The Grain Exists, and Most of It Never Moves

The Agriculture Department's September estimates put world wheat ending stocks for the coming marketing year at 276.3 million tonnes against total use of 826.8 million, which works out to a stocks to use ratio of about 33 percent. World corn stocks come to 272.1 million tonnes against use of 1,320.2 million, or roughly 21 percent. By the conventional reading those are comfortable numbers. A third of a year's wheat consumption sitting in store is not a shortage.

The conventional reading assumes the grain can be bought. A large share of it cannot. Of that 276.3 million tonnes of wheat, China holds 120.2 million, about 44 percent. Of the 272.1 million tonnes of corn, China holds 165.1 million, close to 61 percent. Of world rice stocks, China holds more than half. These are state reserves held for domestic food security, and they do not enter world trade in any normal year. The Agriculture Department's own commentary this month reported corn stocks outside China at about 4.2 billion bushels, down 680 million bushels on the year.

The Historical Echo

The classic demonstration of what a thin tradable reserve does under a demand shock is the summer of 1972, and the mechanism was as much about information as about grain.

The Soviet harvest that year came in at about 168 million tonnes against 181.2 million the year before. Moscow went quietly into the American market, with the central negotiations concentrated around the twentieth of June 1972 at a Washington hotel, and contracted for roughly 28 million tonnes of grain for the 1972 and 1973 marketing year, some eighteen million of it from the United States. The wheat component alone ran to something like 440 million bushels.

What made it a shock rather than a transaction was that nobody knew. The purchases were spread across private exporters, export subsidies were still being paid on the sales, and the scale only became visible after the grain had been committed. World food prices rose somewhere between thirty and fifty percent within ten months. The episode entered the language as the great grain robbery, which is unfair to everyone involved but captures how it felt to a market that discovered its reserves were gone after they had already been sold.

The parallel to now is not a coming shock. It is that the number everyone watches, the world stocks to use ratio, was as reassuring in early 1972 as it is today, and for the same reason. It counts grain that is not for sale.

Where Patient Capital Is Positioning

Strip China out and the picture tightens considerably. Wheat stocks outside China come to roughly 156 million tonnes; corn to roughly 107 million. Measured against use outside China, both ratios fall to somewhere near half the headline figure. The United States carries its own share of the buffer, with corn ending stocks at 1,567 million bushels and a stocks to use ratio of 9.67 percent, below the ten percent level traders have long watched as the point where price becomes sensitive to weather.

The scale of the Chinese build up is worth stating for its own sake. In the 2006 and 2007 marketing year China held 36.6 million tonnes of corn and 38.6 million tonnes of wheat. The corn figure is now more than four times larger. A country that imports food has spent two decades accumulating a physical reserve rather than relying on its ability to buy in a crisis, which is a considered judgment about the difference between a claim and a holding.

This letter keeps arriving at that distinction from different directions, and grain states it in the plainest possible terms. A reserve you own and a reserve that exists somewhere in the world are not the same reserve. The first is available in the circumstances where it matters. The second is available on ordinary days, which are the days you do not need it. For a family holding productive acreage, the relevant observation is that the world's genuinely tradable grain cushion is roughly half what the headline suggests, that it has been shrinking outside China, and that the land which grows the marginal tonne is worth more in that world than a stocks to use ratio implies.