Gauging the Oil/Wheat Ratio

A recent report by the Worldwatch's Lester Brown points out that while the US pays for its oil imports in part with grain exports, exports of grain and oil are each concentrated in a handful of countries with grain coming largely from North America and oil mostly from the Middle East.

"The United States, which dominates grain exports even more than Saudi Arabia does oil, is both the world's leading grain exporter and its biggest oil importer. Ironically, all 11 members of OPEC are grain importers.

"Using the price of wheat as a surrogate for grain prices, shifts in the grain/oil exchange rate can be easily monitored. From 1950 through 1972, both wheat and oil prices were remarkably stable. In 1950, when wheat was priced at $1.89 a bushel and oil at $1.71 a barrel, a bushel of wheat could be exchanged for 1.1 barrels of oil. At any time during the 22-year span, a bushel of wheat could be traded for a barrel of oil on the world market.

"With the 1973 oil price hike, this began to change. By 1979, the year of the second oil price increase, OPEC's strength had pushed the exchange rate to roughly four to one. By 1982, when the price of oil had climbed past $33 a barrel, the wheat\oil ratio had climbed to eight to one. This steep rise in the purchasing power of oil led to one of the greatest international transfers of wealth ever recorded.

"Today, 27 years after the first oil price hike, the terms of trade are again shifting in favor of OPEC. With grain prices at their lowest level in two decades and oil prices at the highest level, in a decade, the wheat/oil ratio has shifted to an estimated ten to one this year."

Tail Wagging the Dog

Family farmers in the US for the past two decades have been propagandized that so-called "free trade" is going to make them profitable, if not rich. In recent years the combined total export tonnage of corn, soybeans, wheat, grain sorghum, barley, oats and rice have only averaged roughly 25% of the total US production of these grains.

Yet, through such misnamed and disastrous legislation as Freedom to Farm --- passed by a Republicrat Congress and signed by a Republicrat President --- we have seen a classic case of the tail wagging the dog.

While giant multinational grain companies like Cargill, ADM ("Supermarkup to the World") and ConAgra use the self-serving argument that our grain exports have to be priced cheap to compete in an almost non-existent world export grain market, we are letting the cheap price for 25% of our grain production set the price for the other 75% of our grain production that is bought for domestic use.

Thus, as we now have near historic record low prices for corn and wheat we see more and more of our family farmers go out of business unable to meet their increasing production costs while receiving only a fraction of the price to which they are entitled.

Food For Thought

"In some respects the deal highlights how many of today's global financial giants are US companies that have leap-frogged over their European counterparts. In effect, the globalization of finance has become the Americanization of finance." -- from the September 13, 2000 issue of the Wall Street Journal on the buying of J.P. Morgan by Chase Manhattan Corp.

* * *

1980-1992 (Reagan/Bush Years): 85,064 corporate mergers valued at $3.5 trillion 1992-1999 (Clinton Years): 166,310 corporate mergers valued at $9.8 trillion -- from the Securities Data Company:

NFU Urges Probe of Smithfield's IBP Stock Buy

Calling the recently announced purchase of 6.3% of IBP, Inc., the nation's largest beef processor, by Smithfield Foods, the nation's largest pork processor, "another step toward corporate control of our food supply from gene to dinner table," the National Farmers Union (NFU) has called for a Department of Justice (DOJ) anti-trust investigation of the investment.

"This concentration of control further diminishes a waning competitive environment where hog farmers have little power to demand a fair price for their livestock," said NFU President Leland Swenson. "Four firms now control over half of the of the pork slaughter in this country, with Smithfield being the biggest of all. Smithfield also controls 70% of the animals they slaughter."

Virginia-based Smithfield Foods recently acquired 6.3% of IBP, which is the next largest competitor in the pork processing industry. Smithfield now joins Archer Daniels Midland (ADM) "Supermarkup to the World" as one of the two major corporate stockholders in IBP. ADM currently holds a 13.3% investment in IBP.

In addition, in recent months Smithfield has purchased the hog processing operations from Murphy Farms and Carroll Foods, two other pork industry giants.

"Competition is the basis for ensuring fair markets," said Swenson. "It is the basis for establishing fair prices for consumers and producers. We do not believe it is possible for one company to possess such a substantial interest in its chief competitor and maintain an open and competitive marketplace. Competition is fundamental to agriculture -- and American culture -- and is the reason behind the development of antitrust laws. These laws must be enforced."

Meanwhile, Smithfield Foods, Inc. has reported record net income of $44.6 million for the first quarter of fiscal 2001; results that compare with $6.9 million in the same quarter of fiscal 2000. The earnings for the current year represented a more than six-fold increase in net income and a more than five-fold increase in net income per share.

Results in the first quarter of fiscal 2001 reflected a strong performance in the company's Hog Production Group (HPG) which more than offset a modest loss in the Meat Processing Group (MPG). The combination of twice as many hogs raised, the result of the Murphy Farms acquisition this past January, and a 41% increase in live hog prices provided the environment for this strong performance by the HPG.

Smithfield Foods provided the highest total return to shareholders among food stocks in the last ten years, according to Fortune magazine's Fortune 500 rankings. With annual sales of $5.2 billion, the Company is the largest vertically integrated producer and marketer of fresh pork and processed meats in the United States.

"Smithfield is realizing profits that boggle the mind of market analysts," added Swenson. "We have nothing against profit and do not intend to begrudge Smithfield of theirs. Still, we take serious issue with the tactics used to ensure this profit while making it more and more difficult for pork producers to achieve a fair price in the market place.

