1. U.S. Agri-Policy and Technology in a Global Context Robert L. Thompson Professor Emeritus, University of Illinois and Visiting Scholar, Johns Hopkins University School of Advanced International Studies 6 November 2012

2. Outline of Today’s Presentation Snapshot of U.S. agriculture in 2012 The Global Context U.S. Agricultural Technology U.S. Agri-Food Policy Implications for Trade Negotiations

3. Snapshot of U.S. Agriculture Record high exports and net farm income Low debt-equity ratio for the sector Record low interest rates Farm land market bubble? (mostly bought with cash) Worst drought in Midwest since 1930s has given record high corn, soybean and animal feed prices; poultry & livestock sectors severely stressed

5. Snapshot (continued) Food prices rising (opportunism by food companies?) Near term lower meat prices as herds reduced; higher later. A few ethanol plants have suspended operations, but high price of oil/gasoline makes production profitable even with high priced raw material (maize).

6. “Farms” in the United States, 2007 CategoryNumber (1000’s) % of Farms % of Sales Retirement404182 Residential/lifestyle990454 Family farm: <$100K435204 Family: $100-250K11157 Family: $250-500K94412 Family: >$500K110554 Non-family farm53218 Totals2197100 Source: Economic Research Service, USDA.

8. The Global Context

9. Projected Population Growth Region2012 2050ChangePercent World 7,058 9,624 +2,566 + 36 High Income 1,243 1,338 + 95 + 8 Low Income 5,814 8,286 +2,472 + 43 East & S.E. Asia 2,193 2,317 + 124 + 6 South Central Asia 1,823 2,565 + 742 + 41 Sub-Saharan Africa 902 2,092 +1,190 +132 Latin America/Carib 599 749 + 150 + 25 N. Africa & W. Asia 457 748 + 291 + 64 Source: Population Reference Bureau. 2012 World Population Data Sheet.

12. Projected World Food Demand World food demand to grow 70-80% by 2050 –40% increase from world population growth – from 7.0 to 9.6 billion – almost all in developing countries –30-40% increase from broad-based economic growth & urbanization in low income countries The World Bank has estimated the number of people in developing countries in households with incomes >$16,000/year will rise from 352 million in 2000 to 2.1 billion by 2030. How many presently low income consumers escape from poverty is the most important uncertainty re future global demand for food.

13. Larger Fraction of Ag Production to Move Through Trade With population growth, urbanization and broad-based economic development, many low-income countries’ food consumption will outstrip their production capacity, and they will become larger net importers. Distribution of Arable Land Distribution of World Population

14. 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: –Urbanization & infrastructure construction –Nutrient mining –Erosion –Desertification –Natural reserves –Reforestation

15. The Land Constraint (cont’d.) 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. Most available cropland is in remote areas of South America and Sub-Saharan Africa where infrastructure is minimal and soils are inferior in quality to many already in production.

16. 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 research to develop water saving technologies and to increase the drought tolerance and water use efficiency of the crop varieties being grown.

17. 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 efficiency of use –Reducing competition from weeds for water, nutrients and sunlight –Reducing losses from disease and insects Reduce post-harvest losses All these will require more agricultural research.

18. Climate Change Adds a Further Challenge Greater expected temperature increase over land than over water and greatest at higher latitudes. Increased spatial distribution of precipitation –Largest reduction in subtropics –Largest increases in higher latitudes –Increase under monsoons Increased frequency of extreme events, such as droughts and flooding. All agro-ecosystems will be shifting, so, given the location specificity of many ag technologies, need more adaptive agricultural research just to sustain present productivity.

19. U.S. Agricultural Technology

20. U.S. Agricultural Productivity Growth Success Story In 2002, U.S. farm output was 2.6 times larger than what it was in 1948. It was produced with fewer total inputs than were used in 1948! This was a much higher productivity growth rate than in the rest of the U.S. economy! The estimated annual real rate of return on public investments in agricultural research is in the range of 30-60 percent – one of the highest payoff investments in the American economy!

22. Technological Change Several mega-technological changes in the 20 th century gave periodic big boosts to agricultural productivity and reduced the cost of production, e.g.: –When horses & mules were replaced by tractors, it released >25 million hectares of land that had been producing feed for them to produce other crops. –Hybridization of maize together with new technologies that reduced the cost of producing nitrogen fertilizer gave a huge boost to corn productivity. –Application of population genetics together with advances in animal nutrition have greatly increased animal product output per unit of feed consumed. –Electronic sensors and computerized decision aids significantly increased the size of farm operation that one person can manage. –The impact of biotechnology has only just begun.

