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Agricultural & Applied Economics Association
The Evolution of World Grain TradeAuthor(s): Stephanie MercierSource: Review of Agricultural Economics, Vol. 21, No. 1 (Spring - Summer, 1999), pp. 225-236Published by: Blackwell Publishing on behalf of Agricultural & Applied Economics AssociationStable URL: http://www.jstor.org/stable/1349982
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8/10/2019 Stephanie Mercier - Evolution of World Grain Trade
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Review
of
Agricultural
conomics
Volume
21,
Number
1-Pages
225-236
The Evolution
of
World Grain
Trade
Stephanie Mercier
Over
hecourse
of history,
world
rain
rade
as
developed
rom
he
stage
where
rain
was
only
shipped
s incidental
argo
o its status
today,
n
industry
n which
housands
f
tons
of
grain
move
daily.
As
a
share
f
total
onsumption,
raded
grain
has
risen
rom
ess
than
0.03%
n
the
eighteenth
century
o more han
10%
oday.
his
explosion
n trade
olume as
relied n
communication
nd
measurement
technology,
hich
has
made
nformation
bout
rain
availableo
buyers
nd
ellers.As
we enter he
wenty-first
entury,
he
nformation
omponent
f
demand
or
grain
will continueo
expand,herebyhreatening
o
overwhelm
he
current
nfrastructure.
The
grain
tradehas been
plied
acrossbordersand oceans
for
more than
3,000
years.
During
that
period
of
time,
it
has
shifted
significantly
n
character. ol-
lowing
the
coast as
they
went,
enterprising
Bronze-Age
merchants nd their sail-
ors
loaded
their flat-bottomed
oats
by
hand
with
available
ommodities
includ-
ing
grains)
and then sailed on to
the next
port
to
sell
their
wares.
In the
last
decade,
grain
trade has
become
extremely
pecialized, nvolving
transactions hat
are
arranged
hrough
satellitecommunications.
aid
grain
is
then
loaded onto
huge, increasinglyautomated ontainerships in orderto be deliveredaroundthe
world.
Up
until the
last
200-300
years,
internationally
raded
grain
accounted or
only
a small fractionof
grain
consumption,
nd
thus,
grain
trade
did not
require
a
separate rading
nfrastructure.
ernandBraudel
stimated
hat
traded
grain
ac-
counted
for
only
0.03%of
total
grain consumption
until
the
eighteenth
century
(Braudel).
Today, mports
make
up
more
than
10%
of
grain consumption
globally
(USDA/WAOB).
ome
countries n
Asia
(i.e.,
Japan)
are
nearlytotally dependent
on
grain
imports
other than rice.
A
reliable,
apid
means
of
transacting
or and
acquiringgrain
on a
global
basis is
essential
to
today's hriving
nternational
economy.
Grain
radehas
expandedrapidly
over
the
last
few
centuries,
hereby
expo-
nentially
ncreasing
he demand for information.The
information
ontentre-
*
Stephanie
Mercier s
an
economist
on the
Minority
Staff,
SenateCommittee
on
Agri-
culture,Nutrition,
and
Forestry.
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Review
of Agricultural
conomics
quired
by
product
buyers
has evolved from
knowing
how
much
grain
is
required
to feed restless Romanplebeians o distinguishingbetweengraintypes in the
fifteenthand sixteenthcenturies o
issuing
tenders
for
specific
wheat classes be-
ginning
in the
twentieth
century.
As we
approach
he
next
millennium,
echno-
logical
advancesand
sophisticated
onsumerscould drive the market o
focus on
quality
characteristics,
s
is
already
the
case
in a small
but
growing
share of
to-
tal
transactions.
In
this
article,
will
examine he courseof
evolutionof
the
world
grain
trade
and will
discuss how these
developments
re
reflected
n
the
structure
of
the
world
economy
and even in the
language
that
is
spoken.
In
additionto a
histori-
cal
overview,
will look at
how these
changes
affect
the
relationship
etween
buyersand sellersand at the contextthatthisbackground reates orcontinued
changes
n the
structureof
the
world
grain
market.
History
of
Agricultural
Trade
The Phoenicians
(living
mostly
in
modem
Lebanon)
were
the
first
world-class
traders;
hey
conducted
a
flourishing
rade and
established
colonies
n
the Medi-
terranean
during
the
second
and
first millenniaB.C.E.
Their
access to trade
routes
came in
part
becauseof their
development
f
keel-hulledboats
(powered
by
both
oar and
sail).
The
Phoenicians
were also the
first maritime
power
to
learn
how to
sail at night,using theirknowledgeof stellarpositions.Archeological nd limit-
ed
documentary
vidence
suggests
that their trade
goods
included
raw
and
pro-
cessed
agricultural
roducts,
ncluding
imber,horses,
grain,
wine,
olive
oil,
dye,
metals
(such
as
gold,
copper,
and
tin),
and
ceramicand
glass
(Remler).
Grain
was
not
a
priority
rade
tem for them
becauseof
the
space
limitationson
their
ships.
