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Agricultural commodity production and trade: a trade economist's view on filling US food supply gaps
Food Policy 24 (1999) 181–195 www.elsevier.com/locate/foodpol
Agricultural commodity production and trade: a trade economist’s view on filling US food supply gaps Philip Abbott* Al Akhawayn University and Purdue University1, Department of Agricultural Economics 1145, Krannert Building—Rm 576, Purdue University, West Lafayette, IN 47907-1145, USA
Abstract Deficiencies in the balance of the American diet have been identified which could necessitate changes in agricultural production and trade. International trade has played only a small role for the products in deficit–fruits, vegetables and dairy products–but will be critical to future market adjustments. The potential to fill food supply gaps via increased imports and from US producers in the future is substantial, as seen in recent worldwide trends for these products. Transportation costs, which encouraged self-sufficiency in these products in the past, have declined. The producer bias of agricultural policy has diminished following reforms in the 1992 and 1996 Farm Bills as well as in the US GATT offer. Evidence that potential exporters of these products may expand sales to the US and that world supplies can cope with the necessary adjustments is presented. Whether and how markets adjust will depend more on changes in consumer preferences than on production technology or policy. An example of trade in tomato juice is used to show that New Trade Theory, and particularly how firms market their products, more so than traditional determinants of comparative advantage, will dictate the path of those adjustments. 1999 Published by Elsevier Science Ltd. All rights reserved. Keywords: Food supply gap; Dietary recommendations; Trade; Production; Agricultural policy
* Corresponding author. Tel.: ⫹ 765-494-4274; fax: ⫹ 765-494-9176; e-mail: [email protected] 1 Professor Abbott is currently Visiting Professor, School of Business Administration, Al Akhawayn University, Ifrane, Morocco. He is on sabbatical leave from Purdue University, USA. 0306-9192/99/$ - see front matter 1999 Published by Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 6 - 9 1 9 2 ( 9 9 ) 0 0 0 3 4 - 2
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Introduction Improvement in the American diet and filling of the food supply gaps identified by McNamara et al. (1997) will necessitate some rebalancing or increase in available food supplies, and thus agricultural production, either in the US or elsewhere. Deficiencies were identified, at least in the balance of the current American diet, particularly for fruits, vegetables and dairy products. International trade and agricultural production overseas have historically played only a small role in meeting US food needs, especially for the categories of products which are in deficit. There is an enormous, as yet unrealized, potential for filling any food supply gaps in the future from international markets as well as from US producers. Trade will play a critical role in how agricultural markets, and hence production, will evolve. Consumer preferences, not policy or production potential, however, will be key to determining whether dietary guidelines are met in future US consumption patterns. This paper explores this general thesis by first investigating why international trade has been relatively unimportant in the supply of certain agricultural products, both in the US and worldwide. High shipping and handling costs of the products in deficit, along with agricultural policies promoting self-sufficiency and encouraging exports, explain historical trade patterns. Recent trends show rapid growth in food trade, especially for fruits and vegetables, so factors underlying these trends are explored. Factors driving this growth highlighted here include improvements in the transportation system, policy reform following the Uruguay Round GATT Agreement, and evidence of potential exporters ready to supply the US market. A subsequent section considers the potential impact on food supplies and the quality of diets elsewhere in the world should American diets improve. Hence, the actual capacity of the world to respond to increased US demand is explored. Trends in high value and processed food trade are then examined in order to make the case that demand patterns are paramount in determining international trade patterns and thus agricultural production trends. Conclusions emphasize the role of consumer preferences in driving agricultural production increases here and elsewhere, as well as the manner in which adjustments are likely to unfold, based on evidence from the past and from recent shifts in world market demand and trade. The recent trade trends in high value and processed food products (Henderson et al., 1996) provide the basis for optimism, at least on the supply side, in meeting American food needs if reflected in improved demand patterns.
