Transcript 120715 TCF Luncheon Presentation

The New Geopolitics of Agriculture:
Why It Matters to U.S. Farmers
Robert L. Thompson
Professor Emeritus, University of Illinois at Urbana-Champaign
and
Senior Fellow, Chicago Council on Global Affairs
December 7, 2015
Exports Are Essential to Size and
Profitability of U.S. Agriculture
• 2014 was 5th consecutive year of
agricultural exports over $100 billion.
• American agriculture exports ¼ to 1/3
of its production of many products.
• Without these exports, U.S.
agriculture would be much smaller
and less profitable, and farm asset
prices correspondingly lower.
Growing Importance of Exports to U.S. Ag
Source: USDA/ERS. “Outlook for U.S. Agricultural Trade,” 29 August 2013.
Globalization of Agriculture
• Fraction of world agricultural production
that moves through trade is growing
rapidly.
• Fraction that flows in value-added form is
increasing faster than bulk commodities.
• Global supply chains mean that more
trade is occurring within firms.
Strategic Importance of Food
• From an individual country’s perspective,
something is strategic if it is essential for
the country to sustain its economic,
political or military power.
• Every country has to ensure that it has a
reliable, safe and nutritious, reasonably
priced supply of food from a combination
of domestic production and imports.
– It is neither economically efficient nor
environmentally sustainable for countries to
be self sufficient in all foods.
Food Prices, Social Unrest & Political Instability
Source: New England Complex Systems Institute [M. Lagi, K.Z. Bertrand & Y. Bar-Yam. “The Food Crises and
Political Instability in North Africa and the Middle East,” arXiv:1108.2455]
Food Prices & Social Unrest
• In 2008 unanticipated rapid increase in
grain prices, when added to ongoing
grievances, e.g. unemployment, poverty,
mistreatment by government agencies,
helped trigger social unrest in 40+
countries.
• Extremely low income and hungry people
with nothing to lose may be easily
mobilized by radical movements.
Global Demand for Food
Projected Population Growth to 2030
(millions)
Region
2015
2030 Change Percent
World
7,336
8,505
+ 1,169
+ 16
High Income
1,254
1,295
+
+
Developing
5,144
5,910
+ 766
+ 15
Least developed
938
1,300
+ 362
+ 30
41*
3
*Of the 1.2 billion additional mouths to be fed in the next 15 years, only 3.5% of
them will be in the high income countries. The potential growth markets of the
future are in the lower income countries.
-Of the projected 41 million increase in the population of high income countries, 38
million will be in the United States. The populations of most of the other high
income countries are declining. When the aging of their populations is also
considered, these are shrinking markets of the past.
Source: Population Reference Bureau. 2015 World Population Data Sheet.
Projected Population Growth to 2050
(millions)
Region
2015
2050 Change Percent
World
7,336
9,804
+2,468
+ 34
High Income
1,254
1,310
+
+
Low Income
6,082
8,495
+2,413
+ 40
East & S.E. Asia
2,237
2,411
+ 174
+
South Central Asia
1,903
2,526
+ 623
+ 33
Sub-Saharan Africa
949
2,081
+1,132
+119
Latin America/Carib
630
776
+ 146
+ 23
N. Africa & W. Asia
479
779
+ 300
+ 63
56
Source: Population Reference Bureau. 2015 World Population Data Sheet.
4
8
10 Largest Countries (millions)
2015
2050
1. China
1,372
2. India
1,314
3. United States 321
4. Indonesia
256
5. Brazil
205
6. Pakistan
199
7. Nigeria
182
8. Bangladesh
160
9. Russia
144
10. Japan
127
1. India
1,660
2. China
1,366
3. United States 398
4. Nigeria
397
5. Indonesia
366
6. Pakistan
344
7. Brazil
226
8. Bangladesh
202
9. Congo D.R.
194
10. Ethiopia
165
Source: Population Reference Bureau. 2015 World Population Data Sheet.
Urbanization Changes Diets
The U.N.
projects that
60% of world
population will
live in cities by
2030; 70% by
2050.
