Sudden, Sharp Improvement in World Meat Export Prospects?
November 11, 2004
Presentation to the Brazilian Meat Conference hosted by Elanco Animal Health
Dennis Avery
I am pleased to be here today and to able to talk about the sharp improvement in world meat export prospects that appears to be occurring in the World Trade Organization. The WTO’s current trade liberalization talks, the Doha Round, have suddenly taken an important turn for the better, after a virtually complete breakdown a year ago at Cancun, Mexico.
Six Months Ago: Farm Trade Gridlock
Over the past 50 years, the world has liberalized its non-farm trade, with tariffs on manufactured goods reduced from about 40 percent to 4 percent over the past 50 years. As a result, world non-farm trade has increased perhaps 15-fold in value. Farm trade has barely doubled in volume over that time period, and only recently has rising Third World meat demand produced any significant trend in farm trade value.
Six months ago, I expected the world’s pervasive farm trade barriers to continue, virtually intact, for another five to ten years. As a result, I was predicting a crash of land values in farm exporting countries, especially in the United States and Western Europe as their subsidy funding dried up. I was forced to predict extremely slow growth in all farm exports. I expected the densely populated and increasingly affluent countries of Asia to continue overcharging their consumers for “national food self-sufficiency”-achieved only by hiding behind the massive food import barriers that have been typical of the world since the 1860s.
Six months ago, I predicted that only Brazil would gain farm export volume in the coming decade. However, I expected that Brazilian farmers would gain only minimally from their small and low-priced export sales expansion. And this only because Brazil’s extremely low land costs put it ahead of subsidized farmers when competing for the small increase that would be allowed in world food and feed exports.
Today: The Beginnings of Real Farm Trade Reform?
Now, fortunately, the picture looks far more optimistic-both for the world’s farm exporters and for the billions of consumers in Asia.
Until recently, the European Union said it could make no changes in its farm subsidies. Now, the EU has agreed to end its massive, long-term program of farm export subsidies, as part of a liberalized set of WTO farm trade regulations.
The United States, after putting in place a major increase in its farm subsidies just two years ago, has now agreed to radically reduce its farm subsidies-also as part of a WTO farm trade liberalization.
The developing countries, after their much-publicized walkout on the WTO talks in Mexico, are back at the negotiating table and working seriously toward the first-ever liberalization of farm trade since Napoleon III reduced French food tariffs nearly 150 years ago. The likelihood is that the WTO will soon require more openness to farm imports in the densely populated Asian countries.
Bullish World Demand for Livestock Products
The French in the 1860s were quickly frightened into re-installing their tariffs by the advent of the steam locomotive and the steamship, which unleashed 500 million acres of additional farmland in such places as the Great Plains of North America, Western Australia, Argentina, and Brazil.
At that time, the only affluent markets in the world for farm commodities were a few cities such as New York and Paris. Western Europe quickly became terrified that its farming regions would be depopulated, with all of its food coming from overseas and the former farm workers standing in unemployment lines in the cities.
Today, the situation is far different. Most of the world’s good farmland not in Brazil is already growing crops. The future of feeding the world lies not in clearing more forest, but in using the farmland we already have more intensively.
Even more dramatic changes have occurred in the world’s consumer markets. Today, roughly 1 billion people are affluent enough to afford high-quality diets, and by the year 2050, we can confidently expect 7 billion affluent consumers. Only Africa, and to some extent the non-oil Middle East, are failing to participate in the modern global surge of prosperity. Non-farm employment is expanding much faster than farm employment, and will do so for the foreseeable future.
The intensification of farming will depend on stronger consumer demand (fueling somewhat higher real prices) to produce more food, especially more feed and more meat, from the existing farmland base.
The world is still rapidly increasing its demand for farm products, driven not only by population growth but even more by rising incomes. Twelve years ago, I predicted world farm demand would nearly triple by 2050. I expected the demand for high-quality foods-meat, milk, eggs, fruits, and vegetables-to increase five-fold.
Since then, total world demand for farm products has been increasing pretty much on that schedule.
World grain consumption has been increasing by about 18 million tons per year, world oilseed demand by about 7 million tons per year, and world meat demand by more than 5.5 million tons per year. To date, as in the past, most of the demand has been met domestically behind trade barriers.
