that the Union has not only become self-sufficient in grains but has turned into the world’s second biggest wheat exporter and a modest exporter of coarse grains, particularly barley. At the same time, some grain imports are also made, but these can be attributed to the fact that they have to satisfy certain tastes. For example, Italy imports most of its durum wheat for its pasta industry, because European wheat varieties are normally soft.

Continuing with exporters, FSU dominates the scene, especially Russia in the market for wheat, where it is at the top of the list (see Exhibit 34), but also Ukraine for both wheat and coarse grains (see Exhibits 34 and 36). United States, Canada, Argentina and Australia are other important wheat exporters. In coarse grains, the United States tops the list of exporters, but South America is the largest exporting region overall, with Brazil and Argentina in second and third position, respectively.

Rice

Although the world production of rice is over 500 million metric tonnes, only a relatively small proportion of this, ca. 10%, enters world trade. This is mainly because China and India, the two largest producers of rice, in an average year need to keep almost all the rice they can produce to feed their own population. Moreover, it is difficult to point to a regular pattern of trade. For instance, it is not possible to say that most rice moves from developing to developed nations (or the reverse, as is the case for wheat). In fact, most trade takes place between developing countries, reflecting the vagaries of monsoon and natural and man-made disasters and their effects on rice production. As can be seen from Exhibit 37, about three quarters of exports originate in South and Southeast Asia. Conversely, the major importing regions are sub-Saharan Africa, Middle East and East and Southeast Asia (see Exhibit 39).

World rice trade is affected by a variety of factors. Production, obviously, is one of the most important factors. Climate affects production, which in turn influences world trade. The amount of rainfall during the main growing season, for instance, is critical in determining the rice supply. Similarly, the use of fertilisers affects production. Other factors that influence world rice trade include prices of substitutes, income growth, currency values and foreign exchange reserves. Long grain (indica) and aromatic types, such as jasmine and basmati, account for almost 90% of total trade, with the remaining being mainly medium grain (japonica) rice. While India, Vietnam, Thailand and Pakistan are the major exporting countries (see Exhibit 38), Philippines, Nigeria, EU and China are the top four importers, while Vietnam also appears as an importer (see Exhibit 40).

A large proportion of the rice that is traded internationally is fully milled and bagged. A few countries, like the USA, also export their paddy rice. Although 50kg or 100lb bags are a common size, the packing requirements in rice contracts can vary from a shipload full of bulk (loose) rice to 1kg retail boxes.

Some other important factors that need to be considered when trading rice are the moisture content, chalkiness, proportion of brokens and the grain type (long, medium or short). Rice can be traded as paddy, cargo rice, white rice, broken rice, rice dust, rice meal, or rice bran. Rice can be shipped either in bags[15] or as bulk cargo. Because rice is susceptible to damage by strong odours, it should not be stowed together with scented and odiferous cargo. If damp or wetted in stowage, rice rots very quickly, generates heat and emits stench, all of which affect other rice in proximity. Bagged rice cargoes need to be ventilated in order to prevent condensation and should be dunnaged as normal bagged cargoes. When shipped in bulk, ships hold must be prepared as for grain cargo and loaded in compliance with grain rules. Rice bran is often infested and should therefore be stowed away from goods likely to be contaminated by insect infestation. 

Soya beans

As discussed earlier in this chapter, soya beans and its products (meal and oil) are important substitutes for most grains, particularly coarse ones. Soya beans are extensively traded internationally: ca. 45% of the world’s production is exported, about 185 million tonnes in 2025/26. In fact, soya, coarse grains and wheat provide a substantial part of employment for small and medium sized dry bulk carriers (Handysize, Supramax and Panamax class vessels).

The three top soya bean producers also dominate world exports. Brazil and the United States exported ca. 145 million tonnes in 2025/26, i.e. ca. 85% of the world exports (see Exhibits 41 and 42).

In terms of imports, China is dominant absorbing ca. 60% of world imports, with the EU following suit with 8% of the total (see Exhibits 43 and 44).

There is also a vibrant trade in the other two products of the soya complex, meal and oil. South America generates three quarters of global exports, led by Argentina and Brazil (see Exhibits 45 and 46).

Imports are led by EU ad Southeast Asia. Most of the trade is in meal, although India is the main importer of oil (see Exhibits 47 and 48).

