WORLD GRAIN MARKET: THE WORSENING GLUT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83B00851R000400040005-4
• Release Decision: RIPPUB
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• Document Page Count: 17
• Document Creation Date: December 20, 2016
• Document Release Date: February 2, 2007
• Sequence Number: 5
• Publication Date: December 1, 1982
• Content Type: REPORT

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Directorate of See-ret
Intelligence
World Grain Market:
The Worsening Glut
( ICS FILE DEPARTMENT OF
r .GRICULTURE RELEASE
Secret
GI 82-10257
December 1982
Copy 4 8 4
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Directorate of Secret
Intelligence
World Grain Market:
The Worsening Glut!
This paper was prepared by
Office of o a Issues.
Comments and queries are welcome and should be
directed to the Chief Commodity Markets Branch
OGI
25X1
25X1
Secret
GI 82-10257
December 1982
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The Worsening Glut
1 -1
25X1.
Key Judgments World grain markets during the marketing year ending 30 June 1983 (MY
Information available 1983) will be characterized by sluggish demand, depressed prices, and
as of 29 November 1982 mammoth additions to already record stocks. This year's potential record
was used in this report.
harvest, coupled with the inability of some key importers to finance
purchases, will flood world markets with grain. Fierce competition,
increasingly incorporating attractive finance packages and concessionary
repayment terms, is already generating acrimony among producers.
Under these conditions, the USSR should be able to choose among sellers.
The Soviets may already have as much as 27 million tons of grain lined up
from all sources for delivery in MY 1983, and we believe that imports from
non-US suppliers may reach 32 million tons. Any reduction in imports
below 42 million tons will probably decrease the 10.5 million tons of grain
we currently expect Moscow to take from the United States.
Secret
GI 82-10257
December 1982
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Table 1
Estimated Changes
in Wheat and Coarse Grain Production,
MY 1983
Change From MY 1982 MY 1983
Total Grain Production a
Canada 2.0 -0.4 52
China 1.0 1.0 143
Other 18.9 2.8 283
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World Grain Market;
The Worsening Glut
A Bumper Harvest
World grain production this year will be about 1.24
billion tons, up slightly from last year's record level.
Despite weather-plagued crops in Australia and the
Soviet Union, world-wheat production will be about
460 million tons according to US Department of
Agriculture (USDA) estimates, about 4 percent more
than last year's near-record level. Coarse grain out-
put, however, may soar to a record 780 million tons,
largely because of a massive US harvest (table 1).
Among the major exporters:
? Only the United States, with its acreage reduction
program, has acted to reduce output in the face of
low prices and glutted markets. Nevertheless, grain
production is expected to set another record because
of exceptionally high yields and farmer indifference
to the set-aside program. Of particular interest, the
US corn crop may reach 210 million tons-equal to
nearly half of this year's global corn crop.
? Canadian farmers increased wheat acreage by al-
most 15 percent, while coarse grain acreage de-
clined slightly as relative prices encouraged rape-
seed plantings at the expense of corn and barley.
Ideal weather during the growing season resulted in
a record crop of nearly 27 million tons, which could
allow wheat exports to exceed 19 million tons this
year.
? Australia had hoped for a record wheat harvest of
17 million tons, but we currently estimate this year's
crop at 8.5 million tons. Rainfall has remained at 20
to 30 percent of normal levels since March, devas-
tating most of the crop in the key eastern states.
? European Community (EC) wheat production has
set a new record because of high support prices that
encouraged both a 2-percent increase in acreage and
the adoption of higher yielding, albeit more costly,
varieties. Production of corn may set a new record,
but barley production is expected to fall slightly.
? Argentina's important coarse grains crop is now
being planted. Argentine farmers, despite height-
ened financial difficulties brought on by the Falk-
lands war, increased wheat sowings by 15 percent
this year. Ideal growing conditions could result in a
10- to 11-million-ton harvest. Coarse grain acreage
will also probably increase from last year's levels.
Weather, as always, will play a decisive role. A crop
failure would substantially alter conditions in world
coarse grain markets, increasing opportunities for
US grain exports and limiting Moscow's choices in
buying grain. 25X1
Major importing nations have had mixed success in
expanding grain output. Some, such as Japan, simply
lack the resources to significantly boost production.
