Global Policy Analysis Division Office of Global Analysis Mike Dwyer Director, Global Policy Analysis Office of Global Analysis Foreign Agricultural Service US Department of Agriculture

Despite drought and cost challenges, U.S. farmers doing very well 2

Global Policy Analysis Division Office of Global Analysis Source: USDA Baseline

Global Policy Analysis Division Office of Global Analysis Source: USDA Baseline

Global Policy Analysis Division Office of Global Analysis Growing global demand projected to keep U.S. net farm income strong Source: USDA Baseline & ERS Farm Income Statistics *1 billion=1,000 Million

Global Policy Analysis Division Office of Global Analysis 1.Global economic growth and the rise of the “middle class” in developing countries 2.Value of the U.S. dollar 3.Worldwide biofuels production 4.Role of trade and trade liberalization 5.Energy and agricultural input prices 6.Additional crop land 7.Biotech developments

Global Policy Analysis Division Office of Global Analysis Global economy emerged from worst recession in decades in Developing countries performed better and growing faster than developed countries. Same is happening now and is likely to continue for the next decade. Consumer incomes are rising and middle class households are expanding rapidly, especially in large emerging markets. Impact on global food demand will be significant due to higher income elasticities for food in developing countries.

Global Policy Analysis Division Office of Global Analysis Most of the increase will be in developing countries and the impact on worldwide food consumption will be significant Middle class in developing countries projected to increase 119% by 2022 vs. just 11% in developed countries Developing countries Developed countries Source: Global Insight’s Global Consumer Markets data as analyzed by OGA

Global Policy Analysis Division Office of Global Analysis 25% of households in these countries are middle class. By 2022, this could increase to 56% and the impact on food consumption will be significant Source: Global Insight’s Global Consumer Markets data as analyzed by OGA

Source: USDA, Economic Research Service using International Comparison Program 2005 data.

Data source: World Bank

Source: USDA Production, Supply & Distribution Database

Global Policy Analysis Division Office of Global Analysis Source: USDA, Economic Research Service; Foreign Agricultural Service

Products covered: ethanol & biodiesel for all countries, but omits biodiesel for the US. No cellulosic biofuels included. Source: FAS Annual Biofuel Reports and Washington staff analysis.

Global Policy Analysis Division Office of Global Analysis Global agricultural trade has grown sharply over the past decade -- should reach $1.1 trillion ( ) over next decade. Most countries’ agricultural imports have increased substantially, esp. China and East/Southeast Asia. U.S. and EU imports growing, too. Almost all major agricultural exporters have seen sharp gains in recent years – not just the U.S. FTAs have proliferated worldwide, boosting trade. This will continue -- with or without the U.S.

Global Policy Analysis Division Office of Global Analysis Source: Global Trade Atlas; USDA/FAS/OGA Projections **1 billion=1,000 Million

Global Policy Analysis Division Office of Global Analysis Source: GTIS data analyzed by OGA *1 billion=1,000 Million

Global Policy Analysis Division Office of Global Analysis Commercial scale agriculture is energy and input intensive – planting, growing, harvesting, transporting, processing, and packaging. In recent years, input prices have risen in response to strong growth in global demand for energy and ag products. Prices of diesel, fertilizer, seed, and agricultural chemicals have risen. Rising production costs pressure farmers’ operating margins, mitigates supply response, and lead to higher long run agricultural commodity and food prices.

Global Policy Analysis Division Office of Global Analysis Source: International Monetary Fund: International Financial Statistics

Global Policy Analysis Division Office of Global Analysis While commodity prices will remain fairly strong over next 10 years, they will lag rising production costs – land rental rates also affected by rising land prices Source: USDA/ERS *1 billion=1,000 Million

Global Policy Analysis Division Office of Global Analysis Where will the gains occur? Transportation/storage infrastructure and marketing costs will play a big role. Land tenure issues, laws governing foreign investment, and the degree of price transmission will also be major issues. South America will likely lead in land expansion (largely new frontier lands in Brazil) as will the Former Soviet Union (esp. Russia and Ukraine). Africa has more uncultivated land but high marketing costs, poor infrastructure, and long distances from markets will be a constraint. How aggressively will producers around the world respond to strong commodity prices?

Global Policy Analysis Division Office of Global Analysis Globally 446 million hectares of uncultivated land (1.1 billion acres*) 123 million ha 202 million ha 3 million ha 52 million ha 14 million ha Sub-Saharan Africa 47% M. East & N. Africa 87% E. Europe & C. Asia 83% East & South Asia 23% Latin America & Car. 76% Share of Land With Travel Time to Market < 6 Hours Source: World Bank *1 acre = ha

Global Policy Analysis Division Office of Global Analysis Source: USDA PSD Database

Global Policy Analysis Division Office of Global Analysis

Source: USDA PS&D Database

Global Policy Analysis Division Office of Global Analysis USDA does not publish alternative baseline projections and only publishes once a year. The projections in this presentation were based on assumptions developed in fall of 2012 and published February Fiscal and monetary actions in the coming months should pre-empt another global crisis but may not revive pre-crisis (2008/09) growth rates However, if macroeconomic outlook worsens, it could: Reduce the growth of the middle class in emerging markets Increase the value of the U.S. dollar (safe haven response) Reduce global trade (including agricultural trade) Reduce almost all dollar-based commodity prices Reduce farm income Prolonged economic stagnation or new recession, crisis in Euro Zone, or a hard-landing in China pose risks to agriculture’s outlook

Global Policy Analysis Division Office of Global Analysis The price and profit outlook looks more promising than it has in decades. New price/income floors for ag producers who receive world prices for their products. Strong growth in global food, feed, (bio)fuel, and fiber demand and a relatively weak U.S. dollar will keep food and agricultural prices high over the next decade. Much of this new demand will be centered in Asia -- agricultural trade will continue to grow with most of the new import demand coming from developing country markets, such as China, Southeast Asia, Middle East/North Africa, and Latin America. High commodity prices and production gains should help the total profitability of agriculture (despite operating margins coming under pressure) – at least in those countries with high degrees of price transmission. If so, this should continue attracting new investment into the sector, i.e. land and new technologies. However, beware of rising input costs and short-term exogenous shocks – they are a major element of risk in the profit outlook. Have we entered a “golden era” for agriculture? That depends on your definition