Pricing

As with other commodities, price determination is a most interesting aspect of the marketing of grains. Price determination has repeatedly attracted the interest of extensive research. Some of the factors that affect prices and are source of price differences among different grains are:

• Qualitative differentiation

• Spatial differentiation

• Seasonality (temporal differentiation)

• Cyclicality

• Trends

• Irregular factors

Irregular factors, like weather conditions and wars, are often blamed for the large volatility of grain prices. True this as it may be in some cases, it is often the demand and supply characteristics of a particular commodity that create its price volatility. An example of this is given in the Exhibit 49, where the prices of major grains are shown over the last 10 years. More details on volatility can be seen in the subsequent chapter on agricultural derivative markets.

Another source of price differentiation is the location of the supply and demand markets for the commodities.  This is commonly known as spatial price differentiation and the most important single variable used to build spatial equilibrium models is transfer costs.  Seaborne transport is a source of such costs, for example.

Seasonal patterns are observed in all major grains. Take US winter wheat for instance; in an average year prices are typically lowest during the harvest months of June and July when supplies are largest relative to demand. As the flow of newly harvested wheat into market channels tapers off and exports pick up, prices often move higher through the September-November period. Toward the end of the year, the approach of the southern hemisphere harvest tends to restrict foreign buying interest, and US prices generally reach a plateau by January or February. As soon as significant amounts of southern hemisphere wheat become available, foreign buying interest shifts away from US wheat. Prices then may trend lower through April or May, after which the US harvest gets under way and the cycle begins again.

In the case of corn, whose production and trade the US dominates, prices are normally lowest following harvest, usually between October and January. Prices often remain under pressure until April or May when planting gets underway, and then move steadily higher through the July-August pollination period. At that point, final crop size has been established, so prices usually turn lower until harvest, when the cycle begins again.

In a similar manner, soya bean prices are usually at their lowest between November and January when supplies are largest relative to demand. As the market absorbs these large supplies – if the harvest is good, of course – and both domestic use and exports pick up, prices often move higher through the May-June planting period. Once the crop is planted, prices usually begin trending lower, and, as long as growing conditions remain favourable, the downtrend often continues until sometime after harvest. At that point, the market typically bottoms out and the cycle begins again.

This sequence is generally regarded as the normal course of events. But unexpected weather developments, either favourable or unfavourable, can quickly alter this pattern and cause wide price swings. The direction of those price swings depends to a large degree on expectations: what actually happens compared to what the market expects will happen.

For example, if the market is expecting a drought, a period of rain and cooler temperatures could send prices lower as crop prospects improve. On the other hand, suppose a blast of bitter cold temperatures and high winds increase the possibility of an early killing frost. This might cause prices to rise as growing conditions become worse than expected.

Cyclicality is another characteristic of agricultural commodity prices.  One of the models used to provide explanation of cyclical components in prices through time is the so-called ‘Cobweb model’, which was first analysed by Ezekiel (1938). Put simply, the cobweb model views prices and quantities as being linked recursively in a causal chain (see Exhibit 49). A high price leads to large production; the large production results in low prices; low prices result in smaller production; this, combined with high demand leads again to high prices and so forth.  The model is based on three main assumptions:

Marketing of grains in physical markets

Producers and consumers of grains eventually meet in the marketplace where pricing takes place and transactions are completed. This marketplace need not be one specific location; it can be at the farmgate, at the elevator (silo), at the point of export, or even on the floor of an organised exchange. In fact, the Chicago Board of Trade (CBOT), the world’s most renown and liquid exchange in agricultural commodities, started its life in the second half of the 19th century as a meeting place for grain merchants and farmers who came in town with their harvested crops.

Marketing grains is a fairly simple operation – or at least it seems so in organised markets like the US and the EU – since it only moves from the farmer to the processor and from there to the final consumer. It is notable, however, how the marketing system has failed in many developing countries, resulting in losses of valuable commodity which ends up rotting in the open or in inadequate storage facilities.[16]

Grain marketing differs substantially from country to country in terms of the degree of involvement of the public and private sector in it. To get a better idea of the different types of the organisation of the whole operation, we will discuss the marketing chains in the United States (rather more extensively) and in Canada.

United States

As discussed earlier, the US is the world’s most important grain producer and exporter, with a substantial share of the international wheat market, and a dominant position in the coarse grains market. The marketing chain consists of three phases: from farms to country elevators; from elevators to processing plants; and from elevators to the export markets.

Strict control of grain quality is essential not only for trade in the cash market, but also for the futures market. The quality of all grains entering the marketing chains are strictly scrutinised by the USDA, which establishes specific classes and subclasses of grains (see Exhibit 50), which are further categorised into grades, ranging from No. 1 to No. 5 (see Exhibit 51 for wheat and corn), under the Grain Standards Act.