Often,
grain
was
only
loaded
if
more valuable
cargo
could not be
found at
a
port
(Casson).
The rise of
city-states
n Asia
Minorand
southern
Europe
and
the
concentra-
tion
of
the
population
within
city
walls led
to
increasing
demand
for
grain
grownoutside the immediatearea.Strongprevailingwinds on the Mediterra-
nean and BlackSea restricted
rade to the few
months in late
summerwhen
the
weather
allowed
passage.
The
larger
the
state
grew,
the
more reluctant he
citi-
zens were
to
depend
on an
irregular
upply
of
grain.
Roman
Grain-Trading
Patterns
The
inability
of
peasants,
who
often farmedon
rocky
or
infertile talian
soil,
to
feed their urban
population
ed,
in
part,
to the
expansion
of
Rome into
neigh-
boring
regions.
While
demographic
data from the
antiquities
are
lacking,
histori-
ans believe
that
by
the
age
of
Augustus(firstcentury
B.C.E.),
as
much as
one-
third
of
the
population
on the
Italian
peninsula
was
clustered
n
cities like
Rome
(Gamsey
and
Siller).
Beginning
n
the sixth
century
B.C.E.,
Rome was
engaging
n
regular
skirmish-
es with
neighboring
ribes n
order
to
maintain
control
of
the
nearby
TiberVal-
ley.
Rome'sdominationof
the Italian
peninsula
occurredover an
eighty-year
pe-
riod,
during
which
Romans
alternately
ought
alliancesand
conquered
erritory;
this
period
culminated
n
victory
n the
FourthSamniteWar n
243B.C.E..The
Romanscemented
heir
position
by establishing
ixteen
separateoutlying
colo-
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Evolution
of
World
Grain Trade
nies. Theiraccumulation f both land and slaves
(a
result
of these
conquests)
al-
lowed for the establishment f largeestates.Cropsgrownon such estates were
shipped
to urbandealersfor sale
(Garsey
and
Siller).
This
same
patternapplied
for the next severalcenturies
until,
at its
zenith,
the
Roman
Empire
stretched rom Hadrian'sWall
n
northernBritain
o
Mesopota-
mia
(moder
Iraq).
n
some
regions,
the
Romans'
strategy
of
resettling
citizens
and
former
legionaries
n
overseas
agrarian
oloniesfailed because of the
remote-
ness
and/or
inhospitable
limatesof these colonies.
The
Romansthen resorted o
assembling
huge
government-controlled
states,
which
were
manned
by
hun-
dreds of slaves
who worked
expressly
o
grow
grain
for
shipment
o Rome
and
to frontier
military
encampments.
Egypt
was a
major
exporter
of
grain during
this
period;
between the accession
of
Ptolemy
the Great o
the throne
of
the
Pharaohs
n 323B.C.E.and
the
conquest
of
Egypt
by
Caesar
Augustus
n
30
B.C.E.,
the
government's
main
source of reve-
nue
was derivedfrom their controlof the
grain
trade.
The
government
main-
tained control
by
taxing
the
producers
of
surplus
grain,
which
they
held
in
state-
owned silos
in
Alexandria
and then
shipped
out on vessels from the island of
Rhodes.Rome
was a minor customer or
much
of
this
period,
but
by
the end
of
it,
the
Roman
navy
conqueredEgypt,
in
part
as a means of
denying
others
ac-
cess to
its
grain
(Casson).
Duringthe Imperialera,the Romannavypatrolled he seas not to conquer
new enemies
but to
protect
the merchant leet from
pirates.
The chief
route
it
protected
ran from Alexandria o Rome
(or
rather,
o
its
nearby
ports
of Pozzuoli
and
Ostia);
annually,
over
150,000
ons of
Egyptian
grain,
which accounted or
one-thirdof
Rome's
consumption
otals,
traveled his
route.The
ships
that
moved
the
grain
were built
expressly
o
carry
t,
and
they ranged
in size
up
to
1,200
tons
(Casson).
The remainder f
Rome's
importedgrain
came
from
Sicily
and
North
Africa.Most of
the
grain
from these routeswas not
purchased
by
the
gov-
ernmentor
by
private
dealers
but ratherconstituted
he
taxes remitted
o the
central
governmentby
its
provinces.
Of the
government-procured
rain,
much
was
initially
sold to citizensat subsidized
prices
and was later distributed ree of
charge.
When Constantine
shifted the seat of
power
to
Constantinople
n A.D.
330,
he diverted
the flow of
Egyptian
grain
away
from Rome
and toward
his
new
capitol.
After a series of attacks
by
barbarians
during
the fifth
century
A.D.,
the
Western
Empiredisintegrated,
nd
the
need
for an
organized
leet that
special-
ized
in
grain
trade
disappeared.
Medieval Grain Trading
Over the next several
centuries,
population
pressures
eased as waves
of
epi-
demics
struck
he
European
ontinent.Pirates
and other
maraudinggroups
(such
as the
Vikings)
emerged
after the
collapse
of the Western
Empire
and were
found
cruising
the
seas and
coastal
waters
around
most
of
Europe.