Why trade has been unimportant as a source of US supplies Most countries in the world, including the US, are largely self-sufficient in the production of agricultural commodities (FAO, 1998). Table 1 demonstrates this point by presenting supply–utilization data and calculating gross and net contributions of imports to food supply for the major aggregate categories of agricultural products. In the US, production exceeds food supply, so self-sufficiency exceeds 100%, except for fruits (other than citrus), dairy (where only 4% of production is needed as
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Table 1 Contribution of International Trade Toward Meeting 1994 Dietary Recommendations Food supply US Grains Vegetables Potatoes Others Fruit Citrus Other fruit Dairy Meat Poultry Fish Eggs World Grains Vegetables Potatoes Others Fruit Citrus Other fruit Dairy Meat Poultry Fish Eggs
Production Net imports*
Imports
⫺71.2 ⫺0.5 ⫺0.3 ⫺0.3 6.0 1.1 4.9 3.0 ⫺1.1 ⫺1.6 1.5 0.0
8.4 2.7 1.0 1.7 12.9 4.0 8.9 4.3 1.5 0.0 3.1 0.0
30.3 30.5 16.0 14.5 33.1 13.4 19.7 67.5 31.6 11.6 5.8 3.5
354.2 32.7 21.1 11.6 31.9 13.1 18.8 69.7 32.8 13.2 5.9 4.4
877.4 430.9 152.8 278.1 345.1 73.3 271.8 422.6 193.6 49.1 78.0 40.0
1780.9 478.3 270.7 207.6 443.9 85.7 358.2 533.1 196.4 49.1 104.5 45.1
239.1 28.2 14.3 13.9 69.5 24.7 44.8 63.8 17.8 4.2 38.4 1.0
Gap (%)
10.5% ⫺47.9% 31.0% 68.8% 64.3% 46.8% 14.5% 14.5% 15.4% 13.6% ⫺19.2% 15.4% 44.6% 552.8% 151.9% 396.0% 294.2% 472.1% 81.5% 110.3%
% Self % Import sufficient** contribution***
335.0% 101.6% 101.6% 101.7% 81.9% 91.8% 75.1% 95.6% 103.5% 113.8% 74.1% 100.0%
27.7% 8.9% 6.3% 11.7% 39.0% 29.9% 45.2% 6.4% 4.8% 0.0% 53.4% 0.0%
72.7% 93.5% 90.6% 95.0% 79.9% 66.3% 83.5% 84.9% 90.8% 91.4% 50.8% 97.5%
27.3% 6.5% 9.4% 5.0% 20.1% 33.7% 16.5% 15.1% 9.2% 8.6% 49.2% 2.5%
*Net imports ⫽ (gross) imports-exports; Animal feed use, seed use, waste and industrial use not presented. **Self-sufficiency equals 1-(net imports/food Supply), expressed %. *** % Import contribution is (gross) imports/food supply, expressed in %. Food supply, production, imports, and net imports are in million metric tons. World gap is based on US pyramid requirements and the ratio of world to US population. Sources: FAO (1998), Agrostat Database Collection for production, imports, exports and food supply McNamara et al. (1998) for US food supply gap and calculations by the author for remaining entries.
imports) and fish. These same product categories stand out as ones where trade is more important for the world. Self-sufficiency is generally above 90% for other products in world trade. These data strongly suggest that neither the US nor the world generally has been significantly reliant on trade in food, with the exception that the world exhibits significant trade in grains. Never-the-less, the food supply gaps computed by McNamara et al. (1997) for the US, and shown in Table 1, are generally much larger than import contributions to supply. A second important aspect of international agricultural trade illustrated by Table 1 is that the US both exports and imports virtually all agricultural products. This
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two-way trade is especially important for fruits and vegetables, where net imports (imports less exports) are much smaller than gross imports. In several cases, for a single product or category, the magnitude of imports and exports is roughly equal. While seasonal differences account in part for this two-way trade, variety in diets is also augmented by this phenomenon. When evaluating the role of trade in the world, these two-way trade patterns must also be taken into account, remembering that in many cases the same regions are often both the world’s largest importers and exporters of particular commodities (Abbott and Bredahl, 1994). Moreover, while the US is showing a “gap” in supplies of certain products, it is also exporting significant quantities of those very same products. Thus, calculating a “food gap” as the difference between production and need may not be a very useful way of looking at the American diet problem. One explanation of the importance of self-sufficiency in international agricultural markets is the importance, more than for other goods, of transportation costs (Trypus, 1995). Food products suffer greater losses due to perishability, and quality can deteriorate in transit. To preserve quality, air freight may be required, which is substantially more expensive than sea freight. Transportation costs are more important for vegetables, dairy products, and to a lesser extent fruits, while bulk ocean shipping is relatively more cost effective for grains, accounting in part for the greater importance of international trade in grains. Since fruits to some extent have “natural packaging” which makes international shipments more feasible, and since climate is important in determining production capacity for particular fruits, there is more trade in fruits than vegetables, dairy products or other agricultural goods except grains. The form in which products are traded is also dictated by this concern with shipping costs, especially for dairy products. There is relatively little trade in fresh milk. Processed products like cheese, UHT processed milk, and non-fat dry milk, which are more amenable to transport, are traded instead. Another explanation behind the existence and importance of exports as well as self-sufficiency, particularly of those foods where supply gaps exist, is the producer bias inherent in agricultural