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DAVID KRUSE

By Staff | Mar 6, 2009

The subject is grain, food and commodity reserves. I’m surprised at how many U.S. farmers, farm organizations and farm writers, who want limits put on ag markets, so that they don’t ration tight supply with price, thereby providing farmers maximum incentive to expand production. They favor what they call strategic grain reserves.

They are called strategic because they provide a “supply of last resort” to avert shortages so that endusers and consumers and governments don’t have to protect themselves by maintaining reserves of their own.

Instead, the federal government would essentially acquire grain stock to do that for them and hold/store these stocks to provide a residual supply should tight stocks occur that raise market prices.

We’ve gone down that road before in the U.S. and it worked from the enduser’s and consumer’s point of view. Strategic grain reserves act as a lid on the market.

Stocks typically never get so tight that when stored supply from reserves is opened like the flood gates on a dam that prices won’t fall and farmers get soaked.

That’s the whole point of having strategic reserves, which is to protect endusers and consumers from high prices resulting from short supplies.

If you are on that side of the fence, I can see why strategic reserves have appeal. However, producers and farmers are not on that side of the fence and depend on supply and demand functioning as much in their favor as it does the other way against them.

China is building strategic reserves of many natural resources. As such a large consumer of commodities and raw materials, they see shortages of basic commodities as a strategic security issue. They have known hunger and the communist government knows that despite their power, their continuing control rests on satisfying the basic needs of its people.

Government fear of social unrest drives their economic plan, which includes strategic food and fuel reserves.

The U.S. has a strategic petroleum reserve because it imports large quantities of oil and is therefore dependent on foreign supply. China imports large quantities of virtually everything to meet the needs of its vast population.

This dependence on foreign sources of supply makes strategic reserves sensible and desirable. The primary difference from the strategic petroleum reserve with a grain and food reserve in the U.S. is that we are by a significant measure, a net food exporter.

We don’t currently depend on anyone else to feed us. The U.S. farmer provides cheap, bountiful, healthy food. There is absolutely no reason for a U.S. food and grain reserve because there is virtually no conceivable risk for shortages in the U.S. food supply.

We import food because we want to, not because we have to. We may like French wine, Peruvian plums, or Mexican tomatoes, but we can provide for ourselves all the calories needed for Americans.

There is a natural argument to be made for other nations who depend on imports to maintain strategic food reserves, but none for us to do it for them. That is a cost that they should bear and the U.S. taxpayers have plenty of things to fund of their own without bearing the cost of something that they don’t need.

The 2008 market spikes were extremely short lived. There was never any real danger of shortages. Exports of corn actually grew all the while we were expanding the ethanol industry and corn production to meet it.

The price rally did exactly what it was supposed to do, which was, give farmers the financial incentive to grow more and they did.

Dan Looker, business editor for Successful Farmer, suggested that VeraSun and Pilgrim’s Pride bankruptcies were caused by shortages that could have been averted by strategic grain reserves.

However, the risk management prowess of these companies were so inept, they created their own problems and their demise. Had these companies had no risk management programs, but instead would have bought and sold daily on the spot market, both would have likely avoided bankruptcy. That’s because the real losses from what was a relatively short period of high corn prices would have been very small compared to what they reported from so called, “hedge losses,” magnified by risk management failures.

No strategic corn reserve would ever guard against that much incompetence. Farmers have to manage their risk and endusers have no less responsibility.

We have had a cheap food policy in the U.S. for several decades and no one has starved in the U.S. because our food was too high-priced or any shortage existed.

Strategic grain, food and commodity reserves are meant to hold prices down and protect national security interests. It would be smart for China, Japan, South Korea and many other nations dependent on the U.S. and other commodity producers for grain and food to maintain strategic reserves. It would be dumb for us to do it for them.

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