Others, most importantly the USSR, find it difficult
to boost output because of the uncertainties associated
with harsh climate. We estimate that because of poor
weather this year's Soviet crop will approximate 165
million tons, well below amounts needed to maintain
livestock production and rebuild stocks.' We expect
China's wheat harvest to remain at last year's level,
while Eastern Europe's wheat crop, although large,
will still be lower than levels reached in the late
1970s. Mexico's coarse grain crop is expected to be
less than last year's, necessitating stock drawdowns.
Prices and Stocks
Although we expect global grain consumption to
increase by nearly 34 million tons in marketing year
(MY) 1983, it will be inadequate to prevent record-
ending stocks of roughly 234 million tons (figure 1).
The US coarse grain crop is responsible for all of the
increase, with stocks elsewhere declining marginally.
US grain stocks will rise to about 146 million tons-
more than double the level of two years ago. This will
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The Soviet grain harvest is now complete; our best
estimate is that the crop approximates 165 million
tons. There is margin for error in this estimate,
although over the past four years improvements in
the collection and processing of weather data, grain
model algorithms,
Figure 1
World Grain Statistics
1,500
1,250 Total grains
have enabled us to forecast
Soviet grain production with increasing accuracy.
During this period CIA estimates have averaged
within 4 percent of the actual crop. Errors ranged
from 0.5 percent to about 8 percent. Allowing for this
error range, then, the current Soviet crop could be as
much as 166 to 178 million tons.
500
250
I I I I I I I I 1 1
900 1972 75 80
have a bearish influence on prices, particularly for World Grain stocks
coarse grains, which make up more than two-thirds of
the total. The USDA estimates US corn carry-in
stocks at 88 million tons, nearly 30 percent greater 200
than one year's global trade. US export prices recent- 150
ly fell below prices of three years ago, and we expect
ices to remain denressed well into 198 figure 2).
Low prices are plaguing the major exporters as they
seek to maintain farm income. In the United States,
where farmers participating in the set-aside program
are paid the difference between target and market
prices, deficiency payments are already estimated at
$1.2 billion by USDA. Canada and the EC will also
increase budget outlays. Low prices will do little to
discourage production, however, both because govern-
ment programs universally help insulate producers
from the market and because producers typically
respond to low prices by trying to increase revenues
through increased plantings.
I 25X1
N M Vt '0 L- W O1 O - N M
[~ l~ N [~ [~ 00 00 00 00
Production
Consumption
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Figure 2
United States: Grain Export Pricesa
grain buying strategy
IIIIIIIIIIII1III1111111III II11111IIIIIIIIIIIIIIIII IIIIIIIIIIIIII11I1111II111I11111IIIIII11111 111
75 1975 76 77 78 79 80 81 82
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Global Trade Outlook
This year's bumper harvests are meeting lethargic
demand from the major importing nations (table 2).
With the exception of China and Mexico, buyer
activity is expected to be at about last year's levels
(table 3). A combination of factors, including im-
proved domestic harvests, credit and foreign currency
constraints, and policy decisions to reduce import
costs caused this restraint.
Soviet Purchases. We cannot pinpoint the amount of
grain the USSR will actually purchase in MY 1983.
Purchasing patterns have not been consistent with the
imports of 42 million tons that we believe are needed
to support current levels of meat and dairy produc-
tion; maintain livestock inventories; and cover require-
ments for seed, food, and industrial use. Unless
Moscow increases its orders from the United States,
total imports will be substantially below this level,
If our forecast of the Soviet grain crop is correct, the
lower purchases could reflect increased flexibility in
handling grain, political considerations, or even a
policy shift in the Politburo:
? Grain supplies on hand are sufficient to last through
the winter. If Soviet logistic capacity is better than
we estimate, the Soviets could postpone large im-
ports (5 million tons or more per month) until early
next spring.
? Political considerations may also be affecting Soviet
ISoviet lead-
ers ze that the Union's aFs-e-nce from the
market is creating uncertainty about US export
prospects-uncertainty they hope will be translated
into stepped-up domestic pressures in the United
States to normalize Soviet-US trade relations.
? A key question is whether the new leadership is
willing to continue the upward spiral of imports of
foreign grain. Some in the leadership may have
questioned the wisdom of this policy, arguing that
less emphasis should be placed on meat as a major
element in the Soviet diet. The lull in purchases
could reflect a decision to reduce dependence now
and accept the consequences of more pervasive 25X1
shortages of high-quality foods.
