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Kub's Den
Thursday, May 24, 2018 9:02AM CDT

By Elaine Kub
DTN Contributing Analyst

Since early April, when a threat began to loom of retaliatory 25% tariffs on U.S. soybeans imported to China, the Chicago soybean futures market plummeted nearly 60 cents. It has rebounded upward, but only in recent sessions now that it seems trade officials from the U.S. and China are backing away from a strategy of mutual punishment. (See DTN Ag Policy Editor Chris Clayton's article: "Enthusiasm Follows China Talks" https://www.dtnpf.com/…)

They say it's "not in the public interest" for either country to play that game, and I agree. It's not desirable to drive down the availability of food in China (and drive up the cost); just like it's not desirable to drive down the availability of steel, minerals or manufactured goods in the U.S. (and drive up those costs).

But there was once a time when grain trade -- simple, necessary, straightforward grain trade -- would never have gotten mixed up in those broader political games. Prior to the two world wars, any trade of wheat from the U.S., Argentina or South Russia going to London, Paris, Hamburg, Alexandria or anywhere else, most likely would have taken place via a standardized contract printed by the London Corn Trade Association (LCTA).

The LCTA would have been the sole authority on what terms and quality standards were included in those international grain contracts, as well as the sole arbitration provider for any disputes. The traders would not have had to been British. For instance, a German trader buying feed peas from Manchuria (Northeast China) in the late 19th century would have used a contract designed and printed by the London Corn Trade Association.

Today, the LCTA is called the Grain and Feed Trade Association (equivalent to the National Grain and Feed Association in the U.S.), but even in its pre-war heyday, it was never a governmental body or obligatory legal forum. It was just a private little organization printing up standardized grain contracts. Only everybody who was anybody in the grain trade voluntarily agreed to obey the covenants set forth in those standardized contracts, and by sheer virtue of their ubiquity, the contracts themselves became "the market."

In fact, the international grain trade, which fed the urbanization, industrialization and globalization of our modern world, might never have occurred without the private ordering made possible by the LCTA. Or, if it did, it would have been highly inefficient, with each country's laws and each trader's contracts subject to intense scrutiny, high transaction costs and high counterparty risk.

As French law professor Jerome Sgard put it: "The LCTA market establishing contracts offered legal fast-tracks, or gateways to international transactions across a long succession of jurisdictions and transactions. And, with the large-scale adhesion of merchants from across the world, these international routes became the only way to access the global market and its many benefits -- legal safety, exact pricing and liquidity.

"What had first looked like an obscure and busy, hands-on, weekly bricolage by a few market insiders in London had become in fact a privately-run contractual highway. The remarkable thing is that this work of legal engineering was entirely based on private contractual language, and by and large, enforced by the Association itself, with limited direct support from public (British) authorities. Market power was enough, but it worked only because it had been formalized and leveraged by the Association itself: it both established the market and extracted from its very success a unique capacity to impose its own rules on merchants."

Sgard's working paper, "The Simplest Model of Global Governance Ever Seen? The London Corn Market (1885-1914)" has been presented at conferences and will be published in the Oxford Handbook of International Governance. It presents a powerful vision -- a time when trade disputes weren't subject to all the frustrations of international coordination, but instead solved quickly by one dominant, private authority, which everyone belongs to voluntarily.

Under the LCTA model, if someone had a problem with a trade (e.g., if China was concerned about pests or diseases in imported U.S. ag products), rather than resorting to whatever byzantine legal machinations were officially available in the local market (e.g., an increase of time-consuming, expensive inspections procedures), the problem would get solved quickly and efficiently through arbitration with two or three selected industry participants who were knowledgeable about commodity trading -- not by lawyers and international judges in a decades-long WTO dispute.

And historically, Sgard's research shows that under the LCTA model, "disputes were typically about the quality of grains and very rarely about points of law." Certainly, there were no fights about intellectual property exploitation spilling over into grain trades.

Why can't we have something like that today? It was a simpler time back then. Since the 1947 General Agreement on Tariffs and Trades, and ultimately the establishment of the World Trade Organization, solving disputes in international commodity trade has become an expensive, complex, decades-long legal process. There is no longer any single, trustworthy "imperial" power dominating global trade.

Maybe we could envision a future in which private market participants voluntarily get together and trust a blockchain to provide the global standardization, verification and arbitration infrastructure once provided by the LCTA, but that future isn't here yet. Grain sellers must take the world as it is --inefficiencies and political squabbling and all.

Watching the soybean market revert back to its pre-"Trade War" equilibrium, I'm reminded of a quote from Jurassic Park: "Life finds a way." Willing buyers and sellers in a market will always tend to work around obstacles and distractions, and ultimately find each other at an agreeable price. Government decision makers will ultimately tend to remember that it's in the public interest to just let that happen. Maybe in this optimistic season of new life popping up in rows all across the Corn Belt, we can say: "Trade finds a way."

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.


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