Maritime
trade was
hamperedby
the attacks
hat these
groups
launchedon coastal
villages
and
shipping
lanes.
The
Crusades'
ncreased
demands
on
Mediterranean
ship-
ping capacity
required
n
orderto move armies
and
equipment)
also limited
the
ability
of traders o move
goods consistently
on a
commercial
asis
(Braudel).
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Review
of
Agricultural
conomics
The
trading
that did occur was conducted
largelyby
those medieval
city-states
thatoperated mall fleets. These fleets wereprivatelyowned and operated. n the
north,
trading
anes were dominated
by
the Hanseatic
League,
a loose
confedera-
tion
of
seventy-five
o
one
hundred
semi-independent
German owns.
In
the
south,
trade
was
handled
by ships
from
the coastalItaliancities of Genoa and
Venice.The holds of the
Hanseatic
ships
carried
grain
from
Germany,
Russia,
and Polandas well as iron
ore, cattle,
dried
herring,
and timber.These merchants
traded
wool
and cloth
with
England
via
exclusive icenses
granted
by
royal
fiat,
beginning
with Edward
II in
the fourteenth
century.
The Italian
ships
carried
products
derivedfrom more
hospitable
climates,
ncluding
wine, fruit,
olive
oil,
and
grain
(Morgan).
Althougha varietyof cerealcrops(wheat,rye,and oats)weregrownand
shipped
to
grain-deficit
ountries,
nformation
bout
the
quality
of the
grain
re-
ceived
in
a
particular hipment
was
often
lacking.
In
fact,
the
Germanword
korn
the
root for the
English
word
corn )
eferred
o
grain
as an
undifferen-
tiated
commodity.
Among
the documents
of
this
era,
most references
were
to
grain, although
a few did
refer
to
individual
grain
types
in
their
discussionof
trade
(Dollinger).
The
main Baltic
port
of
Danzig
handled,
on
average,
1
million
kilograms
of
grain annuallyduring
the fifteenth
through
he
seventeenth entu-
ries
(Dollinger).
Partof the motivationorEuropean ountries o establishoverseascolonies n
Africaand the
Americas
during
the
sixteenthand seventeenth
enturieswas
the
need to
fill the
grain
bins back
at
home.
Shifting
political
alliancesbetween coun-
tries made access to
surplus
eastern
Europeangrain
uncertain
or
England,
France,
Spain,
and
Portugal, herebydriving
these countries
o look for alterna-
tive sources.
Once
colonies
were
established,
both
the
laws of
comparative
d-
vantage
and customs
regulations
et
by
the
mothercountriesdictated hat
trade
flows consist of
grain
and
other
raw
commodities,
which were
moving
east
to
Europe
(or
north,
n
the case of African
colonies),
with
finished
productsmoving
westward.
The
legal
restrictions n
colonies
that were
selling
their
goods gave
merchantsn the homecountriesmonopsonisticpower,therebyallowingthem to
keep
offer
prices
for
commodities,
uch
as
wheat,
rice,
tobacco,
naval
stores,
spic-
es,
and
dyes,
static.Forthe
first
time,
contracts
were transacted or
specific
com-
modities,
and
producers
made
planting
decisions
based
on the
prices
that Euro-
pean
merchants
were
offering.
Ultimately,
he
disparity
n
market
power
that the
North American
planters
suffered
was
one
of
many
factors
contributing
o the
AmericanRevolution
n the
1770s.
The Industrialization
of
the Grain Trade
Industrialization
n
the nineteenth
century
can be tracedto the establishment
of commercial
grain-trading
irms.
Coincidentally,
his
occurred
during
the
same
period
that
majorgrain-surplus
reas
n
the
Western
Hemisphere,
uch as the
United
States,
Argentina,
and
Brazil,
gained
independence
1776,
1816,
and
1822,
respectively).
Russia,
except during
periods
in
which circumstancesimited ac-
cess to
Baltic
Sea
ports
(i.e.,
the
Napoleonic
Wars),
ontinuedas
a
major
source
of
grain
until the RussianRevolution
n 1914
(Goodwin
and
Grennes).
The
emer-
gence
of
a
middle
class
in
western
Europe
created
demand
for a
steady supply
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Evolution
f
World
GrainTrade
of
bread-quality
wheat,
a
supply
that
could not be met within the
continent.
Since these countriesno longer possessedthe politicalor militaryabilityto com-
pel
formercolonial
regions
to
ship
it,
the
grain
had
to be
purchased
at
negotiat-
ed
prices.