'Let the Share Wars Begin'

Investor concerns that retail giant Wal-Mart Stores Inc. is positioning itself to crush competitors in the grocery industry, just as it squeezed the profits of retail rivals like Kmart Corp. and Sears, Roebuck and Co. was underscored last week when Albertson's, one of the nation's largest grocery operators, warned that its earnings for the fiscal second quarter ended Aug. 3 will be well short of expectations, and that earnings in the near future also will be lower than anticipated.

Responding to the news, investors engaged in a high-volume sell-off that sent shares of the Boise, Idaho, company to a new 52-week low, losing $3.69, or 14%, to $22.75 on the New York Stock Exchange, on top of a more than 15% loss the preceding day.

And as the Chicago Tribune's James P. Miller reported Albertson's woes battered stocks of its rivals as well: Shares of Pleasanton, Calif.-based Safeway Inc., one of the nation's largest grocers, fell $1, or nearly 2%, to $51. Shares of Cincinnati-based Kroger -- which recently reiterated that it was comfortable with analyst estimates for its earnings -- fell more than 3%, and other grocery companies, including A&P and Delhaize America Inc., also declined.

While Albertson's says the company's profits are being squeezed by several factors, including higher labor costs and temporary expenses associated with its ambitious growth-through-acquisition strategy, it concedes another factor hurting its earnings was the "significant market-entry activity by competitors" in a number of key marketplaces.

"Let the Share Wars Begin," wrote UBS Warburg analyst Neil Currie, in a report that downgraded the entire food-retailing sector. Albertson's earnings disappointment, the analyst said, represents a "warning of things to come" for the grocery industry.

The news from Albertson's shows, Currie contended, that "competitive pressures in the US food retailing market are heating up even faster than we thought, as Wal-Mart continues its aggressive coast-to-coast rollout of superstores."

In the latest quarter, Albertson's sales proved most disappointing in markets in Idaho, Utah, Montana, Wyoming and South Dakota, the analyst noted, adding that he considers it "no coincidence" that those are regions where Wal-Mart has recently stepped up its drive into grocery sales.

As Miller points out "In recent years, the once-fragmented industry has undergone a dramatic consolidation, with Albertson's, Kroger, Safeway, and Great Atlantic & Pacific Tea gaining economies of scale by snapping up regional chains, using volume to achieve growth in an industry with historically razor-thin profit margins. With their purchasing muscle, the national grocery chains have been able to squeeze lower prices from food suppliers, helping hold down prices for consumers."

But even as they grow, Miller relates, they face a growing threat from Wal-Mart, the hugely successful Bentonville, Arkansas-based discount merchandiser. Wal-Mart operates the Sam's Club warehouse stores, and for more than a decade has been building a swelling number of "superstores," that boast a conventional Wal-Mart side by side with a low-price Wal-Mart food store.

"It's a potent combination, with heavy customer traffic for the merchandise store feeding sales at the grocery outlet. To date, the push has been focused in more rural areas, Wal-Mart's traditional core market," he adds.

"Although Wal-Mart's designs on the national food-retailing sector helped drive grocery chains into the recent frenzy of mergers, even the bulked-up national chains are expected to be vulnerable to the Arkansas company once it eventually gains enough critical mass."

UN Panel: WTO 'Nightmare' for Developing Nation

Labeling the World Trade Organization a "nightmare" for developing countries, a United Nations-appointed sub-commission on protection of human rights dismisses the WTO's open trading rules as based "on grossly unfair and even prejudiced'' assumptions.

The document, a study of the effect of globalization on human rights, was written by two jurists, J. Oloka-Onyango of Uganda and Deepika Udagama of Sri Lanka.

If approved by the full sub-commission, it will be presented to the annual session of the overall UN Human Rights Commission when it holds its annual six-week session in Geneva in March and April next year. The rules of the currently 137-member WTO, the two authors said, "reflect an agenda that serves only to promote dominant corporatist interests that already monopolize the area of international trade.''

In addition to recommending that the WTO should be brought under the UN's purview, the report calls for a "radical review of the whole system of trade liberalization'' and critical consideration of whether it is geared toward shared benefits "for rich and poor countries alike.''

But, as Reuters' Robert Evans reports, "although it echoes criticism of the trade body from Western anti-globalization groupings, the 40-page report rejects the idea many of these groupings promote of linking trade rules to human rights, labor and environmental standards. Many 'civil society' groups in developing countries also oppose such linkage, arguing that it would provide Western countries with an excuse to put up more barriers against goods from poorer states."

Human rights, the UN report points out, were given only an oblique reference in the founding documents of the WTO, which was launched at an international conference in Marrakesh in 1994 to replace the old General Agreement on Tariffs and Trade (GATT). "The net result is that for certain sectors of humanity -- particularly the developing countries of the South -- the WTO is a veritable nightmare,'' the jurists declared.

In a discussion on the report, Evans notes, UN sub-commission member El-Hadji Guisse of Senegal, accused the WTO -- of which his country is a member -- of carrying out a "second colonialization process in which the only interest was profit," according to a UN summary of his remarks.

If the UN were consistent, it would oppose the existence of the trade body -- which is outside the UN system and takes its decisions by consensus rather than vote -- whose driving motivation was "money, domination and exploitation,'' he said.

A. V. Krebs operates the Corporate Agribusiness Research Project, P.O. Box 2201, Everett, Washington 98203-0201. Email; web

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