Combining various long-term agreement (LTA) obli-
gations and purchases outside these agreements, the
Soviets have lined up 27 million tons of grain from all
sources for delivery in MY 1983 (table 4). We believe
that they can secure another 11 million tons of grain
from non-US suppliers for delivery before the end of
June. The remaining 4 million tons of grain, which the
USSR would need to put imports at 42 million tons,
however, would have to come from US stocks.2 With
July-October shipments already on the books, the
2 This calculation is based on actual deliveries of 7 million tons
during July-October 1982 and our estimate that Soviet ports can
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Table 2
Major Exporters:
Estimated Production of Wheat and Coarse Grains,
July 1982-June 1983
Production Domestic Exports Ending Stocks a
Consumption
? Argentina currently has only about I million tons of
coarse grain available for export until January,
when the new wheat crop will be ready for shipping.
Moreover, high domestic Argentine grain prices
have driven up export prices to $130 per ton for corn
and $120 per ton for sorghum, while US export
prices are about $100 for each.
? France has nearly 8 million tons of old crop wheat
available for export; however, we believe 3 million
tons may be the upper limit of Soviet purchases for
quality and logistic reasons. Of this amount, we
expect 2 million tons to be shipped during the next
six months.
EC b
Other
a Stock figures coincide with respective countries' marketing years.
b Excludes intra-EC trade.
USSR would have to import 4.4 million tons of grain
monthly during November-June to reach 42 million
tons. Although this rate is more than twice the July-
October pace, it is within our estimate of Soviet port
capacity.
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Table 3
Major Countries: Grain Trade a
a Market year, July through June.
b Estimated.
5.6
0.7
5.7
0.7
? Australia will be able to send only about 1 million
25X1 tons during the winter to the USSR because of this
year's drought-reduced harvest. The Wheat Board
has successfully petitioned Canberra to amend the
Wheat Marketing Act of 1979 to permit grain
imports for domestic use
The situation
eliminates Australia as an alternative grain supplier
for Moscow until December 1983.
Soviet Leverage. Although the potential for shipping
from alternate sources is limited in the short run,
current grain surpluses do permit Moscow to choose
among offers. The choices Moscow makes will deter-
mine the pattern of world trade this year. Unlike
other major importers who have well-established trad-
ing patterns, the Soviets have highly variable purchas-
ing patterns because of disruptions created by the US-
led embargo of grain sales in 1980. Thus, an exporter
who fails to court Soviet sales will be forced to 25X1
compete in well-entrenched markets
Soviet leverage differs widely among exporters.
Canada, Australia, and the EC-all with highly
developed and well-serviced markets-look to the
USSR as an escape valve for surplus grains. Argenti-
na, on the other hand, has become heavily dependent
on Soviet purchases
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1981/82a
Actual
1982/83a
Purchases
Estimated
Requirements
Purchases
to Date
Additional
Commitments
Total
45.0
41.5
22.0
5.2
United States
15.4
10.5
3.5
3.0
Argentina
13.2
14.0
5.5 b
2.2
a 1 July-30 June.
b Including 1.95 million tons under negotiation.
The extension of the LTA between the
Unite States and the USSR commits the Soviets to
purchase 6 million tons of US grain during October
1982-September 1983, and the United States has
offered 23 million tons. Although the United States
possesses natural advantages in terms of quantities
and types of grains, shipping flexibility, and potential
private credit arrangements, sales probably will not
reach last year's estimated 15.4 million tons
world import demand this year is due to bumper crops
and reductions by the other major importers-none of
which can expand production to meet growing popula-
tions and domestic demands for improved diets. The
current buyer's market may evaporate, leaving the
USSR as only one of several vigorous competitors for
world grain supplies
Other Buyers. We believe China's wheat imports may
rise by about 1 million tons, with the actual level
heavily dependent on credit availability and crop size.
We estimate that East European imports of both
wheat and coarse grains will be only about three-
fourths of last year's level because of foreign currency
constraints and record grain harvests. Japan's wheat
purchases will decline slightly, reflecting the govern-
ment's continuing policy of diverting rice land to
wheat production, while coarse grain imports will be
virtually unchanged from the receding three years.
25X1
In the absence of a US grain embargo, Argentina may
have to trim prices substantially to move its grain.
The country has limited storage capacity. Argentina's
precarious financial condition has made Buenos Aires
reluctant to offer credit, a disadvantage in trying to
compete for Soviet sales because Moscow has been
demanding credit to finance grain purchases. Argenti-
na will also find it difficult to reenter markets it
abandoned last year to sell to the Soviets.