Unfortunately for the world’s export farmers, virtually all of the demand growth has been occurring in Third World countries pursuing the myth of food security through national food self-sufficiency.
Unfortunately for the world’s consumers, virtually all of the demand growth has occurred at high cost, behind trade barriers that prevent rational use of the world’s scarce land and water. They also suffer higher levels of food insecurity because individual countries’ food production is far less stable than that of the world as a whole. Especially if they’re trying to rely on marginal farming resources subject to drought, flood, pests and diseases.
Unfortunately for the world’s wildlife, the continuing drive for national food self-sufficiency has left huge tracts of Third World wildlands at risk of being cleared for more unsustainable, low-yield cropping. For example, Indonesia has been clearing low-quality, species-rich land with massive erosion potential on the island of Kalimantan-to grow chicken feed. China is now forced to reforest millions of acres of steeply sloping land in the Yangtze Valley because stripping it produced more floods and soil erosion-and not much more food.
What Free Trade Can Achieve When Given the Chance
It’s no accident that the strongest growth in global pork imports has been in Mexico, where the United States and Canada got duty-free market access through the North American Free Trade Agreement. Mexico’s pork imports have risen by 155,000 tons per year in the past five years, to a projected 345,000 tons in 2004. Without NAFTA, Mexico, too, would have forced its consumer to overpay for domestic livestock products, even though Mexico lacks the rainfall to support expanded pastures and feed crop production.
Nor is it any accident that the strongest growth among pork exporting nations in the past five years has been in Brazil, where low land costs and the construction of new pork processing facilities have enabled Brazil to reach more export markets with processed products. Farm land values, and thus farmers’ costs, have been driven up in many of the other export-worthy countries by government farm subsidies.
Without farm trade reform, of course, the U.S. and European farmers have been at risk of their subsidy systems collapsing and their land values crashing to Brazilian levels, and the ancient competitive forces in agriculture re-emerged full force.
The new turn of events in the WTO seems to lift the pall of gloom that had re-settled over the farm export markets after the Cancun Collapse.
The World’s Fast-Fading Population Growth
The world’s population is still rising, but far less rapidly than in the past 50 years. Within the next 50 years, human population numbers will start a long slow decline.
Back in the 1970s, people were afraid of population growth. I can understand why. Agricultural research had just created the Green Revolution, which was tripling crop yields on good land over most of the world, except Africa. Famine was becoming outmoded. In addition, DDT and other synthetic chemicals and vaccines were radically cutting human death rates. Paul Ehrlich, author of The Population Bomb, wrote eloquently of his fears that human population would top 20 billion.
High-yield farmers were accused of “growing too much food.” We were seen as the root cause of global overpopulation.
Since then, we have learned that while poor farmers mostly have large families, affluent, urban couples have small families. We have learned that the countries which increased their crop yields the fastest also brought down their birth rates the most rapidly. Now, the world is moving rapidly toward good diets and urban affluence, and birth rates are plummeting.
Europe is now down to a fertility rate of about 1.7 births per woman, with Germany, Italy, and Spain at 1.2. (Italy is now offering a $1200 subsidy for 2nd Italian children, to ensure the country is not totally given over to Albanian and North African immigrants.)
In the Third World, birth rates have fallen 75 percent of the way to stability, from about 6.2 births per woman in 1960 to about 3.1 births today-with stability at 2.1 births. Fertility levels continue to decline rapidly in all countries. The UN Population Division has just lowered its peak projection for human numbers-again-to between 8 and 9 billion people. That still means a substantial increase in people, but not nearly the fearsome expansion predicted in The Population Bomb.
Rising Incomes: the Last Frontier of Farm Product Demand
In 2004, income gains for emerging economies are the last frontier of farm product demand growth. To date, my long-term demand growth forecast has been largely on target and Asia remains the key area.
China, with its massive population of 1.3 billion people, has been increasing its GNP by roughly 8 to 9 percent per year, with virtually no population growth. That has meant very rapid increases in consumer incomes. The “precious three” desired household purchases in China have changed radically from the 1970s (bicycle, digital wristwatch, and transistor radio) to the 1980s (telephone, TV, and refrigerator) to the current moment (cell phone, computer, and car). Yes, the Chinese will have cars, lots of them. They bought 2 million last year.
