APCA Food Demand and Population Growth: Can Agriculture Keep Up? Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Daryl F. Kraft Lecture University of Manitoba, Winnipeg February 23, 2010

APCAIntroduction 2050: World population and their food requirements Will/can agriculture meet the challenge? Agricultural policy changes: help or hindrance? Grain reserves: Are they necessary? The unique nature of food and ag. World hunger: How should it be addressed?

APCA 2050 According to FAO World population to increase to near 10 billion (70 percent increase from 1995) –Nearly all the growth will be in developing countries Sub-Saharan Africa the fastest (108 percent, 910 million) South East Asia the slowest (11 percent, 228 million) Per capita incomes will grow Need for a doubling of cereal and meat production

APCA Will There Be Enough Production in the Future? In a word: Yes. But it depends on how you define “enough” Effective demand will be covered— total food requirements will not… In fact, I think excess capacity will be a worldwide problem in the future Increased acreage Increased yields and livestock efficiencies Analysts focus on demand but…

APCA It’s Easy to Underestimate Supply Growth In the case of the US: –Investment in yield enhancing technology (300 bu./ac corn on best land in a few years?—national average a decade or two later??) –Gradual conversion to cellulosic feedstocks for ethanol production –Conversion of Conservation Reserve Program Acreage to livestock or crop use –Improve livestock hay and pasture land

APCA It’s Easy to Underestimate Supply Growth Yields—a renaissance in the making? –Development and adoption of crops that: are more drought/heat/saline/disease resistant survive floods for 2 weeks not 3 days (rice) better utilize the sunlight for photosynthesis fix nitrogen as if non-legumes were legumes better utilize fertilizer, other nutrients and water

APCA It’s Easy to Underestimate Supply Growth Yields—a renaissance in the making? –Globalization of agribusiness: Near universal access to the new technologies world-wide Narrowing of technology and yield differentials between the developed and at least some developing countries –Helpful help to increase productivity of small-holder farmers in Africa especially

APCA It’s Easy to Under Estimate Supply Growth International supply growth—acreage –Long-run land potentially available for major crops Savannah land in Brazil (250 mil. ac. -- USDA says 350) Savannah land in Venezuela, Guyana, and Peru (200 mil. ac.) Land in former Soviet Union (100 mil. ac.) Arid land in China’s west (100 mil. ac. GMO wheat??) Savannah land in Sub-Saharan Africa (300 mil. ac percent of 3.1 bil. ac. of Savannah land) Added acreage due to new yield technologies that: –further shorten the length of required growing seasons –improve drought tolerance –lesson soil fertility requirements

APCA So Will Agriculture Be Able to Keep Up?” My answer is yes… –Unless global warming causes massive output changes or other bad stuff happens –But remember we are talking only about “effective” or market/commercial demand so far I say yes because supply growth has always caught and then surpassed demand growth (and it typically does not take long) Recent Malthusian scares were grounded in short-term events and policy missteps –Not the inability to marshal expanded productive capacity

APCA U.S. Farm Policy Historically there have been two major components of farm/commodity policy –Policy of Plenty: Ongoing public support to expand agricultural productive capacity through research, extension, and other means

APCA U.S. Ag Policy Did Not Start in 1932 Historic policy of plenty –Land distribution mechanisms – 1620 onward –Canals, railroads, farm-to-market roads –Land Grant Colleges – 1862, 1890, 1994 –Experiment Stations – 1887 –Cooperative Extension Service – 1914 –Federal Farm Credit Act – 1916 –Plus legal and other institutional arrangements This policy of plenty often resulted in production outstripping demand

APCA Farm Policy Historically there have been two major components of farm/commodity policy –Policy of Plenty: Ongoing public support to expand agricultural productive capacity through research, extension, and other means –Policy to Manage Plenty: Mechanisms to manage productive capacity and to compensate farmers for consumers’ accrued benefits of productivity gains

APCA We have dropped the “Managing Plenty” Part In the past farm policies for grains included –Floor Prices –Supply management tools –Price stabilization and reserves Over the years, especially since 1985 & 1996 –All three were eliminated –Replaced with payment programs: Coupled to price and production (Deficiency Payments) and Decoupled (Direct Payments) Partially funded insurance schemes In 2008 added another revenue based insurance scheme (ACRE)

APCA Current U.S. Policy Can Cause Economic Crisis When supply outruns demand: –U.S. Commodity prices plummet –U.S. grain farmers become wards of the state –U.S. livestock producers, other grain users and farm input suppliers are subsidized –Low grain prices are triggered internationally –Many countries, especially developing countries, are unable to neutralize impacts of low prices –U.S. accused of dumping