policy (Young et al., 1991; Swinnen and van der Zee, 1993). That is, historically agricultural prices have tended to fall and technical improvements increased supply faster than demand. In the face of these market forces, government intervention has transferred income to producers in ways which lower consumer welfare. Producer subsidies either require increased taxes or alter market prices in favor of producers. This makes products more expensive to consumers and so provides an incentive to lower consumption. The extent of these effects on consumption depends strongly on how sensitive consumer demand patterns are to price and income, however (Kinsey and Bowland, 1999). The dairy program is the best relevant example of this producer policy bias (Blaney and Fallert, 1990). A combination of price supports, marketing orders, and import quotas have raised dairy prices in the US, both regionally and nationally. Higher prices have surely diminished consumption of dairy products, but only to the extent that price matters in demand. For dairy and other agricultural goods, price responsiveness of demand as well as income responsiveness can be low, so the actual extent to which this discourages consumption may be limited. This effect is muted
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further due to the fact that commodity values at farm gate prices are only a fraction of consumer food costs. Trade policy has been coordinated with domestic policy, and so has reinforced the producer bias of agricultural policy at the expense of consumers and taxpayers (Young et al., 1991). Import quotas on dairy products raise domestic prices by limiting available supplies. In the cases of fruits and vegetables, non-tariff trade barriers, including grades and standards on imports, are set not only to protect the safety of US food supplies, but also to raise producer prices and incomes, and to limit supplies (Buckley, 1990). In fact, for fruits and vegetables, this aspect of trade policy—limitations due to quality controls at the border—is likely to be much more important than are any domestic support policies (Hillman, 1978, 1997). Trade policy has also explicitly promoted exports of the key commodities in question here. The Dairy Export Incentive Program (DEIP) explicitly subsidizes exports of dairy products, in part to dispose of surpluses which have accumulated as a result of domestic price support programs, and in part to augment foreign demand (Blaney and Fallert, 1990). While explicit export subsidies are not given to fruits and vegetables, these commodities are eligible for and receive credit guarantees through the USDA GSM 102 program (and other similar programs) administered by the Foreign Agricultural Service [FAS]. These have been shown to act as implicit subsidies on exports by permitting credit to importers who would not otherwise be able to obtain credit, or who would have paid substantially higher interest rates. In addition, FAS explicitly acts as a promoter of exports by providing market information, services to US agricultural exporters, and even identification of contacts and leads to exporting organizations (FAS, 1998a, b, c). A brief examination of the FAS web page should convince one of the export orientation of this agency, both by the nature of data available and by the emphasis in articles contained there. Whether the activities of the FAS are simply a public good which would not otherwise be provided by the private sector is a debatable point, but the importance of this agency as a promoter of US agricultural exports cannot be denied. Thus, high transportation costs and an agricultural policy, especially trade policy, which in the past has promoted producer income at the expense of consumers, has led to self-sufficiency in many agricultural commodities, two-way trade, expansion of exports and barriers to imports. Trade and trade policy have been diminishing US food supplies for products in deficit (on the basis of nutritional standards) rather than contributing to increased supplies or availability of food.
Why trade may play a greater role in the future in filling any US food supply gaps Fruits and vegetables are among the most rapidly growing US agricultural imports, in spite of continued exports and policy promoting exports (Henderson et al., 1996). These trends are driven by rapidly increasing high value and processed product trade throughout the world, and more recently in the US, as shown in Fig. 1. Thus, these recent trends contrast with some observations cited above, which are based on a
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Fig. 1. US trade trends in agricultural products. Source: FAO (1998) Agrostat database collection.
much longer historical period. Moreover, lack of dynamics in dairy trade may reflect import quotas, which must increase under GATT commitments but today are not significantly higher than historical levels (IATRC, 1994; FAS, 1998c). As a result, dairy trade remains low and slowly growing, whereas fruit and vegetables imports (and exports) are increasing rapidly, and have been for over a decade. Recent trends in high value and processed food product trade are driven by a number of factors leading to the phenomenon labeled “globalization”. Three factors of particular importance to the fruit, vegetable and dairy trade, and which resolve some of the problems cited above, are highlighted here. These include improvements in transportation, policy reform, and the potential of other countries to increase exports.
