Free Trade When Crop Supplies are Limited


Prices for corn, soybeans, wheat, sorghum, rice and other feed and food crops at or near record highs have captured the attention of trade policy analysts. Identified causes include drought in Australia and ethanol production in the U.S. Largely unnoticed in the uproar have been efforts by governments to limit exports or encourage imports. The commitments of WTO member countries to more open trade have been only marginally effective in discouraging market interventions by governments.

Interventions have generally taken two forms. The Ukraine and Argentina have imposed export bans when wheat shipments have reached a specific limit. Russia has imposed a 40 percent export tax, and China ended its 13 percent tax rebate on grain exports and imposed a tax on exports. Other countries like those of the EU have removed import tariffs that limited imports under more normal market conditions. The purpose of all of these government actions is to force the rationing of supplies onto consumers in other countries. In Japan, which imports about 60 percent of its food consumption, the government has created a council for food strategy that will report in March on options to increase food reserves.

Market conditions have changed rapidly in just a couple of years. U.S. corn and sorghum prices paid to farmers on a yearly average basis as reported by USDA doubled from the 2005 crops to the 2007 crops. Wheat prices are just short of doubling; soybean prices will be up at least 75 percent. Rice prices will be up 45-50 percent for the three years, but up over 130 percent from an average price of $4.25 per hundredweight for the 2001 crop.


2005 Crop

2006 Crop

2007 Crop (proj.)

Corn per bu.




Wheat per bu.




Sorghum per bu.




Rice per cwt.




Soybeans per bu.




Source: USDA

All of the 2007 crop yearly average prices are record highs, and current market prices are well above these yearly average prices. Futures market prices for the 2008 crops are also high as crops compete for acreage to be planted in the northern hemisphere this spring. Total production in the southern and northern hemispheres is unlikely to lead to substantial increases in carryover stocks and lower market prices in the immediate months ahead.

There should be little surprise that major grain and oilseeds importing and exporting countries that have taken a hands-off approach to markets over the past ten years feel compelled to intervene now. Free trade in agricultural commodities is still a relatively new idea, and many government officials are sure they can manage scarcities better than markets can manage them.

Free trade is most beneficial in this kind of market by moving commodities to markets where they are most needed to offset lower supplies. For example, total commitments by U.S. sources to ship wheat to North Africa and the Middle East through the end of December 2007 (the first seven months of the 2007-08 marketing year) are almost 300 million bushels, up from less than 75 million bushels a year earlier. This largely offsets lower sales by the EU, Ukraine and Australia. Total U.S. wheat exports this marketing are expected to be 265 million bushels higher than last year at 1.175 billion bushels, and U.S. carryover supplies at the end of the current marketing year on May 31 are expected by USDA to be at a modern era low of 290 million bushels, down 165 million bushels from a year earlier as higher market prices have attracted U.S. wheat into world markets. U.S. corn exports from the 2007 crop are also up 325 million bushels to 2.425 billion bushels, topping the previous record of 2.4 billion bushels from the 1979 crop.

The U.S. had its own try at government managed exports with an embargo on soybeans and cottonseed and their oils and meals in June of 1973. A rapid increase in market prices for the 1972 and 1973 crops fueled by unexpected exports to the Soviet Union led to the policy experiment. The decision was also influenced by rapid price inflation in the U.S. caused by a change in monetary policy and the weak political position of President Nixon because of the Watergate break-in. The embargo of soybeans to Japan is credited with encouraging the Japanese to help fund the then fledgling soybean industry in Brazil.

Markets like the current ones have two sources of instability – changing supply and demand conditions and changes in government policies. One outgrowth of the market experience of the early 1970s was an agreement between the U.S. and the Soviet Union to exchange production and use information so export markets would not be caught unaware of demand conditions in the Soviet Union. Market information has continued to improve over the past 35 years so that supply and demand information is more quickly available and widely distributed. The largest unknowns on production and consumption for major producing and consuming countries are in China.

The uncertainty of how and when political leaders in major importing and exporting will intervene in markets remains the larger unknown. WTO rules will not stop a politician who thinks it is necessary to respond to special interest groups within a country. The best that can be hoped for is that political interventions will not lead to a serious misallocation of available supplies and that government managers learn that they are more likely to cause harm than good in managing grain supplies.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

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