Minding Ag's Business

Has anyone else observed what was missing in the lists of possible retaliations for Russia's takeover of Crimea? Military strikes, asset freezes, trade retaliation were on the table. But notice the words grain boycott or its cousin, grain embargo, never came up.

Have policymakers learned their lessons or just forgotten?

When I asked Kevin Ryan, a retired two-star general and a Russian expert at the Harvard Kennedy School of Government about prospects for embargoes earlier this month, it wasn't even on his radar. He was most concerned that neither the US or NATO is militarily capable of forcing Russia to roll back its gains in Crimea. That reality will force them to take a much harder line toward Russia for the foreseeable future, he says.

Cold Wars have a way of fostering bad policies, if history is any judge. I was a cub reporter covering USDA press conferences when President Carter imposed the ill-fated 1980 grain embargo to punish Russia for its Afghan invasion. The sight of then-USDA Secretary Bob Bergland endorsing food as a weapon made a lasting impression on me. We in the press corps suspected he was a soldier following orders he personally detested but could not publicly oppose. USDA spent about $2.2 billion in 1980-dollars to compensate grain companies and farmers for disrupted sales, but the repercussions reverberated.

The 1979 harvest had been a disastrous crop year for the Soviets, with a drought that cut grain production by 21%. To prevent liquidation of its livestock herds, the Soviets had made plans to import an all-time record 35 mmt of grain, with about 25 mmt supplied by the U.S., economist Robert Paarlberg wrote in Foreign Affairs at the time. Suddenly, the White House cancelled 17 mmt of those grain shipments, supplying only 8 mmt required under a 1975 bilateral agreement. U.S. grain prices collapsed over night and languished for years. The U.S. also restricted its phosphate exports to Russia, but that was a bit dicey since we received (and still do) a significant amount of nitrogen fertilizer from them.

Many historians credit Carter's strike as the beginning of agriculture's credit crisis, although the Federal Reserve's inflation fight certainly exacerbated the problem. Great Lake ports never really recovered their grain business, shipping firms told me years later. A Philadelphia grain terminal--once under long-term lease by the nation's grain cooperatives--sat idle for decades until it was demolished this century. Not until the mid-1990s did total U.S. farm exports even match 1980 levels. By then, the emphasis on exports had shifted to Asia, not the former USSR.

Today, both Ukraine and Russia are poised to come out of their own post-Iron Curtain retirement. They don't need to import grain from us. Since 2005, the FSU added 28 million acres of new crops, second only to South America's 40-million acre leap, according to Purdue University's Chris Hurt. Until the Ukrainian-Russian split in March, USDA had been projecting that those two Black Sea countries would overtake Argentina as the world's second largest corn exporter in the near future and stay there for most of the next decade. Their wheat production has also rebounded, but because quality is so poor, much of it is destined for the Middle East, Egypt and European Union animal feed.

A formal boycott may not make much difference to this year's crops, since the bulk of last fall's harvest has already been exported. Customers don't seem to mind Russia and Ukraine's on-again, off-again grain business, anyway, since weather-depleted stocks prompted both countries to trigger formal or de facto grain embargoes in three of the last six years. Buyers kept coming back for more because the world needs every bushel it can get.

Boycotting Russian grain has no support in Europe either, not with the Russians supplying 30% of the European Union's natural gas. As Yelto Zimmer, with the von Thunen Institute for Farm Economics in Braunschweig, Germany, tells me , "I haven't heard anyone talking of a Russian grain boycott here. The sad thing is people are very scared about depending on Russian gas imports. I wouldn't think it is a likely option."

Sounds to me like the Russians are the ones who learned their lessons well. The best way to defuse retaliation is to make yourself indispensible to your trade partners, whether that be food or energy. Global trade is so intertwined, it is hard to unravel.

See my previous post for information on corn profitability and yields in Ukraine and other up and coming corn competitors.

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