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Transportation—containerization Improvements in transportation services are an important and often overlooked factor contributing to recent trends in high value and processed food product trade (Trypus, 1995). The first important technical innovation was containerization. This has allowed shipment of a wider variety of goods by boat, which is more economical than air freight, now for more perishable goods such as fruits, vegetables, dairy and meat. Improvements that allow accurate climate control (temperature and humidity) inside containers have also permitted maintenance of high quality and minimization of losses at an economical cost. In addition, regularly scheduled shipping between more ports, more timely deliveries, and modern port handling equipment speed deliveries, reduce transportation charges, and simplify the logistics of agricultural exporting. Trade in processed foods is a way of addressing shipping problems, and consumer demand for variety and “service” embodied in food products. It is provided through imports of both high value (e.g. fruits and vegetables as well as meat) and processed foods from foreign firms. Processing can also be a way of packaging products to ship at lower cost, or with less risk of losses, as for cheese. It provides products in forms demanded by consumers, incorporating an element of “service” in the delivery of products. Processed food trade is also expanding rapidly (Henderson et al., 1996). Agricultural policy reform Agricultural policy in the US has also been undergoing significant reform in a manner which may continue producer support, but with less distortion introduced into consumption patterns. The 1996 Farm Bill reduced producer support via the price mechanism (Young and Westcott, 1996; Stovall and Hathaway, 1995). This continued the process fostered by GATT and begun in the 1991 Farm Bill of “decoupling” farm income support from prices, and so it is borne by taxpayers instead. Thus, consumers will not in the future be discouraged as much by price incentives from consuming critical foods. Dairy price supports in particular are to disappear by 1999, and there are now no price supports for fruits and vegetables. The Uruguay Round GATT Agreement limits both domestic support and export subsidies, and permits no new explicit export subsidies (IATRC, 1994). This will directly constrain existing dairy export subsidies (DEIP) and will not permit fruit or vegetable export subsidies in response to a push for promotion of exports. The Agreement on Agriculture also adopted principles based on decoupling producer support from the price mechanism. Many actual country offers and commitments to GATT deviate somewhat from this principle, and in many cases retain high protection (Ingco, 1995; Dixit, 1996). The US was among the most faithful to the principles of the GATT agreement, especially to the extent that decoupling was part of the 1991 and 1996 Farm Bills. Another initiative in the Uruguay Round of GATT focused on sanity and phytosanitary rules governing agricultural trade (Roberts, 1998; Orden and Roberts, 1997; Unnevehr et al., 1994). Harmonization of grades and standards under the World
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Trade Organization (WTO), and basing those standards more on scientific evidence rather than as a vehicle for disguised producer protection, should help with the US trade policies most significant in hampering imports of fruit and vegetables. In addition, some compromises were reached under the NAFTA Agreement with Mexico and Canada which also limit non-tariff barriers to fruit and vegetable imports, and require that existing regulations are intended to protect the food supply rather than producer incomes (Raney and Shagam, 1997). Hence, this aspect of trade policy is less likely to be a deterrent to imports in the future, with trade rules both more transparent and better directed to the function they are intended to serve. Certainly problems with US agricultural policy, which raises prices for critical foods, may persist. Dairy marketing orders may continue to raise consumer prices. Low international commodity prices may cause future farm policy to revert to old institutions. The tariff rate quota under GATT has permitted effective continuation, at least for a time, of the dairy import quota regime. Some regulations on fruit and vegetable trade clearly remain protectionist, but improvements in key areas have been reached and debate on remaining protectionist policies continues. Potential exporters Another reason for optimism that trade and agricultural production worldwide could contribute to providing food supplies needed to meet any improvements in US diets is that potential exporters exist in Latin America and the Mediterranean region who could expand output. Evidence from policy debates, evidence of those suppliers seeking access to new markets, and relative producer prices support this claim. Policy worldwide has favored agricultural producers at the expense of consumers, especially to diminish reliance on imports, elsewhere as well as in the US (Swinnen and van der Zee, 1993). Producer biases in the European Union and Japan are even greater than in the US. Many agricultural exporting countries in addition to the US have sought, through GATT and bilateral negotiations, to reduce barriers to entering those markets (IATRC, 1994). In addition, some countries who served the European market under special provisions (generally due to their status as former colonies— such as through the Lome Convention) have lost that privileged access under the new GATT Agreement. They will lose traditional export markets, and so are actively seeking alternative outlets for their production capacity. Real reform, lowering prices and increasing market access opportunities in the EU and Japan seem limited, based on the content of their GATT offers and negotiated free trade agreements. The demands and dilemmas of exporters to those regions is evidence of at least a perceived capacity to profitably increase world output and exports, especially for fruits and vegetables. Countries exist where producer prices for vegetables, fruits and dairy products are even lower than in the US, in spite of our status as a leading exporter of these goods. Table 2 reports such price data (FAO, 1998), highlighting countries where producer prices are currently less than 90% of comparable US farm gate prices. This table can be viewed as a simple, crude test of comparative advantage. Agricultural trade policies now serve as barriers to prevent the free trade outcome, and any price differ-
6.29 0.48 2.11 3.58
1.32
Asia Japan China Indonesia Thailand
New Zealand
5.06
16.53 0.31 0.89 1.70
2.03 8.49 5.70
1.27 0.95 0.71 0.44
1.34 2.13
1.00 0.88
6.03 0.13 0.43 0.66
1.09 3.15 2.73
0.89 0.34
1.14
0.46 1.34
1.00 0.73
4.85 0.10 1.68
1.29 3.64 1.58
0.86 0.23
0.76
0.99 0.71
1.00 1.06
6.90 0.17 0.21 0.47
1.71 1.12 3.05
0.44 0.46 0.61 0.14
0.43 0.71
1.00 0.48
6.50 0.23 0.62
0.81 1.61 1.32
0.96 0.99 0.67 0.17
0.62 0.64
1.00 0.58
Entries are local producer prices, converted to US dollars, and divided by US producer prices. Sources: FAO (1998), Agrostat Database Collection, for producer prices in local currency. IMF (1997), International Financial Statistics, for exchange rates.
