I remember an amusing story about a group of grain traders traveling to Russia with the expectations of making a serious killing on soybean futures after a food shortage and a crop failure had hit the former Soviet Union in the early 70s.
They had soybeans, and Russia wanted them, they all thought, and they had taken some seriously long positions in soybean futures on the Chicago Board of Trade. But as they sat down with the Russians to discuss the terms of the mammoth soybean sale, one of the Russians politely said, “Wait a minute Comrades, we don’t want soybeans. It is wheat we want.”
The traders were stunned, and one even puked on the fine rugs of the Kremlin. Good story, but not factually correct.
Dr. O. A. Cleveland corrected bits of the story in his weekly Bayer CropScience newsletter on Friday, December 4. He went back to those days in Russia and the country’s decision to upgrade its people’s diet. And it was wheat the Russians wanted, and they came to us trying to buy enough for livestock feed and food for 130 million people.
“In 1973, the country suffered its worst wheat-crop failure ever. Needing feed for livestock to maintain its promise to upgrade the country’s diet, the Russian government sent representatives to the U.S. and over a single weekend purchased much of the U.S. wheat crop,” Cleveland said.
Wheat, which had been trading for $2.50 per bushel, jumped to $6.00.
A few years later, China and India decided that they, too, would upgrade their peoples’ diets. “The Chinese selected pork and the Indian government selected poultry,” Cleveland continued. And both countries need grain to feed them. But this time, Cleveland said, instead of trying to feed 130 million hungry people, the two countries were trying to fill 1 billion hungry stomachs.
On top of that, crop failures around the globe and our commitment to ethanol, reduced world grain stocks even further, and prices exploded.
Also during this time, cotton stocks were well above demand. “Cotton had the largest supply on record,” Cleveland said. “Presto, price ratios moved immediately in favor of grains and oilseeds, leaving cotton acreage to plummet.”
The rest is the purest form of supply and demand. As cotton acreage spiraled lower, so did the supply.
“The world has used its surplus of cotton supplies — taking five years to do so,” Cleveland said. “All this says is that economics works. With cotton supplies used, the market has to catch up with the grains and oilseeds. More specifically, the price ratios between the various field crops have to come back in line. That is what dollar (plus) cotton has done. Yet, the world cotton supply cannot be rebuilt in a year.”
The result, Cleveland said, is that it could take 5 to 10 years for the world to refill the cotton pipeline.
“In the meantime, cotton has joined the party and will see many more months of the magic dollar sign,” he said.