Harvests Down, Prices Up

By Christopher Byron

Grain markets groan, sugar sours, and the cost of eating escalates

A world economy already staggering under the impact of repeated blows from petro-inflation is now staring at another and different onslaught: higher food costs. Disappointing harvests in several of the world's key agricultural producing nations have resulted in soaring agricultural prices. From the truck farms of Japan to the wheatfields of Poland, bad weather and dismal crop yields are putting a sharp pinch in the global production of everything from meat and grain to vegetables.

The poor harvests climax almost a year of turmoil in world agricultural markets. Farmers were thrown into a spin in January, when the U.S. partially embargoed food exports to the Soviet Union in retaliation for the Soviet invasion of Afghanistan. Prices plummeted, and by last spring, many farmers were facing ruin. Then came the summerlong drought that seared the U.S. heartland.

The nation's wheat crop was harvested before the weather turned bad, and as a result was excellent. But corn and soybean production is down sharply. The corn harvest has fallen from 7.7 billion bu. to 6.4 billion bu., while soybean output is down from 2.2 billion bu. in 1979 to 1.7 billion bu.

Adverse weather has reduced grain harvests in the world's three other major exporting countries as well: Canada, Australia and Argentina. The Canadian Wheat Board labeled this year's crop "disappointing." Australian wheat farmers are suffering the worst drought of this century, which has reduced the present harvest from an anticipated 15 million metric tons to 9.5 million. Argentina has also had lower than normal production because of dry weather.

Meanwhile, the Soviet Union's just completed summer grain harvest is poor. Preliminary tallies show a total crop of no more than 181 million tons, a 23% shortfall from the 235 million-ton target set by Moscow planning officials. This means that Soviet buyers will be stalking the world's grain markets more determinedly than ever.

A tip-off of Soviet intentions came in September, when Swiss customs officials reported that Soviet traders had quietly resumed selling large quantities of gold in the Zurich bullion market. The sales, which were the first in nine months, are often used to acquire Western currencies in order to pay for grain imports.

To the heavy Soviet imports are likely to be added large Chinese grain imports. Peking will buy 7.5 million metric tons of American cereals this year, in contrast to 4 million in 1979. Two weeks ago, the U.S. and China signed a four-year agreement that will permit the People's Republic to buy annually up to 9 million tons of American grain without prior approval of the U.S. Government.

The low harvests and high demand have already begun pushing up prices. Wheat has gone from $3.98 per bu. in early April to $4.90 last week. During that same period, corn jumped from $2.98 to $3.49, and soybeans rose from $5.68 to $8.57. Because soybeans are a primary feedstock for cattle, poultry and pork, the higher prices are emerging as similarly steep increases at the meat counter. By next summer, a pound of hamburger that currently sells for $1.79 could be going for $2.40.

This year's poor harvests and rising prices have also hit sugar. Since January, the cost of the sweetener has increased at the supermarket by about 90%, to 88-c- per lb. Part of the squeeze traces to Eastern Europe, where very heavy spring and summer rains soured the sugar-beet harvest. That has forced both the Soviet Union and Poland to buy heavily in world markets.

Sugar exports from the Western Hemisphere have also declined. Cuba's crop this year was raked by the rust fungus. The Cubans lost about 1 million tons of their 6.5 million-ton-harvest to the disease. As a result, the Castro government has cut its deliveries to the Soviet Union, which normally takes approximately half its crop, by about 30%.

Brazil, Latin America's other big sugar producer, accounts for close to 10% of world output and has enjoyed a good harvest. But sugar in that country is now winding up as an important source of automotive fuel instead of as a sweetener on dinner tables. Brazil has embarked on a crash program to manufacture ethyl-alcohol automobile fuel from sugar cane. And last month, when the Persian Gulf war halted oil shipments from Iraq, which supplies 50% of Brazil's petroleum imports, the government slapped an emergency ban on all new sugar export contracts. The action is expected to remove at least 500,000 metric tons of the commodity from the world's 1981 supply.

While world agricultural markets grow tighter, the American embargo on farm exports to the Soviet Union is showing more and more signs of collapsing.

Says C. Robert Saathoff, a grain expert with the Wall Street investment firm Bache and Co.: "Whenever you have many suppliers, an embargo is usually effective only in the first six months to a year at most."

Before the January embargo, Moscow had planned to import some 25 million tons of grain from the U.S. during 1980, as well as about 12 million tons more from other nations. The Carter Administration stopped the export of approximately 17 million tons, but the Soviets have been able to make up for most of that on world markets. The Soviet Union has been obtaining large amounts of wheat and corn from Argentina, which refused to support the U.S. boycott. Usually the Soviets are forced to pay higher prices to these suppliers than they paid the U.S.

Some grain exporters have picked up part of the trade slack by thinly disguised transshipments. During the twelve months preceding September 1979, for example, only 764,000 metric tons of U.S. wheat were shipped from Duluth, Minn., to Canada. But in the following twelve months, the quantity more than doubled, to 1.8 million tons. Says William Cortez of the Duluth Port Authority: "This is definitely not grain for Canadian consumption. You have to assume that it is being shipped elsewhere."

Now France is trying to give the embargo the coup de grace. France, which is Western Europe's leading grain producer, although it is not a major world exporter, has just completed a bumper harvest. The French this year will have 3 million to 4 million tons of wheat available for export. As a member of the European Community, France is bound by a pledge made last winter that it would not take advantage of the American embargo by boosting its own grain exports to the Soviet Union. But now the French government wants the Community to shelve the commitment on the ground that, indirectly at least, the U.S. has not been abiding by its own embargo.

Despite the recent sharp price in creases, farm experts do not expect a total runaway in the cost of grain and other commodities, such as occurred following the disastrous Soviet crop failure in 1972. Grain inventories around the world still provide a modest reserve cushion, and that should stop any serious agricultural shortages during the coming year, when world grain consumption is expected to exceed production by 37 miliion tons. On the other hand, another harvest as bad as this year's, and nations could find themselves facing disturbing shortages.

-- By Christopher Byron

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