How long the Soviets will have this kind of leverage is
difficult to measure. We believe they will continue to
be a major grain importer for the near future. Slack
We believe that EC grain imports-primarily corn
and hard wheat-will also be stagnant because of a
potential record crop. Mexico's poor coarse grain crop
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Although the USSR apparently has the resources to
pay cash for most of its grain imports, Moscow is
likely to continue using credit to finance some pur-
chases. Three major sources of credit are open to
Moscow:
? International grain trading companies can provide
financing because of their longstanding credit rela-
tions with major banks. By extending short-term
credit to purchasers using the firm's line of credit,
the trader can profit from both the sale and the
credit arrangement. The companies can also help
arrange direct credit between banks and grain
buyers.
enable it to reduce imports by about 800,000 tons.
by dismantling consumer subsidies on wheat should
volume, largely because of $1 billion in credit guaran-
tees from the United States for the purchase of
agricultural goods. Brazil's efforts to dampen demand
Increased Competition for Exports. Despite sluggish
demand, Canada and the EC will be able to increase
wheat exports by about 1-2 million tons each this
year. US wheat exports probably will decline 4.1
million tons, and coarse grain exports, although the
same as last year, still will be below levels reached in
MY 1980.
? Commercial banks will independently provide
short-term, unsecured loans to grain-buying coun-
tries that are deemed creditworthy. Interest on
loans is pegged to the US prime rate or the London
Interbank Offered Rate (LIBOR) on most US-
financed grain. Both prime and LIBOR rates had
exceeded 15 percent for most of the past year but
have now declined to 12 and 11 percent,
respectively.
? Government financial assistance is available from
some exporters to promote grain sales. Support can
take a variety offorms, from providing direct credit
to guaranteeing private loans. Canada and Austra-
lia both have offered government-guaranteed loans.
relative to last year may necessitate a 2-million-ton
increase in coarse grain imports. We do not expect
Mexico's financial difficulties to affect grain import
Fierce market competition, increasingly incorporating
attractive finance packages and concessionary repay-
ment terms, is generating acrimony among grain-
producing nations. Much of these nations' anger is 25X1
focused on the EC's Common Agricultural Policy
with high tariff barriers, wheat support prices three
times the US level, and generous export subsidies that
are being blamed for two consecutive years of grain
surplus. EC attempts to expand sales in North Africa
and the Middle East and to enter markets in Asia and
South America are receiving sharp press and diplo-
matic criticism from the United States, Canada, and
Australia. Moreover, EC efforts to stimulate domestic
grain consumption by proposing import restrictions on
feed substitutes, such as corn gluten feed, are anger-
ing US farmers and corn processors. The EC cites US
25X1
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 Western Europe-10.5 .
US-40.7
Other-6.0 -
Canada-20.4-
Australia- 13.5
Argentina-8.9
US-45.0
Other-6.C
Canada- 19.5
Australia-7.5
Argentina-5.5
Western Europe-16.5
Argentina- 12.9
Australia-4.0
Canada-5.5
Other-11.6
US-60.6
Argentina- 12.1
Australia- 1.8
Canada-7.1
Other- 11.5
US-62.2
(:D
farm programs and price supports as unfair competi-
tion. The head of the EC Grain Commission recently
claimed that the United States was pushing the EC
out of its traditional markets in Morocco, Tunisia,
and Egypt and was forcing the EC into the Soviet and
East European markets. At a conference of major
grain exporters in Ottawa last summer, Australia
accused the United States of using political clout to
monopolize the wheat markets of South Korea and
the Philippines.
Some Implications for the United States
Larger US exports will have to await improvement in
world economic conditions, especially in developed
nations. The United States can expect no cooperation
from other exporters, who are under intense domestic
pressure to maximize output and expand exports.
Enough latent demand exists in the major importing
nations to significantly increase grain imports, if
economic conditions improve and demand for meat
picks up. It will also be difficult for the United States,
Canada, and the EC to duplicate this year's yields.
Thus, present surpluses could disappear relatively
quickly, and the world could experience a general
scarcity as in 1972. Many USDA economists believe
that an extended grain scarcity may characterize the
late 1980s. Until import demand picks up, however, 25X1
surpluses will continue. F7 I
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Figure 3
Major Grain Exporters: Share of
World Exports
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Figure 4
World Grain Trade Flows, Average 1976/77-1980/81
Tradable Pool of Grain
175 million tons
Canada 19.2 (11.0)
Australia 13.8 (7.9)
Argentina 13.8 (7.9)
European Communitya 8.7(4.9)_
USSR 22.9 (13.1)
European Communitya 20.7
(11.8)
Eastern Europe 15.6 (8.9)
China 9.7 (5.5)
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