Chinese pork consumption increased nearly 70 percent in the decade of the 1990s, and is currently expanding by more than one million tons per year. So far, China has been supplying virtually all of that pork domestically. China is fostering domestic pork production with import barriers, high consumer prices and investments in its own animals and facilities.
Chinese pork imports this year will about match the EU’s pork imports. They will total a pitiful 70,000 tons, less than 0.2 percent of China’s annual consumption. China is now a member of the World Trade Organization, but the WTO farm trade rules have not yet required its members to open their farm commodity markets.
Perspective for farm imports: China has about 20 percent of the world’s population, about 7 percent of its arable land and a huge proportion of its economic growth.
India has been expanding its GDP by nearly 6 percent annually since it began to liberalize its economy in 1990, while its rate of population growth has been declining from 3.2 percent to 2.9 percent. That means India’s per capita incomes are now finally rising rapidly.
India’s milk consumption has been increasing by about 1.4 million tons per year, and its poultry consumption is also rising by about 8 percent per year. (Even India’s pork consumption has risen nearly 5 percent annually, though from a small base.) Again, the expanded livestock consumption has been met through domestic price supports protected by import barriers. However, in the last five years, consumer demand has been constrained by high prices. Milk consumption has increased only about half as fast in the last five years as in the especially high, government-set grain prices of the 1990s, partly because milk prices have sometimes been three times as high as on the world market.
India imports significant amounts of pulses and palm oil, but virtually no other farm products.
Perspective for farm imports: India has 17 percent of the world’s population and about 11 percent of its arable land and most of the Third World economic growth not occurring in China.
Indonesia, with 225 million people, has not recently achieved the 7 percent annual GDP growth it registered from 1990 to 1997. However, the economy has lately been expanding by 3 to 3.5 percent per year, and household consumption has been rising by 6 percent per year.
Indonesia’s poultry consumption has recently been about 50 percent higher than a decade ago, despite the economic ravages of the “Asian Collapse” of 1997. Indonesian meat consumption is heavily focused on poultry because it is a Moslem country and eats virtually no pork. (It does produce some pork on its northern islands to supply Singapore.)
Perspective for farm imports; Indonesia has 3 percent of the world population and only 2 percent of its arable land.
Combined, these three countries have 40 percent of the world’s consumers and less than 20 percent of its farmland.
Asian Incomes Will Continue to Rise, Especially in China and India
Fifteen years ago, the new phenomenon of rapid Asian economic growth was a startling development, seemingly shaky by its unprecedented nature. Eight years ago, the Asian Economic Collapse seemed to portend the end of a brief, soaring, unsustainable skyrocket of economic spurt and collapse. Today, in contrast, we see strong, continuing growth in both incomes and long-term prospects for at least the 2.5 billion Asians who live in China, India, and Malaysia.
The industrialization that started in Europe 200 years ago has been spreading, with increasing speed, around the world. It took Britain 70 years to double its living standards in the 19th century. South Korea did it in 15 years, and China in 10 years.
Growth is now so strongly embedded in Asia that it’s said the recent deliberate slowdown in Chinese GDP growth, from 10-11 percent to about 8-9 percent, will primarily stimulate higher GDP growth in India.
China has also successfully managed a massive employment shift in the last decade. Employment in the inefficient and money-losing state-owned industries has been reduced by 20 million, even as self-employment by Chinese businesspeople has risen by about 20 million. This is a huge movement toward increased Chinese growth in the future financed in major part by a rise in foreign direct investment. In 2002 alone, China received more than $52 billion in foreign direct investment, close to half of it from Hong Kong (i.e., the global Chinese community). That was more investment than in any country not in the OECD “rich nations” club. Chinese exports, already large, grew by more than 34 percent last year.
India is more and more integrated into the world economy. Until 1990, India was content with what economists used to call “the Hindu rate of growth,”-less than 3 percent annually. Its recent economic growth has been 5-6 percent annually, a little higher than its population growth. Since 1990, India has begun to unravel much of its bureaucratic red tape, and is taking much greater advantage of its strengths in textiles, computers, and most recently, modern medicine. India is now attracting patients who need major surgery, both from Third World countries that lack the facilities and skills to perform them, and from First World countries such as Britain and Canada where public health systems have long waiting lines and higher costs.
