Crop failure was common in the Soviet Union. The cold climate, frequent droughts and mismanagement led to regular shortages of basic foodstuffs. 1972 was one such year. High temperatures scorched Europe leading to drought across much of the continent. By summer much of the ‘Black Earth’ region (a belt of rich and fertile soil stretching eastward from Moldova and the Eastern Ukraine) was in danger of being ruined. Coming straight after a poor harvest the previous year, the Soviet leadership realised that a catastrophic wheat crop failure meant famine was becoming a very real danger.
In June 1972 the Soviet Union started a series of negotiations with commodity traders in the US with the aim of purchasing enormous quantities of grain and oilseeds – without letting on that they were in a precarious position. No one outside of the Soviet Union had any idea how badly their crop had failed. If the Soviet negotiators let on how bad their situation was then they would have been forced into paying much higher prices.
Leading the negotiations was Nikolai Belousov, the head of Exportkhleb, the Soviet agency in charge of trading grain. In the summer of 1972 he came to New York in order to negotiate the purchase of US grains. After stepping off a jet in New York on 28th June he met with six US commodity trading companies, each in separate negotiations over the next five weeks. Each firm under the impression that they were the only trading company Belousov was negotiating with. Unbeknownst to the commodity traders, Belousov had outsmarted them by recognising that their penchant for secrecy would work against them. Each firm thought they were the only ones who had cut a deal with the Soviet’s, and so each agreed to sell grain, not realising the scale of the combined purchases.
The exports to the Soviet Union also benefited from generous US government export subsidies. This enabled the Soviet’s to purchase the wheat at the artificially low global price of $1.63 per bushel, while also taking advantage of cheap ocean freight. The subsidy had been in place since 1949 and paid US exporters the difference between the domestic wheat price and the lower, frozen global price. President Nixon eyeing the chance to jack up agricultural commodity prices and curry favour with rural voters, was only too happy to export what appeared to be surplus grain to the Soviet Union.
Much like the commodity traders, the US government negotiating team were almost completely in the dark over the scale of the problem the Soviet’s faced, even under the impression that the Soviet’s were merely buying the wheat to feed their animals. Under the terms of the export subsidy agreement between the two governments, the Soviets contracted to purchase a total of at least $750 million worth of USA grown grains, from US commodity trading companies over the next three years, including at least $200 million in the first year. There was nothing in the agreement setting maximum tonnages of any commodity. It did not occur to the US delegation that the Soviets could ever buy too much.
The first signs of something going badly awry were picked up by the commodity traders when they observed their competitors chartering significant numbers of dry bulk ships to ferry the grains across the Atlantic. When the scale of the deal came to light, agricultural traders came to the shocking conclusion that there was nowhere near enough available to meet the terms of the deal, plus that demanded from other traditional importing nations, let alone its own domestic consumption. All told, the Soviet’s purchased almost 20 million tonnes of grains and oilseeds from the US commodity traders. The sale included 11.8 million tonnes of wheat, equivalent to around 30% of the US wheat harvest. The cost of the deal to US taxpayers was estimated to be in the region of $300 million.
By early August the scale of the buying was becoming clear. Other grain purchasing nations were getting worried. Countries in Europe for example, had also suffered from drought conditions and so they quickly got their grain orders in, perhaps conscious that the longer they waited the greater the risk that the US would renege on the artificially low global wheat price (those fears came true on the 25th August when it was announced that the subsidy would drop to zero over the following four weeks). Poor grain and oilseed harvests elsewhere in the world also increased the perception of scarcity. A further devaluation of the US dollar in early 1973 only added to the pain felt by importing nations. By mid 1973 the price of wheat had increased by 170% to $4.35 per bushel.
The Soviet grain purchase was characterised as a robbery, but that was really a misnomer. The Soviet’s had no need to disclose how desperate they were. If they had of course, they would have been forced to pay much higher prices as the rest of the world understood how desperate the Soviet’s were for wheat. A combination of poor communication and nonchalance on the part of the US Department of Agriculture meant that early intelligence that the Soviet’s were in the market in size did not get passed onto other parts of government.
Weeks after the deal was announced the satellite Landsat 1 began scanning the Earth for crop conditions around the globe. If the US negotiators had access to that information sooner then they would have known how precarious the situation was for the Soviet’s. It’s unclear though whether better information would have made any difference to the outcome.
A few months later the 47th Presidential election was held on 7th November 1972. Incumbent Republican President Nixon was re-elected in a landslide, taking 60.7% of the popular vote. Strong agricultural export demand appeared to have made the difference.
The spike in grain prices quickly filtered through to the end consumer. Grocery food prices rose by some 20% over the following year as first cereals, and then meat prices were driven higher. Although the direct impact of the Soviet purchases on consumer inflation is open to question the impact was certainly significant.
The bout of food price inflation in the early 1970’s was the first taste of what was to come, later in the decade.