Once
the
protectionist
Corn
Laws
in
England
were
repealed
n
1846,
an infra-
structure
began
to arise that would make this trade feasible.The London
Corn
Exchange,
which had
operated
since
1749,
formed
the
backboneof the
emerging
international
rade.Over the next
fifty
years,
several
amilies
began grain
busi-
nesses
that would one
day
dominate
he
world
market. n
Europe,
he
Fribourgs
(Continental
Grain),
Louis-Dreyfus,
Bunge,
and Andre all
emerged,
while the
Pillsburies,
Peaveys,
and
Cargillsbegan
their
milling
and
grain-handling pera-
tions
in the United States
(Morgan).
The first effortto devise
a
uniform
set of
contracts
began
with
the
founding
of
the
London
Corn
Trade
Association
n
1878
(Barty-King).1
hese contracts
ncludedthe
provision
of standard
sample
sets for
grain
of a
certain
origin.
At
the
same
time,
railroad
systems
and
steamship
ines
capable
of
moving
the
grain
were
developed
n
the United
States
and,
to
a
lesser
extent,
n
Argentina
and
Australia.
By
the end
of
the
century,
hese countrieses-
tablished heir
own
commodity
exchanges
n
order
to
facilitate
he
movementof
grain,
and
the
modem
grain-distribution
ystem
was born
(Morgan).
Underthis
system,
merchantsno
longer
put grain
on
a
ship
without
knowing
whatpriceit would receiveupon delivery.Despitespeculativeactivityand fre-
quent
attempts
o
manipulate
he
market,
price
discovery
did occur
in the
com-
modity
exchanges.
As
telegraphs
and
telephonesdeveloped,
hat
price
informa-
tion
was used
as the basis for
formulating
ontracts.
As the
majorgrain tradingcompanies
established
relationships
with
their
counterparts
n
other
countries,
grain processors
had
some discretionabout
their
source
of
grain.
With a more reliable low of
product
rom
the
international
is-
tribution
system
processorsbegan
to view
purchased
grains
as
regular nputs
in
a
production
process.
In the same
way
that
grain
had been divided
into
grain
types
in
the seventeenth
and
eighteenth
centuries,
he
grains
were
now
increas-
ingly
differentiated.
n the
case
of
wheat,
buyers
early
in
this
century
expressed
their
preference
or
soft versus hard
wheat
based
on the source
country.
Muchof the
market
power
came to
reside in
those
grain-trading
irms
that
were
much
larger
than
eitherthe
crop producers
or most of the
processors,
o
early
effortsto
establish
uniformity
of contractsand the
quality
of
the
grain
shipped
met with failure.Traders
were
unwilling
to surrender
any ground.
Con-
sequently,
most
exporting
countries ook action
n the first
part
of the twentieth
century,
nforcing
a set of standards
or the assessmentof
grain.
The GrainStandards
Act of 1916 established
he
first
grain grades
and stan-
dardsin the UnitedStates.Underthis act,all grainand oilseed thatis designat-
ed for
export
must
be
submitted or
inspection
and
graded
on the basis
of
a set
of standard
physical
characteristics
Hill).
The
Canadian
approach
was to estab-
lish a state
trading
agency,
he Canadian
Wheat
Board
(CWB),
whose anteced-
ents
date from
the
FirstWorld
War. n
its role as
a marketer f all
grain
that is
for
export,
the CWBalso establishes
quality
criteria or
grain
that is
accepted
from
farmers.Enforcement
s
conducted
by
restricting
he
grain
varieties
ap-
proved
for
delivery
nto
export
channels.
Though
ts wheat board is of later
vin-
tage
(1939),
he
Australian
government
ollows
an
approach
imilar
to that
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Review
of Agricultural
Economics
adoptedby
Canada.
All
of these institutions
disseminate nformation
boutthe
grain being transported,ncluding(1)knowledgeaboutthe physicaltransferof
grain
and the
handling
services
nvolved;
2)
the flow of information
boutthe
grain,
ncludingprice
and related actors
such
as credit
terms);
and
(3)
descrip-
tions
of the
physical
and intrinsiccharacteristics
f the
grain
contained
n
ship-
ments.
The
Interaction Between
Grain
Buyers
and Sellers
In
grain
markets
today,
contracts
negotiated
between
buyers
and
sellers
reflect
the conditions
under
which trade will be conducted
n
terms of both the
physical
and informationalracks.Forthe majorityof transactions,he physicalaspectof
the
grain
trade dominates.
The
structureof these contracts
allows
buyers
to sub-
stitute attributes
hat ensure the
highest
profitability.
Automated
technology
of
modem flour
mills leads
many
wheat
buyers
to
make their
purchasing
decisions
based on
the
gluten
contentof
the
flour
they
intend to
produce.
This involves
mixing
and
matching
wheat of differentclasses
in
orderto
get
the desired
gluten
content
within
narrow olerances.
Similarly,
cientificadvances
n
livestock
man-
agement
have
given producers
he
ability
to evaluate he metabolizable
energy
contained
n the
grain
in
orderto create hose feed rationsbest suited to their
animals.The value of the grainis thereforebased on its nutritivecontent.This
constitutes
a
considerable hift
in the
concept
of
substitutability
n
marketing,
which
previously
relied
largely
on
the
prices
of
grain
relative
o
the
most abun-
dant
grain
(i.e.,
corn
in
livestock
feeding
or
hard red winter wheat in the
wheat
market).