23. Environmental Benefits of GMOs GMOs now account for 88-94% of U.S. corn, cotton and soybean area planted, with great environmental benefits: –Large reduction in insecticide use –More effective weed control using less energy –Natural resistance to diseases –Increased water use efficiency –Preservation of forests and reduced pressure on fragile lands

24. Agricultural Research Potential There remains more productivity enhancement potential from classical plant and animal breeding, especially with modern genomics, and genetic engineering opens new frontiers:, e.g. –Improve nutritional content of grains, etc. –Increase tolerance to drought, wetness, temperature, salt, aluminum toxicity, …. (to increase yields and/or planted area under adverse or variable conditions) –Internalize resistance to diseases; viruses –Reduce pesticide use, esp. insecticides –Herbicide-resistant varieties –Slow down product deterioration

25. Other Ag Technologies Low-till agriculture Precision agriculture Computers/data processing capacity Nanotechnology And many more

26. Food vs. Fuel? Production of ethanol in the U.S. and biodiesel in Europe comprise the biggest shock to world agriculture since 1970s. Creating large demand for corn and edible oils, which is pulling land out of other crops and new lands into production. Higher feed grains prices reduced profitability of livestock and poultry industries. When will we have technology for producing ethanol economically from cellulosic feedstocks? Can they be produced on inferior soils?

27. Public vs. Private Investments in U.S. Ag Research S Source: Fuglie, ERS, USDA

28. Agriculture Has Been Off the Global Development Agenda Agricultural & rural development were priorities for foreign aid and international development bank lending up until the mid-1980s, but: –Between 1980 to 2005, foreign aid to low income countries for ag development dropped from $8 billion to $3.4 bill./yr (from 17 to 3% of the whole) –In the 1980s, 25% of U.S. foreign aid went to agriculture; dropped to 6% by 1990 and 1% by 2008. –Share of World Bank lending going to agriculture fell from 30% in 1978 to 16% in 1988 to 8% in 2006. The share of foreign aid and development bank lending invested in agricultural research fell by an even larger percentage during this period.

29. U.S. Agricultural Policy

30. Many Types of Policies Affect the Food & Agricultural Sector Commodity programs Trade policy Science policy Macroeconomic Policy (thru exchange rate, inflation rate and interest rates) Credit Policy Tax Policy Energy Policy Environmental policy Food safety policy Competition Policy Animal welfare policy Health insurance Immigration policy Rural and economic development policy Et cetera

31. USDA Expenditures, $ billions Program20052011 Farm Commodity Programs39.6 22.9 Foreign Programs 5.3 2.0 Rural Development 14.3 4.2 Food and Nutrition 51.0105.3 Food Safety 0.9 1.0 Natural Resources & Environ. 8.7 11.8 Marketing & Regulation 1.8 2.7 Research, Education & Econ. 2.7 3.3 USDA administrative & other 0.5 0.7 Total124.9153.8

32. USDA Spending by Category Other – 15%Commodities – 23% Nutrition – 62% Conservation – 8% Commodities – 11% Nutrition – 68% Other – 12% Source: Congressional Budget Office

33. Historical Perspective 1985-95: U.S. farm policy & Uruguay Round Ag Agreement moved in similar directions Late 1990s: U.S. farmers lost enthusiasm for exports and became infatuated by biofuels, esp. corn-based ethanol. 2002-2008: US. reversed course on ag policy reforms

34. WTO Problems with 2008 Farm Bill Raised loan rates and target prices (shifted dollars from green to amber box) while reducing direct payments ACRE created additional large upside potential in amber box support if market prices drop No repeal of fruit & vegetable exclusion Extended authority for dairy export subsidies and monetization of food aid Failed to change cotton program as required by WTO Brazil Cotton Case & reauthorized equivalent to “step 2” subsidy Increased sugar support & protectionism Mandated Country-of-Origin Labeling (“COOL”)

35. U.S. PSE* Level & Composition PSE=Producer Support Estimate (percent of farmers gross receipts attributable to all forms of government policy.

37. Towards the 2012 Farm Bill It is likely that the political process, reinforced by campaign contributions, will ensure continuation of some form of agricultural support programs in the future. Direct payments are politically indefensible in era of record high net farm income. Tighter budget constraint likely to induce shifts of $ from decoupled direct payments to avoid cutting commodity-specific sup- ports (i.e. from green box to amber box).

38. Federal Budget Deficit Reduction Is Essential

39. Redundancies in Farm Policy There are overlaps and redundancies among the five components of present U.S. farm policy: –Direct payments –Counter-cyclical payments (with price or revenue trigger) –Loan deficiency payments (“marketing loan”) –Subsidy to crop insurance –Disaster payments Could all programs be rolled into one?

40. Likely Outcomes Eliminate direct payments. Some form of revenue insurance for feed grains and oilseeds (shallow/deep loss?) Continue subsidizing crop insurance. Individual provisions for dairy, cotton, rice and sugar Cut conservation programs, probably by reducing the size of the CRP. Tighten eligibility criteria for food stamps.