There is little doubt that the unleashing the energy and creativity of tens of millions of well-educated Indians will generate strong economic growth over the next decades.
The Problem of Moslem Extremism
Neither China nor India will be much hampered by Moslem extremism. In fact, they are likely to receive extra foreign direct investment as businesses try go avoid the negative impact of Moslem zealots in such countries as Pakistan, and Bangladesh-and perhaps even in Indonesia with its milder approach to Islam and its new democracy.
The Asian Development Bank estimated, before the terrorist attacks on the World Trade Center, that Asia could be producing 40 percent of world GDP by 2020 or 2025. Terrorism will necessarily slow down that timetable in South Asia’s Moslem countries. The need to re-establish the will of the moderate Moslem majorities in Asian countries could cost these societies as much as a decade, though it may be resolved in somewhat less time. Ultimately, there is little question that Asian societies will reject murder and violence as the guiding principles of their societies, as all societies have done in the past.
To date, however, the lack of representative government in most Moslem countries, and the fear of fundamentalist retaliation against moderate spokespeople, has stalled the inevitable debate about extremism and moderation among Moslems. The World Trade Center and the Pentagon became unlikely surrogates in the religious debate for control of their countries.
At the moment, it does not seem as though Moslem extremists are having a major impact on world meat demand, since Moslems have traditionally been too poor to eat much meat per capita. And, of course, they eat virtually no pork at all. Let us think more broadly, however, about the reality that Moslems are just as hungry for high-quality protein and the valuable micronutrients in livestock products as other humans. The surge in poultry demand in Indonesia since the Asian Collapse is testimony to this fact.
Moslems will eventually achieve economic growth. The competitive nature of societies virtually guarantees that they will. The replicated model of modern industrialization- and the massive, unprecedented decline in world trade barriers-will make this easier to achieve with each passing decade.
When the Moslem countries achieve economic growth, they will demand poultry, lamb, and milk, if not pork. Those commodities will require more feedstuffs. That will add Moslem demand to the already-apparent demand among Christians, Confucians, Hindus and Buddhists for better diets. The global surge will stimulate the demand for more intensive and productive use of the land and water in agriculture. This will then stimulate somewhat higher real prices to call forth the new farming efforts and investments.
The Pet Challenge
There will even be a pet challenge.
Brazil is already in the midst of a massive expansion of its pet population. There has been a one-third increase in dog and cat numbers in the last half-dozen years, and more cats and dogs are undoubtedly to come. Pet food statistics were not even kept until the last decade, but sales are rising rapidly in both volume and value as more affluent households want their pets to have “the best.” The only creatures that stimulate more intensive caring than children are pets. (And pets don’t argue or want the car keys.)
In China, with its one-child policy and rising incomes, we can expect a surge in pet ownership as people divert their parenting instincts to companion animals. The traditional Chinese pets were crickets and small birds, but with affluence we can expect Chinese people to stop eating dogs and put them on leashes. Pet stores will be a growth industry in China, as they already are in Brazil. We can expect perhaps 500 million companion cats and dogs in China in 2050, and their dietary demands will be added to the length of the world’s “grocery” list.
The pet challenge, like the better-diet challenge, will reverberate around the world.
The Farm Subsidies Were Already Shaky
The stifling effect of farm subsidies on world farm trade is a well-known story. However, the First World’s farm subsidies have been on shaky ground for decades. The first problem was rising yields, which not only increased farm subsidy costs, but produced massive food surpluses for export-even in Japan with its limited cropland.
More recently, the commercialization of agriculture has made it much harder for politicians to claim that subsidies are helping the “small farmers” of the world. However, politicians are very reluctant to stop buying votes with public funds.
Witness the United States in 2002. The U.S. was split 50-50 between Democrats and Republicans. Control of the entire U.S. government seemed to turn on a few farmer votes in the Midwest. To make matters worse, the federal budget seemed to be in surplus at the time, so there was no political constraint against increasing American farm subsidies. A lavish new farm bill was passed by the congress, and President Bush did not dare to oppose it.
Unfortunately for farmers, the 2002 election also proved that American voters were ready to hear about reforming our massive Social Security system. It’s basically a pyramid scheme, and we will soon have less than three workers to support each of the 77 million “baby-boom” retirees-an impossible tax burden for our younger generation.
