The Case for Strategic Reserves

by | July 18, 2022

The world is facing a looming food crisis. The Secretary General of the United Nations, António Guterres, said at the end of June 2022, “There is a real risk that multiple famines will be declared in 2022. And 2023 could be even worse.” 

Even before this crisis, around a quarter of a billion people globally were already food insecure.  The 2022-23 global food crisis could impact many more, potentially touching billions of men, women, and children, not just in poorer countries but also in advanced and otherwise wealthy nations around the world. This crisis has been brought about by a combination of man-made activities including war, sanctions, and mismanagement of natural resources and supply chains, as well as by natural catastrophes such as extreme weather and pestilence. It appears the Four Horsemen of the Apocalypse are trotting towards their posts. Global food prices are now at the highest level ever recorded (since at least 1961), not just in nominal but also in real terms (Chart).

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Rapidly rising energy prices are a contributing factor. So, too, are output and transportation disruptions owing to war. Russia and Ukraine together supply the world with up to 30% of its wheat. Russia is also the world’s largest supplier of fertilizer. Fertilizer is a by-product of natural gas, a difficult-to-transport product which the US has in abundance but not Europe. Government attempts to restrict fertilizer use in the hopes of a greener, zero carbon future have in recent weeks backfired violently in Sri Lanka (resulting in the overthrow of the government) and peacefully but forcefully in The Netherlands.

While neither Russian wheat nor fertilizer are sanctioned goods, Western imposed restrictions on Russia’s international financial flows means the world is finding it extremely difficult to pay for them. The head of the African Union recently warned that African leaders are “very worried about the collateral impact of the disruptions caused by blocking the SWIFT payment system as a result of sanctions.”

At times like these, the world could use a strategic reserve of grains and other foodstuffs. But the use of strategic reserves has become mismanaged.

Take energy as an example. I previously argued in The Ant and the Grasshopper that the Biden administration’s decision to tap 180 million barrels from the U.S. Strategic Petroleum Reserve (SPR) was a strategic folly that would come back to bite the nation. By using it as a political tool (i.e., to temporarily lower gasoline prices) rather than as a storehouse for future emergencies, the administration was leaving the country vulnerable to an unforeseen disruption in the global energy market. Moreover, the U.S. government was unwisely selling cheap only to have to buy dear later to replenish the SPR inventory in the future if oil prices remain elevated.

The US has no corresponding strategic stock of food reserves. As Frederick Kaufman points out in Bet the Farm, the U.S. depleted its strategic grain reserve around the time of the millennial turning, i.e., at globalism’s apex, when conventional wisdom foresaw a world forever at peace and trade enduringly unfettered.

The idea of a US strategic grain reserve is attributed to the famous value investor Benjamin Graham. During the Great Depression President Franklin D. Roosevelt took up Graham’s ideas, creating a national grain reserve that helped moderate the price of grains, thereby saving farmers from bankruptcy and providing the US with an abundant emergency reserve of food stock. This system benefitted the US for well over half a century until, according to Kaufman, “the dogma of deregulated global markets came to dominate American politics, and the 1996 Freedom to Farm Act abolished our national system of holding grain in reserve.” 

This isn’t to say there isn’t grain storage in the US. Indeed, there are hundreds of millions of tons of capacity, primarily with private commodities trading companies. However, private corporate ownership is quite different from national stewardship. 

Consider, instead, the case of China. Reuters reported in 2021 that China has over 650 million tons of grain storage capacity, with more coming online. China, according to the government’s reserves administration, has sufficient grain and rice to feed the nation’s 1.4 billion people for “more than one year of the country’s consumption.” While disclosure is limited, the same principle of maintaining vast reserves exists in China across numerous commodities classes including energy (oil and coal), strategic and industrial metals, and other food products.

The US is not similarly prepared. The consequence is that we cannot rule out the possibility of shortages, or even rationing. That could occur in the US but is an even greater risk elsewhere. And, notably, food shortages are a primary cause of social unrest and political upheaval (e.g., Arab Spring). 

Soaring food prices, shortages of key inputs (e.g., fertilizer), and disruptions to production and distribution due to war should set off alarm bells. The US needs to immediately rethink its approach to strategic reserves across multiple categories, including food, energy, metals, and other commodities. This is not a merely a recommendation for a temporary solution to address a clear and present danger. Rather, I suggest US policy makers take steps to implement permanent, long-term, and comprehensive plans to better address “long-tail,” low-frequency but high-consequence events that see more likely to occur in a post-globalization world.

About the Author

Michael Wilkerson is an investor, author, and the founder of Michael has three decades of experience as an emerging markets investor, financial advisor, and business executive, including as Chief Executive Officer of Fairfax Africa Holdings Corporation, an investment holding company listed on the Toronto Stock Exchange. Michael is Chairman of charity: water, one of the world’s largest and most well-recognized organizations focused on solving the world water crisis, which since its founding in 2006 has provided 14.8 million people with safe access to clean drinking water through over 90,000 projects in 29 countries in Africa and around the world. Mr. Wilkerson served as the Managing Partner of AgriGroupe Limited, a private investment firm which he co-founded in 2013 and whose core investment thesis was Food and Energy Security for the African Century. Previously, Michael served as Global Co-Head of the Consumer, Food & Retail Group and as a Managing Director in the Financial Institutions Group at Lazard, one of the world's preeminent financial advisory and asset management firms. Mr. Wilkerson was also a Managing Director at Citigroup, where he led the Financial Institutions M&A effort in New York. Michael is the author of Stormwall: Observations on America in Peril and Why America Matters: The Case for a New Exceptionalism and a contributing author to numerous leading publications and media outlets. Mr. Wilkerson holds an MBA from Harvard Business School, a MA in International Relations from Yale University, and a BS summa cum laude from Oral Roberts University.

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