Organization
of
Grain and Oilseed Markets
Over
the
centuries,
ransactions
n
grain
and oilseeds have occurred n several
sets of
markets,
ets which sometimes
overlap.
Even
today,
he
majority
of
deals
are transactedn localand regionalmarkets.Grain-deficitregions,whichstem
from dense
population
oncentration
nd/or
inadequate
arable
and,
obtain
sup-
plies
from other
parts
of the same
country
or from across nternational
orders,
depending
on
grain availability
nd
transportationapacity
within a
given
coun-
try.
In
terms of the
importance
f
trade n
use,
the
world
rice market
s the most
thinly
traded
(at
less
than
5%),
with the wheat marketat the other end of the
spectrum
with
exportsaccounting
or
19%
of
total
consumption
n
1996-97)
(USDA1998).
Operating
n
parallel
with these
physical
markets,
nformation n
grain
characteristics
nd
preferences
lows
between
buyers
and sellers as well.
Local
and
regional
markets
Even
in
the
complex
world
marketwe
now
face,
a considerable mountof
grain
does not move far from the fields
in which it
was
produced.
For
nstance,
in the
United
States,
between
30%
and
40%
of corn
produced
s held back for on-
farm
feeding,
seed
use,
or
stocks,
and about
10%
of
wheat
(Heid,
data
updated
from
Leath,
Meyer,
and
Hill).
Of
the
grain
marketed,
0%
s
typically
delivered
into
the
country
elevator
system
and
transported
y
truckover
county
roads. Be-
cause
moving
raw
grain
is
relatively ostly
compared
o the
grain's mplicit
value,
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Evolution
f
World
GrainTrade
processors
and subterminal
levators end to clusterwithin
easy
reachof
major
productionareas.Ninetypercentof the springwheat milled or assembled or ex-
port
in
Minneapolis,
MN,
comes
from
within
450 miles of
that
city.
Within hese
regions,grain
transactions re
generally
governedby
a few
key
factors.
The
overall
supply
of
grain generated
by
producersdepends
on the
rela-
tive
price
incentives
they
detect at the time
the
fields
are
cultivatedand the
weather
patterns
hat
prevail
n the
region
over the course of the
growing
season.
How
that
grain
is marketed
depends
on the
accessibility
o
elevatorsand the ex-
tent
of
the
farmer's
wn
livestock
operations
and
operations
on
neighboring
farms.
Local
and
regional
demand for
grain
is
determined
by consumption
e-
quirements
f
the area's
population
human
and
animal)
and
by
existing
relation-
shipsbetweenproducers,handlers,and processors.
When
a
processor
n a
grain-abundant
egion
must
meet
tight requirements
n
orderto
produce
a
specific
grain-based
product,
he
buyer
typically
relies
on in-
formal
relationships
nd
past experience
with
the
quality
of
grain
receivedfrom
various
country
elevators o
locate
a
specificgrain.
In a few
instances,
he
uni-
form
quality
of that raw
grain
is
so crucial o
the
productionprocess
that the
company
inds it
necessary
o assure
its
supply by contracting
with
individual
producers.
These detailed contracts
specify
the varieties hat
producers
must
plant
and
restrict heir
cultivation
practices.
This
level
of control s
exerted
most
oftenby food-processing ompanies,and it accounted orless than2%of feed
grain
marketed
and
for less
than
1%
of food
grain (chiefly
wheat)
marketed
n
the United
States
n
1993.Such
production
ontracting
s
more
prevalent
n
horti-
cultural
and livestock
processing,reaching
99%
n the
sugar-beet
ector
and
85%
for broilers
n
the same
year
(Manchester).
For
the
majority
of
grain
moved from the farm
to the
elevator,
prices
are de-
termined
by
the
schedules
posted
on a
daily
basis
at
the local
elevators
and are
adjustedby
discountsor
premiums
assessed
for
quality
factors hat
depart
from
the norm.
Since elevators'
ability
to measure
quality
s limited
to
a few tests
con-
ducted
as the
grain
is
weighed
and unloaded
from
trucks nto
storage
bins,
those
discounts/premiums
do not
apply
to a wide
range
of characteristicsnd
during peak
delivery
time
may
not be
applied
at all.
Posted
prices
are
generally
driven
by
the
prevailingprices
for
the
grain
at
the relevant
cash
exchanges.
On
average,
10%
of
grain
and
oilseeds
delivered s
priced
n
advance
through
u-
tures-driven orward
contracts
Manchester).
National
and international
markets
At this
level,
individual
producers
do
not
play
a
significant
role. The
supply
side of transactionss in the hands of the nationaland multinational rain-trad-
ing
firms and of the
large-scale
armer-owned
cooperatives
who
own
the subter-
minal and terminal
elevators. n some
countries,
uch as Canadaand
Australia,
the actual
decisionsare made
by
exporting
state
tradingagencies,
who hold the
monopoly
n
purchasingauthority
over
domestic
producers), lthough
he
physi-
cal transactions
re
often handled
by
private
parties.
