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The current spread between US and Back Sea port grain prices suggest that the latter are something of a give away. This will be confirmed if grain supplies from this source dry up before the end of the crop year. (660 words)

Those with good memories and long experience with the grain trade will perhaps remember the supposed "Great Grain Robbery" of 1972. During much of the late 1960's and early 1970's the international grain trade had been challenged by low prices and very substantial surpluses.

In the summer of 1972 the Soviet Union, as it then was, suffered drought and while this was known at the time, the seriousness of it and the implications were not fully appreciated. Grain production short falls were not new to the Soviet Union and the practice to that time was to cut back on consumption while importing what was absolutely essential.

In February of that year the Supreme Soviet in its five-year plan had set targets for food consumption. But targets were commonly set in such plans and often missed by wide margins. Those outside the Soviet Union who were conscious of these targets, therefore, probably did not take them very seriously.

In August 1972, however, the Soviet grain buying agency made massive purchases of grain particularly from the US. And, as would any grain buyer in such a situation, it was careful to buy from several companies in order to conceal its order book from the trade while it was actively in the market. Not only was it successful in making the purchases without driving prices substantially higher, but it also managed to obtain the benefit of export subsidies from the US government which was very anxious to increase grain exports at that time.

While the market did move up as a consequence of these sales, the market continued to move still higher as it became apparent that Australian production would be reduced materially by drought and India came into the market for sizable quantities of wheat.

With perfect hind sight the perception became general that US farmers and their government had been robbed by the Soviets who were anything but the US flavour of the month at that time. In reaction to this the US government stepped up its international crop surveillance and instituted export reporting procedure that would ensure that such an episode would not be repeated. These programmes have been maintained and are of great value to the grain trade.

Thirty years later the situation seems almost exactly the opposite. The countries of the former Soviet Union have for a second year had abundant harvests. After about 90 years Black Sea ports have re-emerged as a significant source of grain on international markets and the US has a short crop.

But perhaps most interestingly Black Sea port grain prices seem to be something of a "give away" compared to US market values. There are, of course, a range of reasons why a new entrant in the market has to discount to get business.

Ability to meet quality specifications, to load vessels promptly and to get the grain to port particularly when the weather turns colder which it does in those parts, immediately come to mind. The need for prompt cash payment where financing opportunities may be limited and doubt about how much grain really is available are others. The US Department of Agriculture currently projects net exports of grain from the region of 19 million tonnes compared to almost 15 million tonnes last year, virtually nothing the year before and for most years for many decades before that.

Of course, the spread between US and Black sea port values will eventually close, in one direction or the other. The grain supply in the US and indeed generally elsewhere is documented and trusted. The unknown lies beyond the Back Sea ports.

If Black Sea port supplies dry up before the 2002 harvest, current prices will appear, with 20-20 hindsight, something of a give away. It highlights the value of reliable market institutions and information.

September 25, 2002