The most important quality factors used for grain grading are:

• Test weight per bushel

• Percentage of damaged kernels, including broken kernels

• Foreign material, which may include broken kernels

• Other conditions, such as rot, sourness, mustiness, commercially objectionable foreign odour (COFO), and the presence of stones, insects, or unknown substances

Apart from the factors mentioned above, moisture is also of concern. It does not affect grain quality directly but makes its long-term storage problematic. This is the reason why grains need to be dried and are usually dried before leaving the farm.

The first and most important stage is the transfer from farm to country elevator. The elevator – or silo, in Europe – is the point of receiving, grading, pricing, drying, storage and shipping of grains. Elevators are located in the countryside and at export terminals and vary in size from 50,000 bushels to several million bushels. The closer we move to the export points the bigger the elevators become. Elevators are owned by independent owners who operate them for a profit, by farmers themselves or their co-operatives, and by subsidiaries of grain merchants or grain processors.

The previous process is described as the on-truck or to-arrive method and is essentially the spot market for the commodity. This implies that any further price risk, until the commodity reaches the final user, is undertaken by the grain merchant. Another way of doing business on the spot market is the consignment method, whereby the farmer consigns the grain to a merchant to a terminal market, but the merchant does not take ownership of the commodity; s/he merely tries to get the best possible price for the producer, effectively acting as a broker, while the price risk stays with the farmer.

While both methods are prevalent during harvest time when the crop is in hand, it is during periods of uncertainty about the crop level that both the farmer and the merchant want to establish some degree of certainty regarding prices. One common tool to achieve this is the cash forward contract, which allows the elevator operator and the farmer to lock in a price before actual delivery.

Exactly the opposite – i.e. pricing grain after actual delivery – is achieved with delayed pricing and basis contracts. Delayed pricing is a cash market alternative that allows the producer to deliver grain to the country elevator and price it at a later time. The time of pricing is negotiable between the farmer and the elevator manager. With a basis contract, the producer and the elevator operator lock in a basis that is over or under a specific futures contract. With the basis being fixed in advance, the cash price fluctuates with the futures price on CBOT.

Most of the methods discussed up to now make up the list of pricing options available to farmers in their transactions with elevator operators. Once the elevator operator, however, takes delivery of the commodity, s/he also assumes a considerable price risk. Unless the operator is fortunate enough to complete a back-to-back sale,[17] he will have to hedge his price risk exposure with futures and options contracts.

Another important feature of grain marketing in the US is the availability of a highly developed inland transportation network, including road, rail and barge haulage. Highways and waterways are publicly funded, and their networks are extensive and advanced, while barges are heavily used along the Mississippi and Missouri rivers. More specifically, the interstate highway programme began in 1956 and since then it has increased the maximum weight limits on the interstate highway system, contributing to greater earnings per load for the trucking industry. In addition, the 1980 Motor Carrier Act deregulated pricing, boosting competitiveness in freight rates; similar changes were brought to the railroad sector with the introduction of the 1980 Staggers Act.

There is also substantial intermodal[18] and intra-modal[19] competition in transportation, which promotes competitive pricing of the services rendered. From the Eastern Corn Belt, grains are shipped, mainly by rail, to East Coast and Gulf Coast ports for export purposes. Western Corn Belt cargoes use both rail and barge to reach US Gulf ports for exports. Railroad as well as barges along the Missouri are used to carry crops from the Great Plains to Gulf ports. Finally, shipments from the Upper Great Plains are directed to Pacific Northwest ports for exports to the Far East.

Canada

Canada has set up a quasi-governmental organisation, the Canadian Wheat Board (CWB), which participates in every aspect of grain production, handling, transportation and export. The Board has extensive control over every stage from production, to transportation and exports. It is charged with the responsibility to market as much grain as possible at the best possible price and, in doing so, it has the authority to use private companies as contractors.

To achieve this goal the CWB posts an initial price for the grain it will accept before the beginning of the crop year, which is guaranteed to the farmers, and is effectively a floor to the market. At the end of the season, when all the delivered grain has been sold, the Board makes an additional payment to farmers if the total realised returns from the crop are greater than those implied by the initial payment; if the returns are not high enough, the state pays up for the difference.

Finally, the Board also has the authority to enter government-to-government transactions and arrange official credit for up to three years. Another responsibility for CWB is the planning and handling of shipment schedules of grain consignments, in conjunction with the railroads and inland waterway carriers. The Board also takes an active role in ensuring that all producers have equal access to markets, from silos to points of domestic consumption and to export terminals.

