My favorite heist movie is one which never got made — the Great Russian Grain Robbery.
It’s been nearly four decades since the Russians pulled off this sting operation and although there was no gunplay or high-tech safe cracking, it had just about everything else — Cold War intrigue, secret international meetings, precision timing, worldwide scandal, and fortunes lost and won by all the usual suspects.
Ever since leaving the Canadian Wheat Board for academia, I’ve made the Great Russian Grain Robbery of 1972 part of my lectures. That’s partly because it’s a great story which I witnessed as a young grain market analyst, but mostly because it was the foundation for one of only two big price breakouts since the Second World War.
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The other one just happened. You didn’t know that? Then listen to the story of the Great Russian Grain Robbery, how it was the defining event for an entire generation of grain farmers.
Before the summer of 1972, North America was awash in grains and oilseeds. The U.S. was particularly keen to get rid of some of its wheat mountain. It had been paying its farmers well above world market price, but despite generous export subsidies, the surplus was still growing. Even though officials from Canadian Wheat Board were quietly telling USDA officials that they did not need high price-depressing export subsidies for new Soviet sales, the Americans did not listen.
In June 1972, the U.S. government went further by providing the USSR with up to $750 million in credit for purchases of U.S. grain. This was compounded by a second, utterly foolish, move. The Nixon administration thought the Russians were only in the market for a much smaller amount, so it authorized lavish export subsidies for each of the grain companies so they could all compete.
Exportkhleb, the Soviet import agency, took swift advantage, simultaneously meeting secretly with all the big grain companies and, in one fell swoop, buying 12 million tonnes of U.S. wheat
It was weeks before anyone realized what had happened but by then, the die was cast. The grain mountains vanished (world wheat stocks alone fell by 75 per cent) — sold at fire-sale prices using subsidized American credit. It was a class operation that would make any heist artist proud. It was as if the robbers got the Brinks guards to help them load the money into the get-away truck.
The world was stunned and grain farmers were happy. As always, other factors were at play but the reduction in grain stocks drove everything. Wheat prices tripled, going from $1.50 a bushel in the summer of 1972 to $4.50 in the summer of 1973 and even briefly touching $6 on the Chicago nearby futures. Adjusted for inflation, $4.50-a-bushel wheat is equal to $22.50 today (which is what compounding produces when inflation rises by an average of 4.53 per cent over 37 years).
In an era when a 10-cent move over a year was a big deal, the price increases shocked the world — corn and soybean prices more than doubled, steer prices rose 50 per cent, hogs 100 per cent and broilers 150 per cent.
Eventually, prices came back down. Wheat fell back to $3.25 a bushel in the 76/78 period — but still twice what it was. And remember that is what we economists call the “nominal price.” The real price, adjusted for inflation, is several times higher. In 1973, wheat sold for $20 to$30 a bushel in 2009 dollars. That’s a real price!
What’s the lesson here?
Simply this: Most of the time when we are talking about supply and demand, we’re only talking about trivia — a drought here, a country upping its sales program there — or the theoretical, such as a rising middle class in the developing world improving its diet.
But there are times when the fundamentals quickly and dramatically change. These are times to be seized. Once after a class on the Great Russian Grain Robbery, a student told me: “Until now, I never understood what grandpa meant when he talked about prices in the early 1970s and how the decisions he and grandma made then laid the base for the really successful farm we have today.”
Three decades from now, farmers may be talking the same way about the period we’re now in.
The second great price breakout in modern times occurred in 2006. This time it was corn, not wheat, and ethanol plants, not crafty Russians. As was the case nearly 40 years ago, we saw the demand side get caught short and then fear, greed and speculation pushed prices to seemingly unprecedented levels (although only in nominal, not real, terms). As before, prices have now come down considerably but are still much higher than before the breakout.
In just three years, some grain growers have realized a large part, perhaps even a majority, of the profits they will earn in their entire farming career.
Whether the parallel to the 1970s will continue can’t be known. But remember this: Most of the time, the market buzz is just that — noise of little importance. Sometimes, however, a big event comes along which changes the game, not just for a month or a season, but for several years.
In the months following the summer of 1972, American grain silos emptied and supply fundamentals changed. When corn started flooding into all those new ethanol plants, demand fundamentals changed.
These are rare events, but if you spot them early enough and act accordingly, you have a chance to lay the base for success that your grandkids will talk about decades from now. CG
Currently head of the department of agribusiness and agricultural economics at the University of Manitoba’s Faculty of Agricultural and Food Sciences, Brian Oleson has had a ringside seat for major developments in the grain business over the past four decades as a policy analyst for Agriculture Canada and both sales rep and senior executive with the Canadian Wheat Board.
