The Great Russian Grain Robbery
This is the story of how, in 1972, the Federal Government botched the largest grain deal in history. Whether through incompetence or ignorance the government's actions:
• cost the American people $300 million
• caused food prices to jump by 30%
• yet still managed to expand their power
After WWII American grain production eclipsed anything the world had ever seen. Countries were westernizing and gaining an appetite for bread, and America was solidifying her hegemonic power partly through humanitarian food aid. The wheat subsidies of the New Deal grew to became the backbone of American agriculture. The Federal Government guaranteed wheat prices at inland terminals and then exported the wheat at a lower price.
The American tax payer made up the difference.
During this period, Russia and the United States had limited grain exchanges due to the cold war. Any trade arrangements had been conducted through privately held multinational grain traders, and the quantities had been relatively small.
This changed in 1971 when Nixon was holding a weak dollar and president of a country that was importing more than it was exporting. Doing a grain deal with Russian would help balance the trade deficit and offload the ever-growing wheat surplus. The Americans wanted to talk.
On the other side of the world, the Russians weren't doing well either. The winter of '71-'72 had killed much of their winter wheat crop, and early summer heat in '72 damaged the spring wheat leaving them in desperate need to import grain. The US knew Russia was in a bad place but had no idea the extent of their desperation.
This is where it gets interesting.
Earl Butz, the Secretary of Agriculture offered Russia a credit line of $500 million in return for a commitment to buy $750 million in grain over three years at the US subsidized price. Although this represented more grain than America could sell in one year, Butz was confident that Russia wouldn't exercise the entire agreement in year one.
With the promise of credit, Russia secretly began talks with several different grain traders to work out the details. Neither the US government nor the various grain traders involved knew that Russia was secretly drawing up purchase contracts with several different traders.
The extent of the business being arranged was far more than anyone expected.
As these conversations were happening, Continental (the largest grain trader involved) decided to speculate by not purchasing from farmers the grain needed to fill the Russian purchase contracts they had signed.
Their logic was that as the Russian export business grew, the price at the inland terminals would increase due to demand. But because the government was subsidizing the export price, Continental would be able to profit greater off the subsidy spread by waiting to buy grain at a higher price.
But it all backfired.
Within 3 weeks, Russia had purchase contracts on $750 million worth of grain - the entire amount of the 3-year deal to be delivered year one. The con was complete.
The US government along with the multinational grain traders were made to look the fool. Over the ensuing year, grain prices soared as the traders scrambled to fill their contracts.
The botched grain deal cost the American taxpayer $300 million for the subsidy payment alone.
And it didn't stop there.
In 1973, Americans paid $2 billion more out of pocket for food. Between '72 -'75, nearly $54 billion dollars was added to the food bill of American families.
For their incompetence the Federal Government rewarded themselves with the creation of a new program. Under the USDA the Export Sales Reporting Program now monitors the export activities of trading companies.
Had the subsidies never existed in the first place, the US gov wouldn't have had excess grain, and grain traders would't have had opportunity to speculate.
The sad truth is that the Russians weren't the robbers in this story. The real robbery was perpetrated by the US government on the American people.
This book was a great read and is the source for this essay.