oftwominds-Charles Hugh Smith

Is There an Organization of Grain-Exporting Countries (OGEC) in Our Future?

If push comes to shove, which do you reckon you'd manage better: a 50% reduction in food or a 50% reduction in petroleum? For most people on the planet, going hungry is far and away more unpalatable than a 50% reduction in their oil consumption.

After all, you can switch to city buses, mopeds, quit the job that's far away, etc., but if hunger is gnawing your guts, there aren't a lot of ways to convince your body it can do just fine on 50% less calories.

And which shortage is more likely to end the reign of incumbent plutocrats? Again, the answer is food. Riots over petroleum shortages might be nasty, but when children are crying in hunger, even an Army will be unable to stem the tide of citizen rage.

Which brings up an interesting question: if food gets even scarcer than petroleum, then who's got the more powerful leverage: Oil exporters or food exporters?

Food is of course renewable--it can be grown again next season. But the constituents of food--arable land, water, fertilizer, access to market, etc.--are limited and cannot be created "on demand." Each element requires immense investment to "bring online."

Petroleum is non-renewable, but at least one alternative--conservation--is essentially free. Alternative sources of energy require large capital investments, but they are varied and widely available: geothermal, hydroelectric, wind, solar, tidal, nuclear, etc.

The 1970s saw the emergence of a new global power center: the Organization of Oil Exporting Countries--OPEC. By banding together, countries which controlled about 40% of the global market for oil essentially seized control of that market--not by cornering 100% of production, but by setting limits on exports. With that power, they then wielded oil as a political weapon--the 1973 oil imbargo OPEC placed on the U.S. being a powerful example.

OPEC's history is also full of other lessons. OPEC's production is dominated by one country: Saudi Arabia. During much of OPEC's history, the Saudis "controled the spigot," meaning that they could raise or lower the production of oil so significantly that they could, on their own, move global prices.

As we have seen elsewhere, the Pareto Principle (80/20 rule) is a useful tool. Though OPEC controls about 40% of global production and Saudi Arabia produces about 30% of OPEC's production, that was enough to leverage global prices up or down.

If grain/food become permanently scarce (demand exceeds supply), could grain exporting countries band together to control prices--or their access to petroleum?

Let's say that the "market price" of oil is $300/barrel and that of wheat is $20/bushel at some future date. (Wheat recently hit $14/bushel and oil is around $135/barrel now). What if the top grain exporting nations--a mere handful produces 80% of all wheat exports-- announce that they're ready to trade three bushels of wheat for a barrel of oil--regardless of the current market prices for each commodity. The "currency" for food would thus be oil-- but the exchange rate would be determined by the three or four dominant grain exporters.

If you're a major grain importer like Iran or Saudi Arabia, and your population has exploded along with your citizen's expectations for the good life, exactly where are you going to turn to to buy your grain if you refuse the grain exporters' offer?

Yes, there are minor exporters you might be able to strong-arm, but just like small oil exporters who are not part of OPEC, they want to sell at the price set by the cartel: the Organization of Grain-Exporting Countries (OGEC). The global price of the barrel of oil is now three bushels of wheat or equivalent rice/corn--regardless of the grain's source.

Let's start with how little food is available for export worldwide. Global rice production is about 418 million tons, but the global marketplace trades less than 30 million tons. The reason is that large producers like China and India consume the vast majority of their own output.

Thus the largest exporter of rice is Thailand, which exports about 8-9 million tons annually. So the price of rice is being set by about 7% of the global crop which is traded. (Source: High Global Demand, Tight Supply To Boost Rice Prices.)

The same holds true for wheat and other grains/agricultural commmodities: World and U.S. wheat production, exports, and ending stocks (USDA)

total world wheat production 2007: 22 billion bushels
U.S. production: 2 billion bushels
world exports: 4 billion bushels U.S. exports: 1.3 billion bushels

Here are some data drawn from the excellent website of the FAO, Food and Agricultural Organization of the United Nations:
Top wheat exporters:
United States … 31.6 million tonnes (29.9% of wheat exports from top 10 exporting countries)Australia … 18.5 million (17.5%)
Canada … 15.1 million (14.3%)
France … 14.9 million (14.1%)
Argentina … 10 million (9.5%)