Purchase procedure

Irrespective of origin, we can find some common elements in the way wheat and coarse grains are traded internationally. The purchase of wheat in the international market primarily takes place in one of the three ways:

1. Public tender

2. Private tender

3. Spot market

The public tender approach is commonly used by government agencies and their delegated semi-official representatives. The buyer issues a tender notice explicitly outlining the specifications and the terms and conditions of the intended purchase. The wheat class, grade, other quality aspects, volume, date of purchase, delivery period, terms of delivery, port of loading and discharge and the method of payment are some of the details included in the tender. The exporters submit their bids (price offers) on a specified day. On the basis of the offers, the buyer chooses the most favourable supplier. Japan, Taiwan, Philippines, Egypt, Tunisia, and Algeria are amongst importers who use public tendering.

The private tender usually involves the buyer privately contacting wheat exporters and requesting them to make firm offers based on the buyer’s specifications. Exporters send in their bids in writing. The buyer then selects the most appropriate/lowest bidder. There may, however, be further negotiations with this potential supplier after which the tender is awarded. Private tendering is usually done when the buyers and suppliers are familiar with each. This method of purchase is commonly used by privately owned mills in Eastern Europe. The wheat purchases in China, former Soviet Union, most of Latin America and Southeast Asia are also undertaken using private tendering. Private tendering is by far the most commonly used form of import negotiation.

In the spot market, also called the open market, exporters offer wheat for sale based on its physical position and pre-determined quality. The Rotterdam market, together with some of the other European ports, is a spot market where exporters offer wheat for immediate and future delivery depending upon its position in Rotterdam. The open market is frequently used by small mills and their brokers in Western Europe to procure their wheat requirements.

Irrespective of the method that the buyer uses to procure its wheat requirements, the following information is needed by the seller/exporter in order to make an offer.

1. Quality: the type of wheat required by the buyer depends on the planned end use. Class, grade, moisture content, protein content, dockage content etc. are some of the quality factors that the buyer will need to specify.

2. Quantity: including the permitted tolerance.

3. Delivery: date and basis (FOB, CFR, CIF etc.), name of loading and discharge ports, any special discharge conditions, berthing charges, demurrage and rate of discharge etc.

4. Payment terms: letter of credit, cash against documents, etc.

5. Vessel size, load rate guarantee.

6. Other special requirements

While the import of wheat is primarily undertaken either by private flour mills and their agents or by official government food and supply agencies and their delegated semi-official representatives, the exporters range from:

• Large, vertically integrated, privately owned multinational companies with offices and/or representatives in importing countries

• Smaller private companies who may not own or operate grain handling (e.g. silos) and transport facilities (e.g. vessels, barges) on their own. These companies do however maintain a network of agents in importing countries.

• Grower owned co-operatives or co-operatively owned firms.

• Statutory authorities.

Grain traders

Up to now we have referred to farmers, processors, consumers, governments and quasi-governmental organisations, which are all directly involved in the grain trade. The last, but by no means least, important player in the international grain markets are the trading houses. Commonly known as ‘grain houses’ they do not restrict their activities to grain, but have diversified in other commodities, both agricultural and non-agricultural.

In the market they are commonly known as the ‘ABCD’ group, which includes Archers Daniels Midland (ADM), Bunge, Cargill and Dreyfus (Louis Dreyfus Commodities).  Glencore is also listed alongside the other four, but these days the company is mostly known for its trading activities in metals and oil products.

What has excited the imagination of many students of the grain markets, and attracted criticisms from many government officials, is the sheer size of these companies. It has been frequently argued that size is crucial for such companies because they rely on economies of scale and information to be able to take advantage of the relatively small margins of the grain trading business.

The origins of most of these companies can be traced in the second half of the 19th century, when grain trade regulation was in its infancy. Most of these companies were originally involved in the storage and/or transportation of agricultural commodities. Cargill started with a family-owned elevator in Conover, Iowa and increased its strength in transportation, storage and finance to become the largest member of the grain establishment.[20] Louis Dreyfus Corporation, although privately owned and still under the control of the Louis-Dreyfus family, is also a co-operative under French law.  It owns 49% of the shares of UFC (Union Française des Céréales), better known as ‘La Coopérative Lafayette’. UFC sells grain exclusively for itself and Dreyfus both within the European Community and to third markets.  Bunge was originally a Dutch and then a Belgian company.  Later, Ernesto Bunge and his brother-in-law Jorge Born extended their operations in Argentina to exploit the opportunities created in the growing Latin American market.  Eventually, the company’s HQ moved to the United States.

In more recent years, a group of new contenders emerged in the business of trading agricultural commodities. The so-called ‘NOW’ group consists of Noble Group, Olam and Wilmar. These are relatively younger companies and all of them are now headquartered in Singapore but have operations around the world. All three have a strong base in agricultural commodities, particularly soft commodities and oilseeds. Increasingly, they are involved in the grain business, as they are located in the region which generates most of the world’s import demand for this commodity group. In March 2016, Noble Agri was fully acquired by COFCO, China’s largest food and agriculture company, and the NOW grouped can rightly be renamed COW.