3.86 0.17 0.44 0.87
1.19 2.77 0.91
2.22 0.92 1.36
Europe Spain Netherlands France 1.00 5.43 2.87
0.33
0.91 0.26
0.46 1.57 1.27
0.53 0.87
1.00 1.70
0.97
2.63 1.35
Latin America Mexico Chile
1.00 0.77
North Africa and Middle East Israel 3.50 Morocco 1.87 Tunisia 1.88 Egypt 1.91
1.00 1.18
USA Canada
8.20
12.80 1.09 4.74 4.02
1.43 3.27 3.52
0.98 1.72 2.03 0.99
0.39 1.25
1.00
1.34
8.01 0.80
1.08 3.99 2.00
2.58 3.01 1.77 0.73
0.89 0.57
1.00 1.06
1.53
12.16 0.72
1.48 9.08 2.46
2.29 3.45 2.07 0.78
1.21 0.69
1.00 2.16
Table 2 Vegetable, fruit and dairy producer prices in 1994 relative to U.S. producer prices Country Potato Cabbage Lettuce Tomato Cucumber Peppers Gr bean Carrot Orange Apple Pear
3.07
13.67 0.61
1.67 11.64 3.71
1.92 1.56 1.91 0.65
1.60 0.75
1.00 1.69
1.22
2.83
25.03 0.71
1.57 5.30 4.26
1.34 1.38 1.04 0.53
0.63 0.87
1.00 1.04
11.17 0.23
1.10 2.00 3.75
1.11 1.09 0.87 0.41
0.54 0.93
1.00 0.66
0.67
3.00 0.47 0.90 1.11
1.25
1.16
0.88 1.10 1.11 1.13
0.68 0.79
1.00 1.41
Peach Grape Melon Milk
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entials which exist indicate profit opportunities which should lead to greater trade (from countries with low prices) if trade barriers are reduced or eliminated in the future. The countries reported here were selected among those clamoring for market access opportunities, and who have traditionally exported substantial shares of these crops. In conclusion, improvements in the transportation system, reform of US agricultural policies both in the recent Farm Bills and under GATT, and evidence of countries willing and able to expand as exporters provide strong evidence of the capacity of international markets to meet any increase in US demand. Indeed, recent trends in agricultural trade patterns show that this is already happening in spite of continued US exports.
Will improving US diets create problems for food supplies elsewhere? In Table 1 food supply gaps are also computed for the world, based on the US nutritional standards established in McNamara et al. (1997), and using world population relative to US population. These calculations suggest a larger problem with food consumption balance elsewhere than now exists in the US, since world food supply gaps are a greater fraction of production. This scarcity in the rest of the world raises a (false) concern that increased food demand in the US might face an unresponsive world market, and so high prices rather than greater US imports. First, such a concern is in contradiction with the major international agricultural policy concerns—how to cope with agricultural surpluses and so rising farm program costs—as reflected in the debate over the Uruguay Round GATT Agreement on Agriculture. Only a couple of times over the last four decades have concerns with the capacity of the world to produce enough food been at the forefront of policy debate. Issues in the GATT debate, which spanned the 1986–94 period, concerned market access and producer support, with scant attention devoted to supply adequacy concerns or consumer subsidies (IATRC, 1994). Second, the US nutritional standards may well reflect a cultural bias, especially with the relatively high consumption requirements for meat which are not met elsewhere. These world food supply “gaps” suggest a larger world malnutrition problem than is reported in typical global assessments by international organizations, such as the Food and Agriculture Organization of the United Nations (FAO, 1996) and International Food Policy Research Institute [IFPRI] (Islam). Food problems, however, are more often the consequence of a lack of effective demand (due to poverty or poor consumer choices) than the inability of world agricultural production to meet demand. Numerous studies have recently explored the capacity of world agriculture to meet future demand, in light of rapidly growing population and significant income increases leading to diet improvements, especially in Asia prior to its recent economic problems. While a few pessimists (Brown, 1995) are concerned with the capacity of the world to keep up, others (Avery, 1996) are decidedly optimistic about the world’s ability to expand production to meet whatever market demand
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materializes, albeit with concerns about environmental degradation. The more cautious, institutional studies by FAO (Alexandratos, 1995), IFPRI (Islam, 1995), the World Bank (Mitchell and Ingco, 1995), and USDA (WAOB, 1996) can all be characterized as guardedly optimistic. They emphasize that supply has generally kept ahead of demand, in spite of any slowdown in production growth rates which may have been observed. While these studies have focused largely on cereals production, and never specifically on fruits, vegetables or dairy products, their conclusions, and more importantly the forces driving those conclusions, are important and relevant to the commodities in question here. They emphasize the responsiveness of agricultural production to price incentives, driven largely by demand, and the importance of agricultural research in meeting any future demand increases. The decline in expenditures on agricultural research in recent years must in part be attributed to the perception of low world prices and surplus capacity in world markets. In very recent years, when demand surged, supply followed, if with a lag of a year or so. The research dimension also suggests that lags in supply response may be even longer. The self-sufficiency story of these key markets is also relevant here. Table 1 shows that US food supply gaps, as well as current US imports, are small fractions of worldwide production in fruits, vegetables, or dairy products. This suggests that the capacity exists in the world to respond to any increased US demand, since the US gap is only a small fraction of