Source:http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK%3A20149913~menuPK%3A34457~pagePK%3A64003015~piPK%
3A64003012~theSitePK%3A4607,00.html
Dynamics of Food Demand Growth
• Very low income people spend as much
as 70-80% of their meager incomes on
food. As their incomes start to rise, they
spend most of the first increments of
income on food.
• As low income people’s incomes rise, a
smaller and smaller share of each
increment in income gets spent on food.
– As they spend more and more of their
incomes on non-food items, this accelerates
growth in the non-ag part of the economy.
Dynamics of Food Demand Growth
• As their incomes rise from about $2 to $10
per day, people can afford to eat more
meat, dairy products, eggs, edible oils,
fruits & vegetables, causing rapid growth
in raw agricultural commodity demand.
Meat Consumption Dynamics
Dynamics of Food Demand Growth
• As their incomes rise from about $2 to $10
per day, people can afford to eat more
meat, dairy products, eggs, edible oils,
fruits & vegetables, causing rapid growth
in raw agricultural commodity demand.
• After people’s incomes reach about $10/
day, the small part of each increment that
gets spent on food is spent on convenience, packaging, processing, variety, and
luxury forms, not more raw commodities.
Importance of Broad-based Economic
Growth to Food Demand
• National average GDP growth tells us
very little about future growth in
demand for various foods.
• It really matters who in society benefits
from a country’s economic growth.
– If only the already rich get richer, little growth
in demand for food results.
– If a country’s economic growth lifts large
numbers of people out of poverty, large
growth in demand for food results.
Economic Growth Translates
Need into Market Demand
• Broad-based economic growth which lifts
the maximum number of people out of
poverty in low income countries is
necessary to alleviate hunger, but it also
unleashes rapid growth in demand for
agricultural commodities, often outstripping their own production capacity.
• Economic growth in low income countries
creates export market opportunities.
– As occurred, e.g. in Japan, Korea & China.
Projected World Food Demand
• World food demand is projected to grow about
two-thirds between now and 2050:
– 33% increase from world population growth – from
7.3 to 9.8 billion – almost all in developing countries
– 33% increase from broad-based economic growth
and urbanization in low income countries
• How many presently low income consumers,
who spend the largest fraction of their incomes
on food, escape from poverty is the most
important uncertainty concerning future global
demand for food.
• With the growing use of agricultural commodities
as raw materials in the of the bio-based
economy, including biofuels, world demand for
grain and oilseeds could double by 2050.
The world’s arable land is not
distributed around in the world in the same
proportions as is population.
Distribution of Arable Land
Distribution of World Population
East and South Asia have more than twice as much of the
world’s population than of the arable land, and virtually all of
their arable land is already in production. The Middle East &
North Africa have land, but not water.
Source: World Bank. World Development Indicators 2013 database and Population Reference Bureau. 2013 Population Datasheet.
The world’s arable land is not
distributed around in the world in the same
proportions as is population.
Distribution of Arable Land
Distribution of World Population
East and South Asia have more than twice as much of the
world’s population than of the arable land, and virtually all of
their arable land is already in production. The Middle East &
North Africa have land, but not water.
Growing Agricultural Trade
• With population growth, urbanization and broadbased economic development, growth in many
low-income countries’ food consumption is
outstripping their production capacity.
• No matter how much they invest in developing
their agriculture, many will become larger net
importers—on either commercial or
concessional terms.
• A larger fraction of world agricultural production
is expected to move through world trade.
– How much will be constrained by barriers to
international agricultural trade.
Global Supply Potential
The Land Constraint
• There is at most 12% more arable land available
worldwide that isn’t presently forested or subject
to erosion or desertification, and loss and
degradation of many soils continues.
• The area of land in farm production could be
doubled…
– But only by massive destruction of forests and loss of
wildlife habitat, biodiversity and carbon sequestration
capacity
• The only environmentally sustainable alternative
is to double productivity on the fertile, nonerodible soils already in crop production.
Water--A Growing Constraint
• Farmers account for 70% of the world’s fresh
water use.