APCA Current U.S. Policy Can Cause Economic Crisis When demand outstrips supply: –Short-Run Prices explode Livestock producers go bankrupt Food prices increase at alarming rates Countries hoard rather than export Additional millions become undernourished/starve in developing countries –Long-Run High prices bring big resources into ag production worldwide Prices crash again

APCA The Need for Food Reserves Supply-Driven Disruptions –Scope Local – Affecting a limited area Regional – Global – Affecting one or more major producers –Causes Crop-related weather - Sporadic Natural Disaster - Occasional Political Instability – Chronic –Result Severe price bubble

APCA The Need for Food Reserves Demand-Driven Disruptions –Unanticipated surge in demand –Usually only three or so per century Can occur in conjunction with supply disruptions –Examples –Russia’s entry into world grain markets –Ethanol demand –Wheat crop failures in Australia and Eastern Europe –Result Severe price bubble

APCA Possible Functions of Reserves Local supply source of storable commodities for local disasters –Local supply stabilization Regional supplies for continental needs –Regionally sourced food aid Stabilize world supply –Back-up supply for more widespread problems Stabilize world price

APCA Our Recent Experience Demand surge (ethanol) –Coupled with wheat shortfall in Australia and Eastern Europe and other cereal shortfalls –Prices of storable agricultural commodities tripled Moderately increased food prices in global North Added 250 million to the 800 million already facing chronic hunger –Results Food riots in over 25 countries Protection of national food supplies via tariffs, taxes and embargoes

APCA This Wasn’t Supposed to Happen Commercials argued they would provide reserves –Government “interference” not needed Not to worry –Freer trade ensures availability from one country or another Neither assertion true –Commercials have no incentive to hold stocks –Supply disruptions can affect more than one supplier (country) in a given year Countries view food as a national security issue

APCA Historical Overview Egypt –1750 BC –Biblical story of Joseph and Pharaoh –7 fat years followed by 7 lean years China –Beginning in 54 BC –Had its ups and downs over period of 2,000 years –“Constant Normal Granary” –China currently holds large stocks for domestic needs

APCA Historical Overview United States – AD –Federal Farm Board – stock holding in attempt to stabilize price –Commodity Credit Corporation/Farmer Owned Reserve Stabilize price Ever Normal Granary Manage supply –Problems Inconsistent management or mismanagement by those who did not believe in rationale for reserves and price stabilization Dumping of excess on world market

APCA Policy for All Seasons Assume the unexpected will happen –Random policy and weather events do occur—Plan for them Establishment of Grain/Oilseed/Food Reserves –Moderate impacts of random policy and weather events by providing stable supply until production recovers –Operated/overseen by a multinational commission –Stores strategically purchased reserves

APCA Policy for All Seasons Keep productive capacity well ahead of demand –Public investment in yield enhancing technologies and practices Provide means to hold arable land in rotating fallow during periods of overproduction –This land could then quickly be returned to production in the case of a crisis

APCA What is the deal with Ag? Why does Ag get into seemingly endless price and income problems? Econ 101 says markets correct on their own In times of low prices or increased inventories: –Consumers buy more –Producers produce less –Viola! Self-correction.

APCA U.S. Ag Sector Agriculture is different from other economic sectors. On the demand side: –Even with a major drop in food prices: People don’t eat more meals a day They may change mix of foods and purchase more services with the food Aggregate intake remains relatively stable

APCA U.S. Ag Sector Agriculture is different from other economic sectors. On the supply side: –With low crop prices— Farmers continue to plant all their acres Farmers don’t and “can’t afford to” reduce their application of fertilizer and other major yield-determining inputs Who farms land may change Essential resource—land—remains in production in short- to medium-run

APCA Self-Correction is Often Called For Over time, increasing amounts of land come into production (Just a matter of where) Technology advances increase yields/productivity –Much of this technology was paid for by taxpayers Series of years of ideal growing conditions The result: output expands faster than population and incomes expand domestic and export demand But the Econ 101 self-correction does not readily occur due to the nature of food and agriculture Because…(all together now) low prices do not cause –Much more total food to be eaten, nor –Much less more total agricultural output to be supplied

APCA Given All That, Where Does Addressing World Hunger Come In? Let’s be clear –Merely increasing productive capacity (and therefore commercial output) will not cure hunger If it did, no one would be hungry when the price of corn is $1.75 per bushel ($70/mmt) –What is good for multinationals (increased production using advanced technologies) and what maximizes trade is what we hear the most about now days but… those mindsets seldom provide food security solutions (and should not drive the conversation on hunger) –The basic problem (one, or the other, or both) Inability to produce sufficient food on their own Too little money to buy food

APCA In My View… It is critically important to help developing nations improve their agriculture –Requires focusing on their economic and cultural situation and not on imposing “our” agenda onto them Back to basics –Increase farmer access to inputs, knowledge and credit –Provide dependable and reasonably stable prices for their output –Encourage production and storage of staples

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