the world supplies, even if it is a larger fraction of trade. Higher world prices might be necessary to encourage greater exports, and a smaller degree of self-sufficiency elsewhere, however. As was found in the studies of world food supply capacity, supply response to price incentives is critical, and historical evidence is that agricultural production is quite responsive to price signals. Lessons from famine management and past food crises reinforce this same position (Islam and Thomas, 1996). Effective demand more often than supply shortages leads to such food problems. Increasing supply without an accompanying increase in demand will likely only lead to disincentives to future production. In a similar vein, there were suggestions that one solution to the world food problem of the 1970s would be reduction in meat consumption in richer countries. Critiques of this idea were based on the notion that it was demand, not agricultural production capacity, which determined output levels. Hence, reduced meat demand would simply impoverish farmers, not raise consumption of the poor by freeing supplies. The bottom line is that we live in a world where, in spite of poverty and malnutrition, effective demand for food has often been inadequate to maintain prices of agricultural commodities, and so does not provide incentives for increased production. Thus, increased US demand, if it occurs, for fruits, vegetables and dairy products is likely to be met with increased supplies in the medium to long run. If supplies are increased, but not demand, prices will fall with little increase in consumption.
An illustration of how world food markets now function An anecdote on international food markets functioning in today’s “globally competitive market place” is instructive on how food markets can and will respond to
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demand pressure, and how borders and policy are decreasingly important in this process. In this case, the author was recently served a can of tomato juice by Royal Air Maroc, the state owned airline of Morocco, on flights between Marseille and Casablanca. The tomatoes were grown and the juice manufactured in California. What seemed startling about this case is that tomatoes are an important Moroccan export and one of the major contentious commodities traded between Morocco and France. This trade issue was emphasized in recent headlines when the Uruguay Round GATT agreement cut Morocco’s share in the French market in favor of higher cost Spanish suppliers inside the European Union. Tomato import policy was then an important issue which Morocco lost further ground on in more recent negotiations over its free trade agreement with the EU. Yet the Moroccan government is effectively importing tomatoes from California. It should be borne in mind, however, that the specific product provided—canned tomato juice—is not common in either French or Moroccan diets, and that the can provided a service for the airline, as a vehicle to serve the juice. Indeed the can (as well as shipping it) may well have cost as much to produce as the tomatoes inside. It is also relevant to note that this is an export of one of the commodities in a category potentially in deficit in the US. However, processing and transportation/distribution (facilitated here by canning) are increasingly important components of food products in these categories exported overseas, or imported into the US for that matter. Target markets for products in this case are also exporters, where a well focused differentiated product can succeed. The driving force behind this transaction was the demand for a product in a particular form by a customer (in this case the airline), likely helped by effective marketing strategy on the part of the California manufacturer. Profit opportunities will be taken by food manufacturers and distributors, in spite of seeming comparative advantage elsewhere based on farm production costs. Competitiveness in international markets is seen increasingly as being driven by such theoretical concerns as economics of scale, imperfect competition, and product differentiation, resulting in significant two-way trade (Ethier, 1994). This case demonstrates the practical relevance of that theory, and in particular the importance of product differentiation and its relation to marketing. Demand pressure is strongly dependent on marketing and distribution efforts, affecting transportation costs, wholesale–retail margins, and so profitability of trade in cases where resource endowments would seem to play against such trade flows. As noted earlier, these marketing and distribution margins are significant portions of final values of consumer foods, often much more important than the values of commodities which make up the food products. The case cited above is just one example of successful international marketing efforts, an aspect of trade badly treated in traditional economic analysis (Abbott, 1998). This case highlights the importance of these new concerns, and serves as a concrete illustration of how the issues from New Trade Theory lie behind what drives trade. What this case, and the lessons derived from it, mean for the thesis of this paper is that food processors and manufacturers are very likely to find ways of supplying markets should changing demand patterns call for (or consumers can be sold) such
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products, and so profit opportunities arise. They will not passively await such opportunities, but will use marketing strategy to bring them about. Effective marketing strategy is in part to blame for the problem which gave rise to this conference, but if consumers demand a more balanced diet, these same forces will drive agricultural production to meet that demand, and not necessarily from the US.