Within the next five years or so, the United States will be forced to reform its entitlements for the elderly-Social Security and Medicare. The unfunded obligation on those massive social subsidies is so huge that a pay-as-you-go system would double Americans’ taxes. The outlook for farm subsidy money in Washington, D.C. after the current farm bill ends in 2007 is bleak.
Nor does Western Europe’s capacity to finance future farm subsidies look very promising. EU economic growth is currently less than 2 percent per year, and Germany has lately been achieving about half of that. Europe has not been creating many additional off-farm non-government jobs in recent decades, and there is no indication of a new flow of off-farm income that could be “painlessly” shared with EU farmers. Yet the EU has just taken in 10 new countries, millions of additional farmers and tens of millions of hectares of farmland. The EU needs WTO farm trade liberalization perhaps even more than the United States or Brazil.
My prediction is that EU expansion and WTO farm trade liberalization will lead to fundamental Common Agricultural Reform-keyed not to commercial production but to direct income payments favoring small farmers.
Who Will Be the Winners in the Export Markets of the Next Decade?
Unless the current WTO negotiations successfully lower the world’s farm trade barriers, there will be few winners in farm exporting over the next decade-and the winners will not win much. There might be modest gains for farmers who do not currently get very much government subsidy, and thus have been forced to keep their production costs low. The biggest of these winners are likely to be the South American giants, Argentina and Brazil. Of these, the biggest is likely to be Brazil.
However, slow market growth and low prices will not finance much improvement in Latin America infrastructure, the biggest weakness of most farm exporting countries.
The real “winners” in an unreformed farming world would be farmers in China, India, and other Third World countries where economic growth is raising incomes for formerly poor consumers. Their governments-and consumers-would likely continue overpaying for low-yield crops and the rape of the Third World environments.
In that sense, all of the world’s export farmers and all of its urban publics share a strong interest in farm trade liberalization. If Brazil, the United States, the EU and Third World consumers succeed in liberalizing the WTO farm trade rules, many people and many countries will be winners, in many ways.
Among the major winners:
Brazil, which has low land costs and relatively low labor costs, also gets relatively high yields. Brazil also has much of the good farmland not yet being cropped in the world. Most nations are pasturing only land that cannot be cropped because of arid climates, steep slopes, or short growing seasons. The U.S. Department of Agriculture believes that 70 to 90 million hectares of Brazilian pasture could be converted to cropland in the future.
Brazil’s ability to expand rapidly is constrained by its lack of infrastructure and a shortage of capital. Brazil suffers from high transport costs, because it lacks railroads, export-suited rivers, and even paved roads over much of its Western frontier. Nor will farm exports likely finance new railroads.
The United States has ultra-high yields and the world’s most cost-effective farm exporting infrastructure. Many of its farms are near low-cost river transport and the rest of them within reach of good railroads already built and amortized. Even its remote country roads are paved, and it has plenty of trucks. The U.S. has burdened itself less severely than Western Europe with high land costs driven by high farm subsidies. The U.S. also has about 16 million hectares of usable cropland in the Conservation Reserve.
Turkey, too, is capable of major increases in crop production. This is partly through the development of its huge new irrigated projects in the Upper Euphrates Valley, where it is creating the equivalent of a new California. Turkey also has the potential to sharply increase its dryland crop production through extending conservation tillage across its large tracts of semi-arid rainfed land. Conservation tillage could double dryland production, by radically reducing soil erosion, and retaining much more of the rainfall in the root zone of its fields. Turkey has now finally been promised membership in the European Union, a move virtually forced by the extremism in other Moslem countries. Thus Turkey will benefit from broader and cheaper access to capital.
Romania is farming with horse-carts and saved seeds, but it has the broad, fertile plain of the Danube Valley in its favor, and now is a new member of the EU. Expect Romania to radically increase the yields-and export potential-from its 10 million hectares of cropland.
Biotechnology: Wave of the Future?
The United States has doubled its yield of meat per acre of farmland in the past 30 years. This has been due to higher grain yields, higher soybean yields, more complete feed rations, better livestock pharmaceuticals, and better animal genetics. Pessimists, however, have said technology was running out.