41. Timing? Senate has passed its version of 2012 Farm Bill. In July House Ag Committee reported its bill to the full House of Representatives. No House action before 6 Nov. 2012l election. –“Lame duck” session? Or next Congress? One year extension? –Budget baseline likely even smaller.

42. Implications for Agricultural Trade Negotiations

43. U.S. Role in World Trade (2002-05) Commodity % of World Production % of World Trade % of Prodn Exported Cotton204070 Maize406018 Soybeans384435 Wheat 92550 Rice 21352 Source: Congressional Research Service

44. World Agriculture in Disarray* In most high income countries, farmers are few in number, but have large political clout –Subsidize agriculture, distorting relative returns to various outputs and induce larger total investment in agriculture relative to other sectors. In many low income countries the political clout is in the cities, and the numerically larger group of farmers has little political clout –Food policies have in many cases turned the terms of trade against agriculture to keep urban food prices low, reducing the incentive to invest; agriculture underperforms relative to its potential. *Title of an excellent study by D. Gale Johnson.

45. U.S. WTO Proposal in 2004 In 2004 the U.S. proposed a full phase-of of all trade-distorting forms of ag support over 15 years, with a 60% reduction in the Uruguay Round cap on trade-distorting support in the first 5 years, to be followed by a 5-year pause for adjustment, with the rest phased out before year 16. Poor communication led to backlash from farmers, who understood that the U.S. had offered a 60% reduction in all ag support.

46. U.S. Farm Organization Attitude Have never been enthusiastic about Doha Round; ethanol excites them much more! Say they will support a Doha Round Agreement that significantly reduces trade- distorting domestic subsidies only if the Agreement includes significant increases in real market access. They put too much emphasis –on increasing access into shrinking markets of the past and not enough on potential growth in the total size of the world market (LDCs). –Protecting current farm program structure with commodity-specific benefits

47. Doha Round Ag Trade Negotiations: What Is Possible? Much had already been agreed by July 2004: –Eliminate all ag export subsidies –Reduce the cap on trade-distorting domestic subsidies (highest the most, but exceptions possible) –Reduce cap on tariffs (highest the most, but exceptions allowed if increase tariff-rate quota) –Give the least developed countries open access to high income country markets for most goods. The issue is NOT to get rid of ag subsidies, but to replace those linked to production of specific commodities.

48. Stalemate of WTO Negotiations Three key disagreements: –U.S. demands real increases in market access. –E.U. & developing countries demand real reductions in U.S. trade-distorting ag supports –Brazil and India are asked to offer more market access for services and non-ag manufactured goods Main issues: depth of real cuts in tariffs and in trade-distorting domestic support and how many exceptions Time ran out: President’s “fast track” negotiating authority expired July 1, 2007, and U.S. Presidential campaign was active already in 2007. Once financial crisis hit in Sept. 2008 and unemployment jumped, no further trade liberalization was possible.

49. The Emerging Deal (as of 7/26/08) Negotiators had agreed on: –Caps on and reductions in overall trade distorting support, amber box (including product specific caps), blue box (broadened to include U.S. CCPs) and de minimis support. –Some updating of bases allowed in green box supports. –Ban on agricultural export subsidies. –Caps on and reductions in agricultural tariffs. –How many exceptions would be allowed in high and low income countries.

50. The Deal Breaker (on 7/28/08) Negotiators had agreed to a Special Safeguard Mechanism: Developing countries would be allowed to increase tariffs to15% above present bound rate if world prices are low and imports surge. – U.S. & India could not agree on how big the surge had to be to allow this (40 vs. 15%). The negotiators never took up the contentious cotton issue, the last remaining issue. The coming elections in the U.S. and India made compromise politically impossible.

51. Prospects If No Doha Round Deal The Uruguay Round Agreement on Agriculture will continue to set the rules of the road for international agricultural trade until some future round of negotiations changes them. Increased frequency of use of SPS measures as protectionist barriers to ag imports. For the foreseeable future, with relatively high world market prices, amber box support, much of which is triggered by low prices, in likely to remain low with little risk of exceeding the AMS ceilings. If this round fails or is delayed significantly, expect more dispute settlement cases to be filed with WTO. Risk of “backsliding” into higher protectionism during financial crisis (but surprisingly little so far). If countries refuse to honor WTO rulings, the WTO and the rules-based international trading system will be damaged.

52. Long-Run Prospects 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 biofuels feedstocks. Future world market price trends will depend on whether ag research increases land and water productivity faster than world demand grows.

53. Growing Agricultural Trade The world’s arable land is not distributed around in the world in the same proportions as is population. (No way for Asia or North Africa & Middle East to be self-sufficient.) Agriculture in most LDCs underperforming rela- tive to its potential, but disincentives declining. With population growth & broad-based economic development in LDCs, growth in their food demand will outstrip production potential & more of world ag production will move through trade. Greater trading opportunities for LDCs would accelerate their economic growth and accelerate growth in their food consumption and imports. Need successful ag trade negotiations.