Huge Soviet grain deals after bad harvest

Press, 23 August 1979, Page 16

Huge Soviet grain deals after bad harvest

By

JOHN EDWARDS

in the “Financial Tinies,” London

The news that the Soviet Union had been given permission to import 10 million tonnes more of American wheat by September, 1980, had as much impact on world grain market prices in Chicago as a slap with a wet lettuce. The announcement came as no surprise at all. Chicago prices have long since moved up in anticipation of the Russians having to buy considerable extra quantities of grain. It became obvious some months ago that because of bad weather the Soviet Union was going to have a bad crop this year, especially when compared with its record grain harvest of 237 million tonnes last year. The United States Department of Agriculture, which has a good record of predicting Soviet harvests aided by the use of sophisticated satellite “spy” techniques, last month estimated the Soviet crop at a lowlv 185 million tonnes. Simple arithmetic made it plain that a steep rise in imports would be required unless there was to be a drastic cutback in the Soviet livestock herds and, thereby, the country’s standard of living.

The rise in livestock numbers to fulfil the growing demand for meat in the Soviet Union means that the Russians are faced with an increase in grain con-

sumption that they simply cannot meet * from domestic production. Although there is plenty of grain available in the world the amount that the Soviet Union can import is limited by the quantity that can be physically handled and, of course, the enormous cost involved in buying large tonnages. It is estimated that the maximum amount that can be handled bv the Soviet ports is 30 million tonnes a year — and this may be somewhat optimistic. Although the Russians revealed this month they had concluded a large wheat deal with Canada, the bulk of purchases must come from the United States, by far the world’s biggest grain exporter, especially of maize.

The two other major grain exporting countries, Australia and Canada, are both facing shipping problems. Although the market reaction to the Soviet grain imports rise was subdued, this was only because it had already been discounted. Russia’s need to import grain on this scale is, of course, vitally important.

For a start the massive grain purchases by the Soviet Union, and China, have transformed the world grain picture, from heavy surpluses to reasonable balance of supply and demand. The

main beneficiary is the. United States, which, as the world’s major grain exporter, was faced with a build-up of huge costly surpluses. The rise in grain prices that has already taken place is a very welcome shot in the arm for American farmers, the ancillary industries attached to agriculture and the Administration which has a commitment to support farmers that could have been extremely expensive. Instead the United States will earn a considerable amount more from its important agricultural exports — one of the mainstays of the economy. It is often pointed out that the real depression in the United States during the 1930 s was a result of both industry and agriculture being hit. There is much less danger to the American economy while farming remains reasonably prosperous. The fact that the Administration has decided next year to scrap the “set aside” programme for wheat, used to restrain production by encouraging reduced plantings, suggests that it is confident farmers will be able to maintain grain exports at a high level. This confidence is mainly based on that belief that the Soviet Union, and possibly China, will be big regular

buyers of grain in future years. It assumes that any cutback in the Soviet livestock population will be restricted to as little as possible to placate a human population requiring improved standards of living.

A rise in American grain prices affects the rest of the world, even the highly protected E.E.C. which is a big importer of maize. But the main impact will be felt by the Soviet Union having to find ways of paying the huge extra import bill. Current export prices are roughly $lBO a tonne for

wheat and $135 for maize to which freight costs of $3O have to be added. The question is how the Russians, and the other Communist bloc countries which are likely to require extra grain imports this year, are to find the money to pay. In the commodity markets, the Soviet Union has been a big buyer of lead (pushing prices up to record levels) and other non-ferrous metals. It has cut back exports of platinum and nickel, although sales are now believed to be resuming on

a bigger scale again. Tf the bad weather that affected the grain harvest also hit other agricultural crops, Russia may have to buy sugar and cut back exports of cotton. So the main two sources of revenue left are diamonds and gold. The Russians’ earnings from diamonds are shrouded in secrecy. But there was a boom market for diamonds, which has cooled off this year.

The Soviet Union must also have benefited considerably from the surge in the gold price to over $3OO an ounce. Its sales last year were reported to be at the highest level for 15 years. The apparently insatiable demand for gold this year from investors, worried by the decline in the dollar, should have enabled sales to be stepped up still further. But there is a limit to how much the Russians can sell, even if they have the supplies, without undermining the market and bringing a sharp decline in prices. There does not, however, appear to be any prospect that the Soviet Union can do much to reduce its need for grain. The great efforts to increase agricultural production have, so far, mainly ended in humiliating failure to match the growth in domestic demand. If this pattern continues, as seems likely, the Soviet Union is likely to become more and more dependent on the United States for grain supplies, with considerable economic and political repercussions.