On the contrary, America has just harvested a record-busting yield of corn and soybeans. Corn yields this year are estimated at nearly 8.9 tons per acre, on 30 million hectares of harvested land. The yield is nearly 13 percent higher than any previous U.S. corn yield average, but it fits the long-term trend of increase a slight gain of 2 to 3 percent per year. The soybean yield was also a record, but not by as much. It, too, fits the long-run trend of increase. Both crops obviously benefited from good weather-but it is also likely that they benefited from the new biotech seeds that permitted better, more cost-effective weed and insect control.
How much of this record yield was due to biotechnology? We don’t yet know.
We do know that China and India are getting much higher cotton yields, due to the improved pest control of Bt varieties.
I am impressed that Bt corn test plots in the Philippines outyielded farmers’ corn fields by 80 percent, testifying to the importance of insect control in tropical fields. Biotech has given us our first victories over plant viruses (in bananas, papayas, and sweet potatoes).
I am highly impressed by the new blight-proof potatoes bred in both the U.S. and Europe. The blight-resistance gene was discovered in a wild potato some 50 years ago, but it had defied efforts to cross-breed it into modern potatoes that taste good and yield well. Now, biotech will prevent a recurrence of the Irish Potato Famine in modern Asia. Will that encourage more densely populated countries to rely more heavily on the ultra-high food yields per acre of the potato? It’s too early to know, although Rwanda tripled its potato production in the 1990s.
In the future, if Europe wants to continue importing non-biotech soybeans, it may actually have to pay a premium to get them. Will that put EU livestock producers at a further disadvantage in world competition?
In almost any case, it seems likely that the rest of the world will proceed with genetically modified crops, and eventually even biotech animal developments.
The Organic Alternative
Many non-farmers have praised organic farming as the appropriate path for Europe and American agricultures. We can understand why they believe it. Affluent city-dwellers see modern agriculture as producing too much food while employing too few farmers. They think organic farming will solve both problems at once.
The reality is that few people want to be organic farmers; doing the hand weeding and the composting, being too often at the mercy of insects and crop diseases; and needing far more land to get the same food production.
In 1999, Denmark’s high-level technical committee on organic farming, the Bichel Committee, revealed (if only in the fine print of its report) that a true organic mandate would cut Denmark’s human food production by 47 percent. Its pork and poultry industries would be slashed 70 percent for lack of feed. Much of the countryside would have to be planted to green-chop forage, to be hauled to feedlot cattle, so their manure could be slathered over the countryside. All of this to replace the natural N from the air (which is 78 percent N) captured today by the Haber-Bosch industrial process invented in 1908.
If Europe went all-organic, it would probably not be able to export any farm products at all, even with the best efforts of newly energized farmers in Poland and Romania.
Dr. Vaclav Smil, author of Enriching the Earth, a fine book on the history of nitrogen in agriculture, says the world would need the manure from another 7 to 8 billion cattle to replace the 80 million tons of N we currently take from the air industrially. America would need the manure from another 900 million to one billion cattle, at three to 30 acres of forage per beast. The U.S. has only 2.1 billion acres in its lower 48 states, so we’d have room for our cities and manure production, but no room for food, forests or national parks.
The Crucial Importance of Farm Trade Reform
Wheat yields in Argentina are double those of Brazil. Sugar yields in Brazil, on the other hand, are double those of beets in the temperate-zone countries. Dairy cattle suffer in the moist tropics. Desert countries have trouble growing feed for livestock and poultry. All over the world, the comparative advantages are far greater and more permanent in farming than in any other industry.
At the same time, the world’s best farmland has relatively few wildlife species. The Great Plains of North America had 60 million bison, 100 million antelopes, and a billion prairie dogs-but that’s only three species. Researchers have recently counted more wild species in three square kilometers of the Amazon rain forest than in all of North America.
The goal of world farm policy should be to use its best land as intensively as sustainability permits, and to leave as much of the poorer land as possible to Nature. Free trade and agricultural research are the two powerful ways to do this.
Without farm trade liberalization, the 21st century promises to be a period of stifling stagnation for the world’s export farmers, and a period of high food costs and wildlands destruction in the densely-populated parts of the Third World.
With farm trade liberalization, there will be a hugely dynamic interaction between population growth, increased incomes, consumer tastes, pet numbers, cropland, and new technology. There is no way we can pick all the winners in advance-but we can be sure that this competition will be healthier and more constructive than the subsidy-imposed stagnation of world farm markets that is the alternative.
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