On the
demand
side,
trade
is conducted
by
large-scale
millers and
processors
who own
the facilities
and
by
private
and state
trading
entities
n
importing
countries.
In
general,
price
formation
ccurs at
the
major
grain
exchanges,
uch
as the
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Review
of Agricultural
conomics
Chicago
Board
of
Tradeand
the
Minneapolis
Grain
Exchange.
Pricing
variations
occurbecause
of
transportationosts,
use of
export
subsidies and
importtariffs,
and
variety
and
quality
differences rom
the benchmark
raded
grain.
While
Ar-
gentine Trigo
Pan wheat does not have the
same
quality
characteristicss the
hard red winter wheat traded
n
Chicago
and Kansas
City,
the two
wheats
are
nonetheless ufficient
ubstitutes
or
most
end-userssuch
that a
price change
n
one
will
affect
the
other.
Market
for information
The
flow
of information ccurs
n
parallel
with the two marketsdescribed
above,although he infrastructureor its disseminations not as well developed
as is the
networkof
inland elevators
and
port
facilitiesand
rail,
barge,
and
ship-
ping
lines
that
actually
moves
the
product.
While the
physical
radehas
been
go-
ing
on for several
millennia,
he information low has been
important
or
less
than a
century.
Approximately
0%
of world bulk
grain
transactions re based on a
set of
standardcontracts stablished
by
the Grainand
Feed
Trade
Association
GAFTA)
in
London,
an
associationof
grain
traders,
brokers,
and
processors
n
seventy-six
countries
hat was founded
n
1971.
GAFTA
ombines he
functionsof
the
Lon-
don CornTradeAssociationand the LondonCattleFeed TradeAssociationn or-
der to
promote
nternationalrade n
grains,
animal
foodstuffs,
pulses,
and rice
(Barty-King).
AFTAmaintainsand
updates
the
language
n
contracts
or more
than
100
types
of
transactions,
ommodities,
and
countriesof
origin
and it
serves
to arbitrate ontract
disputes.
Contracts
or
grain
that is to be traded
internationally
ypically
require
hat
execution
of the contract nclude
transmission f
an
inspection
certificate,
which
is issued
by
an official
agency
of
the
exportingcountry.
The certificatemust as-
sure
buyers
that
grain
loaded at the
export
facility
meets or exceeds the
contract
quality
requirements.
hese
quality
requirements epresent
hose contained n
the officialgradesand standardsof the country. n addition,manycontractsm-
pose
minimumor maximum imits on factorsnot coveredunder the
official
grade,
such as moisturecontentor
dockage
(in
the case of U.S.
wheat)
(Mercier
1993).
In the
past,
these
additional
provisions
have
focused on
physical
grain
at-
tributes,
because
measurement f
these attributes
an be
accomplished
t rela-
tively
low cost
during
loading
or
unloading
at
elevators,
while tests for intrinsic
characteristics
usually requireexpensiveequipment
and/or
considerable ime to
process
results.
Over the last several
years,
buyers
have
increasingly
xpressed
nterest
n
the
intrinsiccharacteristicsf the grain,becausethese factorsarebetterthanphysical
factors or
predicting
he
grain's
inal
performance.
n
most
countries,
uch
infor-
mation s not
included
among
the
factors
hat make
up
official
grades.
However,
the
variety
release
regulations
mposed
in
some countries
i.e.,
Canadaand Aus-
tralia)
serve
as
a reasonable ubstitute.
Under
these
rules,
a
grain
variety
s not
releasedfor
public
use unless
it
equals
or exceeds
the
performance
haracteristics
of
the benchmark
variety
for its class
(U.S.
Congress).
For
buyers
seeking
grain
in
countries
without
such
tight
restrictions,
hey
have
recourse o
buy
on
an identi-
ty-preserved
asis,
but that can
add
considerable ost to the transaction.The
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Evolution
of
World
GrainTrade
grain-distributionystems
in
these countriesare
designed
for efficient
movement
of standard-qualityrain,which calls forbulkhandlingandblendingof grains
of different
quality
n
orderto
meet
contractual
requirements.
hese features
make it
costly
to
segregate
grain
throughout
he
system, especially
when
the
grain
is destined
for
export.
For
example, hipping
overseas
by
container ather
than
by
bulk
carrier
n
order
to maintain he
identity
of
a lot of
high-quality
grain
can
raise
transportation
osts
by
a factorof at least three to one
(Interna-
tional
Grain
Council).
In
most
countries,
official
inspections
are not
required
or
grain
moved
within
domestic
channels,
but
nonetheless,
buyers
have
ways
of
evaluating
he
quality
of
grain
available or
purchase.
While
some local
jurisdictions
ffer
grain testing
at
low cost,mostprocessorsand millersrelyon theirknowledgeof past quality
variations
within their
buying
region
and
on
long-standing
elationships
with
lo-
cal elevators o locate
needed
grain.