Conclusion The evidence cited above demonstrates that consumer demand, much more so than production potential, is key to how food markets will evolve and whether improvements in US diets will be accommodated by increases in agricultural production. Inadequate effective demand has been the source of most food problems, as well as the low prices that agricultural policy are intended to cope with. Consumer preferences, and education programs intended to alter in desired ways those preferences, will determine effective demand. Marketing and distribution efforts of food manufacturers can also influence those demand patterns. Production will follow, due to the incentives that new demand patterns put into place. While adjustments in the mix of agricultural production may not be immediate, and price increases will most likely lead any supply adjustments, production in both the US and abroad can accommodate the needs projected by the US food supply gaps. Due to the inelasticity of demand relative to supply, and the time involved for supply adjustments to fully take place, past abrupt changes in demand for US exports have led to substantial initial jumps in prices, followed by subsequent production increases to meet that demand. Both the World Food Crisis of 1973–74, and the recent surge in Chinese demand in 1994–95 demonstrated this pattern. Policy has been intended more often to cope with the sustained periods of low and falling prices, seeking to prop up prices in the face of inadequate demand, rather than the high prices evidenced during these two periods. In each case the longer run consequence was eventually production increases, causing low agricultural prices to re-emerge. In each of the above instances demand changes were abrupt, which is much less likely to be the case for US consumption patterns for fruits, vegetables and dairy products. Education programs will take time to have an effect and so will more gradually alter consumer preferences. Extreme price variations are less likely in this case. If changes in demand do occur, they will have the beneficial effect of both improving the health and well-being of the American population, and relieving some pressure for return to past agricultural policies. Transportation system improvements and agricultural policy reform will make the contribution of international trade toward the goal of meeting new, increased demand for foods now in deficit easier than in the past. Containerization and improvements in the logistics of shipping fruits, vegetables, dairy and other perishable food products make international trade in these goods both more feasible and less costly. Decoupling of producer support from disincentives to consume critical food products, as was accomplished in both the US GATT commitment and recent farm bills, reduce policy-induced problems for incentives to a balanced diet. Reductions in non-tariff
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barriers to trade, accomplished under NAFTA and the WTO, and evidenced by the move to grades and standards less often intended to protect producers and more often intended to guard food safety, also mean it is easier for international trade to contribute to that outcome. Rapidly increasing processed food and HVP trade, especially for fruits and vegetables, indicates that this process is already underway, and that international trade coupled with US agricultural production can provide the variety and service that consumers demand. References Abbott, P., 1998. Competitiveness: theoretical foundations versus empirical observation. Presented at the EAAE/ISHS Seminar on Understanding Competitiveness: Economic Theory and its Contribution to a Better Understanding of Competitiveness, Apeldorn, The Netherlands, 21–23 April. Abbott, P., Bredahl, M., 1994. Competitiveness: definitions, useful concepts and issues. In: Bredahl, M., Abbott, P., Reed, M. (Eds.), Competitiveness in International Food Markets. Westview Press, Boulder, CO. Alexandratos, N., 1995. World Agriculture: Toward 2010, an FAO Study. John Wiley and Sons, Chichester, UK. Avery, D., 1996. Toughest Rome Food Summit Challenge is Not How to End Famine—but Preserving Wildlife. Global Food Quarterly, 18, Hudson Institute, Indianapolis, IN. Blaney, D., Fallert, R., 1990. The World Market in Dairy Products: Government Intervention and Multilateral Policy Reform. Staff Report AGES 9053, ERS, USDA, Washington, DC. Brown, L., 1995. Who Will Feed China? Wake Up Call for a Small Planet. W.W. Norton and Co., New York. Buckley, K., 1990. The World Market in Fresh Fruits and Vegetables, Wine and Tropical Products: Government Intervention and Multi-lateral Policy Reform. Staff Report AGES 9057, ERS, USDA, Washington, DC. Dixit, P., 1996. Agriculture and the WTO: The Road Ahead. Agricultural Outlook, AO-233. USDA, Washington, DC, 18–23 December. Ethier, W., 1994. Conceptual foundations from trade, multinational firms, and foreign direct investment theory. In: Bredahl, M., Abbott, P., Reed, M. (Eds.), Competitiveness in International Food Markets. Westview Press, Boulder, CO. Foreign Agricultural Service, USDA, [FAS], 1998a. FAS Online, www.fas.usda.gov.Web Page of the Foreign Agricultural Service, FAS, USDA, Washington, DC. Foreign Agricultural Service, USDA, [FAS], 1998b. World Horticultural Trade and US Export Opportunities. Circular Series FHORT 8-98, FAS, USDA, Washington, DC, August. Foreign Agricultural Service, USDA, [FAS], 1998c. Dairy: World Markets and Trade. Circular Series FD 2-98. FAS, USDA, Washington, DC, July. Food and Agriculture Organization of the United Nations, [FAO], 1996. The State of Food and Agriculture. Rome, Italy. Food and Agriculture Organization of the United Nations, [FAO], 1998. AGROSTAT Database Collection. Rome, Italy. Henderson, D., Handy, C., Neff, S., 1996. Globalization of the Processed Foods Market. AER No. 742, ERS, USDA, Washington, DC. Hillman, J., 1978. Non Tariff Agricultural Trade Barriers. University of Nebraska Press, Lincoln, NE. Hillman, J., 1997. Non tariff agricultural trade barriers revisited. In: Orden, D., Roberts, D. (Eds.), Understanding Technical Barriers to Agricultural Trade. International Agricultural Trade Research Consortium [IATRC], University of Minnesota, St. Paul, MN, January. Ingco, M., 1995. Agricultural liberalization in the Uruguay round. Finance and Development, September, 43–45.