• With the rapid urbanization underway, cities will
outbid agriculture for available fresh water.
• The world’s farmers, who are being called on to
double food production, will have to do it using
less fresh water than they are using today.
– i.e., they will have to more than double the “crop per
drop,” the average productivity of the water they use.
• This will require investments in water saving
technologies e.g. increased drought tolerance
and water use efficiency of crops.
• “Virtual water” will drive more agric trade.
Sustainability Will Require Increased
Global Food System Productivity
• Make presently unusable soils productive
• Increase genetic potential (of individual crops
and/or farming system) (ditto for farm animals)
• Achieve as much of that potential as possible by:
– Improving nutrition of that crop
– Increasing water availability and control
– Reducing competition from weeds for water, nutrients
and sunlight
– Reducing losses from disease and insects
• Reduce post-harvest losses
Large Crop Yield Gap Suggests
Productivity Growth Possible
Source: FAO. State of Food an Agriculture 2012, p. 106
Climate Constraints Changing
• Warming greater over land than over water and greatest
at higher latitudes.
• Changing spatial distribution of precipitation
• Increased frequency of extreme climatic events
Source: International Institute for Applied Systems Analysis, Laxenburg, Austria.
Adaptations Will be Required
Due to Global Climate Change
• As all agro-ecosystems shift with climate
change, need larger investments (public
and private) in adaptive plant and animal
breeding just to sustain present
productivity levels.
– e.g. introduce more drought or heat tolerance.
• Change the mix of what crops are
produced in a some geographic locations.
• Rely more on international trade.
Geopolitical Risks to Agriculture
Geopolitical Risks to Agriculture
• Wars and conflicts that displace people
and make agricultural production
impossible.
• Diplomatic feuds among countries that
lead to embargoes—of either exports or
imports.
– N.B. Embargoes more often hurt the country
that imposes the embargo than the country
they were intended to hurt.
Geopolitical Risks to Agriculture
• Failure to pursue economic development
strategies that maximize the number of low
income people lifted out of their poverty.
– Population growth in low income countries
creates need; income growth translates need
into commercial demand.
• Failure to get agriculture back onto the
global development agenda.
• Rejection of modern agricultural
technology, e.g. GMOs.
Geopolitical Risks to Agriculture
• Macroeconomic instability resulting in
swings in national income and/or
exchange rates.
• Beggar-thy-neighbor trade policies in
times of high food prices.
• Failure to continue reducing barriers to
international agricultural trade.
– Conversely, increases in agricultural
protectionism.
World Market Prospects
• Most high income countries’ food
demand is shrinking:
– Declining populations
– Aging populations (Older people eat less.)
– High income consumers don’t eat more
when their incomes rise further.
• The only potential growth markets are in
developing countries where population
and income are growing.
Larger Fraction of World Food
Production to Move Through Trade
• The world’s arable land and fresh water are not
distributed around in the world in the same
proportions as is population.
– No way for Asia or Middle East to be self-sufficient in
food
• With population growth, urbanization and broadbased economic development, many LDCs’ food
consumption to outstrip their production capacity
and they will become larger net importers.
• Continued liberalization of agricultural trade
will be essential to achieve the potential
growth in U.S. agricultural exports.
The Long-Run Challenge
• Since Malthus, prophets of doom have argued
population growth will increase food demand
faster than agricultural production can grow.
• Public and private sector investments in
agricultural research have increased productivity
faster than demand growth, with resulting 150year downward trend in real price of grains.
• Need big increase in world food production by
2050 using less water and little more land than
today and also produce feedstocks for the
bioeconomy.
Long-Run Price Prospects
• Whether world market prices trend upwards,
downwards or sideways in the 21st century will
depend on whether agricultural research
increases productivity faster, slower or at the
same speed as world demand for food grows.
• Never forget that these are still commodity
markets. Regardless of the long-term trend,
there will be years of high prices, and there will
be years of low price.
• With increased frequency of extreme climatic
events we should expect greater variance
around that trend.
Thank You.
[email protected]