In
addition,
he
presence
of in-house abora-
tories
gives
the
buyers
the
ability
to
performpostdelivery esting
and to
dispose
of
grain
in
less
discriminating
utlets
f it fails
to
meet their
expectations.
The
transaction osts of
such
sifting
of
quality
nformation
re
relatively
ow at
the
local
level,
because
the need for
segregation
during handling
s minimal.On the
other
hand,
the costs to
foreignbuyers
of
acquiring
and
acting
on such
detailed
information
re
prohibitively
igh
in
many
cases,
becauseuse of
segregation
practices
n
international
ransactions f
high-quality
grain
is essential
for suc-
cessful
completion
of such a contract.A handful of
importers
such
as the Tai-
wan Flour
Milling
Association)
end
agents
on
highly publicized
ours
of
U.S.
wheat-producing egions
in orderto
identify
the
specific
wheat to be
purchased,
but the volumes
purchased
as
a
result of such activities
account or
only
a small
share of total
trade.
The central
pricing
mechanismsat
the
majorgrain exchanges
discussed
above)
reflect he trade for
the bulk of the market
domestic
and
international),
n
which
grain
is differentiated
only by
class,
grade,
and
protein
content
or some
classes of
wheat.
In
fact,
for
a
grain
like
corn,
which is
largely
destined for feed
use, there is little differentiationby classin the compositionof exports.Between
1986-91,
nearly
70%
of U.S.
export
corn
was tradedas U.S. number3
or
better,
with
only
moisture
maximumsotherwise
specified
(Mercier
994).
This elaborate et
of
mechanisms,
ombined
with
public
dissemination f the
resultingprice
data on a
regular
basis,
has
reducedthe
cost of
arranging
ransac-
tions
for
standard-quality
rain
but
may
have
increased
he
cost of transactions
for
grain
with
quality
attributes
utside
the standard
et,
especially
or
foreign
buyers.
Since such
grain
will not
receive
premiumprices
or
segregatedhandling
if
sold
into the
general
market,
buyers
and
sellers
must
work
within
informal,
secondary
channels,
n
which
pricing
practices
are less
transparent.
n a
series of
studies conductedby the EconomicResearchService n the early1990s, mport-
ing
countries
uch as
Japan,
Taiwan,Korea,
taly,
he
Netherlands,
Venezuela,
Brazil,
and the
Philippines,
were identified
as
exhibiting
moderate o
high
sensi-
tivity
to the
quality
of
their
importedgrains
and oilseeds and were
willing
to
seek such
grains
in some
if
not
all
transactions
Mercier
993, 1994,
1995).
Context
for Continued Market Evolution
Within
he
local-regional
nd
national-international
arkets
described
above,
the
pressure
on
the
informationalnfrastructure
ill increase.
A
numberof fac-
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Review
ofAgricultural
conomics
tors
will
likely
contribute
o this
pressure,
uch as the
increasingly ophisticated
tastes of higher ncome consumersand advances n processing echnology.Re-
sponses
from
both
the
private
and
public
sectors
will be
required
n order
to
al-
leviatethis
pressure.
Basis
for
Competition
The broad
competition
between
various
exporters
s
largelyprice
driven,
al-
though
that
motivating
actor
has lessened since the commitments
f
the Uru-
guay
Round
Agreement
of GATT
UR
Agreement).
High
world
prices
in
the mid
1990s reduced
the
use
of
export
subsidies,
particularly
n the
world wheat mar-
ket.The shareof wheatsold under subsidies declinedfrom51% n 1991-92to
less
than
16%
n
1996-97.2
These
subsidies
helped exporters
egment
their
mar-
kets,
and
for
the
60-70%
of
eligible mporting
countries,
he
availability
f
dis-
counted
prices
from some
exporters
greatly
overshadowed he
quality
of the
grain
offered.On this
macro,
partly policy-driven
evel,
the
competition
occurs
between
homogeneous
ommodities.
To some
degree,
such
homogeneouscompetition
also dominates
he
transac-
tional
level of the
feed-grain
market,
as feed
processors
ormulate he
rations
they
will offer
for
sale
based on
the
energy
contentof the
grain
available or
purchase.
However, ven withinthe feed market, ulturalpreferences nd livestockphysiol-
ogy
constrain
buyers'
choices
between
grains.
For
example,
consumers n
Japan
and Venezuela
prefer
brightly
colored
egg yolks,
so feed
processors
who serve
the
layer ndustrybuy
more
Argentine
han
U.S.
corn,
becausetheir flintcorn
lends a
brighter
olor
to the
eggs
(Mercier
994).
The
food
and
industrial-use
market
segment
has
demonstrated ven more of a
propensity
o differentiate
pur-
chases,
both
in
terms
of
quality
and trade
servicing
attributes.
Environment
for
Transactions
The
majority
of
grain
and oilseed transactions ccur within the
local-regional
market
segment,
with little reference
o other
segments
except
for
price-discovery
purposes.
