The New Geopolitics of Agriculture: Why It Matters to U.S. Farmers

1. 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

2. 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.

3. Growing Importance of Exports to U.S. Ag Source: USDA/ERS. “Outlook for U.S. Agricultural Trade,” 29 August 2013.

4. 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.

5. 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.

6. 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]

7. 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.

8. Global Demand for Food

9. Projected Population Growth to 2030(millions) *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.

10. Projected Population Growth to 2050(millions) Source: Population Reference Bureau. 2015 World Population Data Sheet.

11. 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 10 Largest Countries (millions)2015 2050 Source: Population Reference Bureau. 2015 World Population Data Sheet.

12. 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

13. 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. • .

14. 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.

15. Meat Consumption Dynamics

16. 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 conveni-ence, packaging, processing, variety, and luxury forms, not more raw commodities.

17. 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.

18. 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 out-stripping their own production capacity. • Economic growth in low income countries creates export market opportunities. • As occurred, e.g. in Japan, Korea & China.

20. 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.

21. 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.

22. 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.

23. Growing Agricultural Trade • With population growth, urbanization and broad-based 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.

24. Global Supply Potential

25. 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, non-erodible soils already in crop production.

26. 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.

27. Sustainability Will Require IncreasedGlobal 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

28. Large Crop Yield Gap Suggests Productivity Growth Possible Source: FAO. State of Food an Agriculture 2012, p. 106

29. 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.

30. 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.

31. Geopolitical Risks to Agriculture

32. 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.

33. 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.

34. 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.

35. 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.

36. 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 broad-based 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.

37. 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 150- year 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.

38. 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.

39. Thank You.Dr.Robert.L.Thompson@gmail.com