Alongside the previous companies, there is a number of very sizeable trading houses, mostly Japanese “sogo sosha”, who have a long-standing interest in the procurement of grains for the Japanese market. Such companies include Mitsui, Mitsubishi, Marubeni, ITOCHU, Nissho Iwai, Sumitomo and Zen-Noh (the latter being a large confederation of co-operatives). All of them were late entrants in the league. Mitsui, for example, took over the bankrupt Cook Industries in 1978, with a view to gain a foothold in the US market and secure grain exports to Japan. Before the takeover, Cook Industries was the fourth largest trading firm in the world.  Originally it was a conservatively managed cotton-trading house that dated back to 1919. In 1963 the company moved away from cotton and into soya beans and rose rapidly to become the newest member of the Big League. An exceptionally badly calculated bet on the soybean market, however, brought the company to its knees. The new owner, Mitsui, has recently shown tendencies to become more international, despite its obvious commitment to the Japanese market.

The intermediary role played by grain houses involves the undertaking of a number of risks, one or more at a time. Imagine a flour mill in Japan who needs to import a consignment of wheat. For this purpose, the importer contacts a grain trader, who is prepared to offer the required quantity at a specific price and for a specified delivery date. Once the contract is signed, the trader has a number of risk exposures. The first is the risk implied by the volatility of the commodity price. If the wheat is purchased in the United States and the importer is prepared to pay in dollars, the trader does not have to worry about foreign exchange risk. If we assume, however, that the commodity is purchased in Australia in the local currency and sold to the Japanese importer in yen, and the grain trader has US dollars as his base currency, the currency risk is not negligible. In addition, assuming that the importer buys on a CIF basis, the grain trader will have to make arrangements for transport and bear the freight risk as well.

To deal with such diverse and closely related risks (but also opportunities for profits), the grain trader can only survive if these risks are diversified. Dealing with many countries, several currencies, and different commodities is intended to diversify away country, currency, commodity price, and credit risks. Survival in the marketplace has been the motto of all of these companies for over a century and a half, and this is the reason why most of them are closely controlled by family interests[21], and refuse to go public or disclose the full extent and details of their business. This very persistence to avoid public scrutiny has often infuriated people and institutions[22] from the outside and has often led to criticism of cartelisation and distortion of the grain market. It would be reasonable to say, however, that...

“... the damage done to global welfare by misguided agricultural and trade policies is far greater than any threat posed by grain traders, not least because the policy makers who enact these policies claim to act in the general interest. Innovative and competitive companies making money from trading certainly do not cause the kind of misallocation of resources that is generated by the EC’s Common Agricultural Policy, a fact their critics would do well to recognise.”[23]

Conclusion

This chapter has described and evaluated the mechanisms and organisation of the international markets for grains. By far the biggest and most heavily traded agricultural commodities, grains also have a long history of large price volatility and heavy interventionism. These features make theirs one of the most interesting markets to study. The inherent risk of the grain business is reflected in the fact that it was the first commodity to develop a market for futures in order to hedge part of this risk.

In the following chapter we are going to deal with some of the smaller – but still important in terms of value – agricultural commodities. Specifically, we will discuss the economics, trade patterns, pricing, physical and futures trading for coffee, sugar and cocoa.

References

Atkin, M. (1989). Agricultural Commodity Markets: A Guide to Futures Trading. 2nd ed. Routledge. 

_____ (1995). The International Grain Trade. 2nd ed. Woodhead Publishing. Cambridge.

Ezekiel, M. (1938). The Cobweb Theorem. The Quarterly Journal of Economics, 52, 255-280.

Hazell, P. (1985). Sources of increased instability in world cereal production. Journal of Agricultural Economics, 36, 145-160.

Nijs, L. (2014). The handbook of global agricultural markets: The business and finance of land, water, and soft commodities. Palgrave Macmillan. https://doi.org/10.1057/9781137302342

Penson, J. B., Jr, Capps, O., Jr, Rosson, P., III, & Woodward, R. T. (2015). Introduction to agricultural economics (Sixth, Global ed.). Pearson.

USDA (2014). Grain Inspection Handbook - Book II Grain Grading Procedures. USDA Grain Inspection, Packers & Stockyards Administration. Accessed on line at http://www.gipsa.usda.gov/Publications/fgis/handbooks/gihbk2_insphb.html 

WTO (2020). Doha Round World Trade Organization. http://www.wto.org/english/tratop_e/dda_e/dda_e.htm