Informationransmittedbetween them
typically
reflectsrelative
prices
and
transportation
nd
handling
margins
for standard
commodities,
i.e.,
the
benchmark
product
raded
on the
grain
exchanges
ike
U.S.
number
2
yellow
corn).
Quality-sensitive uyers
within
local-regional
marketscan
rely
on
infor-
mal channels o
augment
his information
et,
becausethe cost
of
diverting
a
shipment
hat does not meet their
expectations
s
relatively
ow.
Buyers
with sim-
ilar
preferences
n the
internationalmarketabsorbconsiderable
osts
in
orderto
ensurethe acceptability f theirgrain shipments,becausebeingwrongwould be
very
expensive.
Despite
these
costs,
some
buyers'requirements
or
high-qualitygrain
cannot
be met within their
local-regional
markets,
which
forces
these
buyers
to search
acrossmarket
segments
n
orderto
locate
adequate
ources.
In
most
years,
these
cross-market
buyers
are selected millers n
Europe
and
East
Asia,
soybean
food
processors
n
Asia,
and
corn industrial
processors
n
both
regions.
In
years
when
wheat
crops
have
lower-than-averagerotein,export
elevator
operators
re forced
to
compete
with inland wheat
processors
or
good-quality
hard
wheats,
which
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Evolution
of
World
GrainTrade
increases
price.
These
types
of
deals
are
characterized
by
the
need for more de-
tailedqualityandhandling nformationhanis the norm.
Prospects
for
the Future
The demand for
high-quality
grain
and oilseed is
likely
to increase
over tle
next
few
decades,
thereby
training
he
system's
ability
to transmit
he
necessary
detailed nformation.
This
growth
in demand stems from
three factors:
1)
in-
creasing
per
capita
ncome,
especially
n
grain-deficient
Asian
countries;
2)
the
liberalization f
grain
trade,
especially
ncreased
privatization
f
trading;
and
(3)
the spreadof moresophisticatedmilling, processing,andbakingtechnologies.
While world economic
growth
is
expected
to increaseat
a
3.2%
rate over the
next
decade,
growth
in
Asia
will
be
even
stronger
n the
long
term,
at more than
6%
a
year
(USDA
1996).
Such
growth
will
lead to
a
burgeoning
middle class
in
these
countries,
a
class that
possesses
increasingly ophisticated
astes
in
terms of
food
consumption.Especially
n East
Asia,
minimal
arable
and in
these coun-
tries
will necessitate ncreased
imports
n
orderto
supply
these
expanding
con-
sumption
needs.
Trade iberalization
n
agriculture
under
the
UR
Agreement
s
expected
to
in-
creasethe volume of grainand oilseed tradedworldwideby about4%by the
year
2005
(USDA
1994).
In
additionto multilateral
iberalization,
many
countries
have
recently
decided
to
dissolve
or reform heir state
agricultural
rading
enti-
ties
(STEs).
While this
may
not increase
he volume
of
trade,
t should lead to a
greater
demand
for
quality
grains
and
oilseeds,
because
private
raders
n
the
past
have
shown
more
responsiveness
o
quality
preferences
f end-users
han
have
importing
state
tradingagencies.
STEs
often
place
constraints n
spending
or
policy
objectives,
with little concern or
satisfying
consumers.
In
addition
to
its
agricultural
rovisions,
which will
provide mpetus
for
in-
creased
agricultural
rade,
he
overall
UR
Agreement
had
separate
accords hat
were
designed
to
encourage
rade in servicesand
intellectual-property
ights.
These
agreements
have
in
part spurred
an
explosion
n
foreign
direct
investment
(FDI)
by
multinational
irms,
particularly
n
food
processing.Among
U.S.-based
firms
alone,
food
processing
FDI
nearly
tripled
between 1984
and
1994,
ntroduc-
ing
state-of-the-art
technology
worldwide
(Handy
et
al.).
High-quality
aw
grains
and
oilseeds
are
likely
to increase
n
demand as
new
western-style
ood
products
are introduced nto
foreign
markets.
More
detailed discussion
of the
current ituation
n
the domesticand interna-
tional
grain
markets
and
possible approaches
o
dealing
with the
overtaxed nfor-
mational nfrastructurean be foundin the companionpiecesto this article.
Endnotes
1
In
1906,
a
separate
London Cattle Feed
Trade
Association was
founded in
order to cover trade
in
animal feeds
and
proteins.
2
The
subsidized amount of
wheat for 1991-92 includes
wheat
exported
by
Canada
(because
of
their
Western Grain
Transportation
subsidies,
which
ended
in
1995),
the
United
States,
and
the Euro-
pean
Union
(EU).
In
1996-97,
only
the EU utilized
export
subsidies
(Ackerman,
Smith,
and
Suarez;
USDA
1997).
235
8/10/2019 Stephanie Mercier - Evolution of World Grain Trade
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Review
of Agricultural
Economics
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