Maize/corn:
United States
Argentina
France
Brazil

Millet:
India
United States
Ukraine
China

Rice (broken)
Thailand
India
United States

Rice (husked)
United States
Guyana
Thailand
Spain

Soybeans
United States
Brazil
Argentina

Sorghum
United States
Argentina
China
Brazil

Certain patterns emerge as we scan these lists of top food exporters. China and India are agricultural powerhouses, but they consume most of what they grow. Certain European nations are big agricultural producers--France, Ukraine, et al.--as are Brazil and Argentina and Thailand. The nation which is on practically every list is the United States, which exports grain to over 100 nations:

USA Grain Exports - Where to, how much? (The Oil Drum/Europe)
How farfetched is a scenario in which global grain exporters band together and announce that in order to give away grain to starving people in poor countries, grain to wealthy countries will be priced in oil/BTUs? Either pump the oil and trade it for food, or get the oil (or equivalent transferable energy BTUs) from somewhere, and then we'll ship you the food.

If we consider the overlap of energy resources and grain-exporting, we can forsee how regional alliances might be established. Brazil is a prodigious producer of sugarcane-based and soy-based biofuels; certainly these could be channeled into powering farm equipment in both Brazil and its neighbor Argentina.

Energy-rich Canada, like its neighbor to the south, is an energy and agricultural powerhouse.

Thailand might form a trading alliance with its neighbor Vietnam, also a rice exporter, as Vietnam has offshore oil. Even pariah-state Burma could join this southeast Asian exporting group once it throws off its cruel dictatorship.

And speaking of the Burmese dictatorship: as China suffers desertification in the north and paves over much of its arable land every year in new highrises and malls, that nation is forced to import ever more grain. (See FAO site for data.) What if the grain exporting nations demanded that China cease its massive support of the Burmese junta?

As long as the demand was made privately so China wouldn't lose any face, it wouldn't take much for China's leaders to weigh the relative value of millions of tons of grain for their hungry millions and the suddenly modest geopolitical gains of supporting a brutal dictatorship.

Since we're considering trends, how about the effects of global warming on global food production?
Global Warming: Who Loses—and Who Wins? (The Atlantic)

Nobody knows, of course, but it certainly seems plausible that the upper Midwest and Canada might extend their growing season, while other regions of the planet might suffer further desertification (northern China, etc.) and semi-permanent drought which could further reduce global production of basic foodstuffs (grain, soy, etc.)

Agriculture requires a lot of oil currently, but that could change. France could divert enough of its nuclear-generated electricity to charge electric tractors, and those nations with some oil (Indonesia, the U.S. etc.) could divert remaining petroleum to get/produce potash and other fertilizer. If push came to shove, oil could be reserved for agriculture, and the 2/3 consumed by transportation could be prioritized globally to serve the production and shipment of grain.

Will "the market" create such a cartel of grain exporters? Of course not, any more than "the market" created OPEC. Cartels are not supposed to exist in classic market-based theory; some new producer is supposed to arise to reduce the power of the cartel.

But you can't grow millions of tons of grain just anywhere, nor ship it without an infrastructure. So the idea that the world could suddenly produce millions of tons of surplus grain to "break" a cartel of the current top grain exporters is essentially absurd. All the best arable land is already in production, and the "Green Revolution" has already snagged all the low-hanging fruit.

Yes, poor nations could increase their yields, but that requires capital and energy-- lots of it when you consider fertilizer and pumping water. And even if you grow immense quantities of grain, you then have to protect it from rats and rot and transport it hundreds of miles to a port or railhead for shipment.

The production of grain is just as capital-intensive and complex as energy production.
This speculation raises this central question: what could cause the grain exporters to band together in what is essentially a political cartel? What events or trends could awaken an understanding of their power and leverage?

How about an oil shortage? How about a sudden realization that we're shipping grain to countries which have oil but aren't selling it to the right consumers, i.e. us, at a reasonable price, i.e. priced in grain?

And as I have already mentioned, the political cover is ready-made: in order to feed the starving poor of the world, we need oil. You wouldn't be so hard-hearted as to refuse us in our noble pursuit, would you? Actually, we don't care what you think: it's a barrel of oil or equivalent BTUs for three bushels of wheat, or your people starve. It's your choice.

For a ruling elite looking down on a seething hungry mob and an Army who is refusing to shoot their own parents, brothers, sisters and children, that will be an easy decision to make. Oh, and by the way, we really think it would be better if you stop doing this or supporting that government; we might decide the bushels won't go your way at any price. How long will you stay in power if you refuse our suggestions?

Thank you, Eugenio M. ($10), for your third generous donation and your longstanding support of this site.