Growing Global - Global Trade Magazine
  May 28th, 2013 | Written by

Growing Global

How International Grain Markets Took Root

What forces create a world market for a commodity? Transporting it more efficiently might help, enough so that, say, iron from Minnesota could compete in Europe with the stuff from Sweden. Or governments could have a change of heart and reverse protectionist policies that inflate prices. But would-be global commodity barons may discover that another kind of barrier is harder to eliminate: indifferent or hostile consumer tastes—tastes that make people think, for instance, that Indian rice and Chinese rice are entirely different commodities.

Of course, “grain” has a cold, biological definition as well—a set of starchy crops that share certain nutritional characteristics. And contemporary Americans might not blink if asked to substitute corn for wheat in their diets. But try telling that to eighteenth-century Neapolitans, who in 1770 rioted against attempts to feed them potatoes—a “slave food” in their eyes—even during a famine.

Looking back, creating a global market for the world’s most basic commodity group—grain—involved convincing millions of people that foods often basic to their cultural identities were interchangeable with the “weird” stuff eaten by foreigners—a task that proved to be particularly challenging. For as long as such strident feelings were widespread, there could be no commonality among the prices of different grains, and thus, no world market in “grain.”

For a world market in “grain” to come into being, then, certain events had to take place: first, the emergence of unified markets in wheat—the great staple of the Atlantic world—and rice, the main grain of the Pacific and Indian Ocean worlds; second, people from all three regions had to alternate their consumption from rice to wheat and vice versa depending on price. None of these conditions existed in 1840, yet all of them existed by 1900.

The emergence of an Atlantic wheat market is the simplest and best-known story: Mid-nineteenth-century industrializing Europe was experiencing soaring demand for wheat, demand that fueled the settlement of the American Great Plains. Barges plying the newly constructed Erie Canal passed the grain to trains, which then unloaded in New York City; and advances in ocean shipping cut the cost of taking wheat across the Atlantic by two-thirds in 30 years.

“I should’ve bought  a sail boat.” Rice trade along the 1,000-plus miles of China’s Yangtze River dwarfed the famous trade in grain from Eastern to Western Europe.
“I should’ve bought a sail boat.” Rice trade along the 1,000-plus miles of China’s Yangtze River dwarfed the famous trade in grain from Eastern to Western Europe.

But even the creation of “wheat” was tricky—and in part accidental. When grain moved by boat from the Midwest to Manhattan, it made the journey in the same sacks in which it left the farm. It reached New York Harbor still identified as farmer Jones’ or Smith’s wheat, and still belonged to that farmer; the middlemen up to this point were commissions agents. New York traders would sample the wheat, appraise it, and only then would they buy it from the farmer. Jones and Smith might get very different prices depending on quality; no set price for “wheat” as such existed.

Railroads changed all that. Because it was very expensive to keep a train sitting under a full head of steam while it was being loaded or unloaded, the process needed to be completed quickly. Thus, before long, shippers had made the switch from hauling individual sacks to using grain elevators that opened and released a torrent of grain into a boxcar. But this meant that Jones’ and Smith’s wheats were hopelessly intermixed in the elevator. Thus, grain had to be sold by the time it reached the railhead, and one farm’s output became interchangeable with that of another.

While wheat continued to be graded, it was now divided into just a few classes, within which one load was assumed to be exactly the same as another. “Wheat” was born; and because now a ton of this year’s “number 2 spring wheat” was also interchangeable with a ton of next year’s, wheat futures trading, options and the Chicago Board of Trade were born.

The story of rice is more complex. Because it stores and ships better than wheat, it had been traded across long distances for centuries: the rice trade along the 1,000-plus miles of China’s Yangtze River, for instance, dwarfed the famous trade in grain from Eastern to Western Europe. But the rice tide flowed within rigid cultural boundaries because people had strong preferences for the particular kind of rice they were used to. Most rice exports, in fact, were built around those preferences and followed human migrations. India’s Kaveri delta sent rice to the tea plantations of Sri Lanka, many of whose workers were also from the delta; labor contractors who supplied Chinese workers for the tobacco plantations of Sumatra also imported the kind of rice those workers were used to.

So, although the mid-nineteenth century saw a huge boom in international rice trading—fueled by the growth of cash crop plantations in Southeast Asia and the creation of “rice bowls” for these plantation workers in the recently drained Mekong (Vietnam), Irrawaddy (Burma), and Chaophraya (Thailand) river deltas—no one rice market existed.

But as more and more rice was used as a source of industrial starches—mostly in continental Europe—a consumer emerged who would “eat” rice based on price alone. Now, when a bad harvest in South China raised prices in Vietnam (which produced a similar variety of rice), European purchasers would abandon Saigon and buy more Burmese rice, raising its price. Cantonese still might not touch the rice that Sinhalese preferred, but now price swings affected what consumers paid, regardless of where the commodity was originally cultivated. And before long, rice futures traded in Singapore much as wheat futures did in Chicago.

To achieve a truly global grain market, that vital connection between rice and wheat had to be made—and that link was forged in India. Though we tend to forget it today, nineteenth-century India was one of the world’s major grain exporters. This reflected both a genuine surplus and British colonial policies that promoted exports at the expense of peasant and working-class consumption. Indeed, India exported both rice and wheat and consumed both. Millions of Indians were accustomed to a cuisine that used both grains—and were too poor not to base their purchasing decisions on price. Thus, when world rice prices rose in the late nineteenth century, Indian exporters responded. And since India’s internal rice prices rose too, consumers shifted to wheat. That meant less Indian wheat made its way to London—and farmers in Kansas faced that much less competition.

For the first time, a worldwide market existed in the most basic of commodities, and for the first time—like it or not—the impact of harvests in Saskatchewan was felt in Sichuan, no matter what the local population grew, or ate.