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International Agricultural Trade Research Consortium, [IATRC], 1994. The Uruguay Round Agreement on Agriculture: An Evaluation. Commissioned Paper No. 9, IATRC, University of Minnesota, St. Paul, MN, July. International Monetary Fund, [IMF], 1997. International Financial Statistics. Washington, DC. Islam, N. (Ed.), 1995. Population and Food in the Early Twenty-First Century. International Food Policy Research Institute [IFPRI], Washington, DC. Islam, N., Thomas, S., 1996. Foodgrain Price Stabilization in Developing Countries. International Food Policy Research Institute [IFPRI], Washington, DC. Kinsey, J., Bowland, B., 1999. How can the US food system deliver food products consistent with the dietary guidelines? Food marketing and retailing: an economist’s view. Food Policy 24, 237–253. McNamara, P.E., Ranney, C.K., Kantor, L.S., Krebs-Smith, S.M., 1997. The gap between food intakes and the Pyramid recommendations: measurement and food system ramifications. Food Policy 24, 117–133. Mitchell, D., Ingco, M., 1995. Global and regional food demand and supply prospects. In: Islam, N. (Ed.), Population and Food in the Early Twenty-First Century. International Food Policy Research Institute [IFPRI], Washington, DC, pp. 49–60. Orden, D., Roberts, D. (Eds.), 1997. Understanding Technical Barriers to Agricultural Trade. International Agricultural Trade Research Consortium, [IATRC], University of Minnesota, St. Paul, MN, January. Raney, T., Shagam, S., 1997. NAFTA’s Impact on US Agriculture: The First Three Years. Agricultural Outlook, AO-244. ERS, USDA, Washington, DC, 20–23 September. Roberts, D., 1998. Implementation of the WTO Agreement on the Application of Sanitary and Phytosanitary Measures: The First Two Years. IATRC Working Paper 98-4. International Agricultural Trade Research Consortium [IATRC], Univ. of Minnesota, St. Paul, MN, May. Stovall, J., Hathaway, D., 1995. The 1995 Farm Bill: Issues and Options. Choices, Second Quarter, 8–14. Swinnen, J., Van Der Zee, F., 1993. The political economy of agricultural policies: a survey. European Review of Agricultural Economics 20 (3), 261–290. Trypus, C., 1995. Implications of the Market Structure of Ocean Line Shipping on US Agricultural Exports: Monopoly Power and Price Discrimination. MS Thesis, Department of Agricultural Economics, Purdue University, West Lafayette, IN, December. Unnevehr, L., Deaton, L., Kramer, C., 1995. International trade agreement provides new framework for food safety regulation. Food Review 17, 2–6. World Agricultural Outlook Board, USDA, [WAOB], 1996. Long Term Agricultural Projections to 2005. Staff Report WAOB-96-1, WAOB, USDA, Washington, DC. Young, C., Westcott, P., 1996. The 1996 US Farm Act Increases Market Orientation. Agriculture Information Bulletin No. 726, Commercial Agriculture Division, ERS, USDA, Washington, DC. Young, L., Marchant, M., McCalla, A., 1991. The Political Economy of Agricultural Trade: A Review of the Literature on Domestic Policy Behavior and International Price Formation. Staff Report AGES 9103, ERS, USDA, Washington, DC.
Agricultural commodity production and trade: a trade economist’s view on filling US food supply gaps Philip Abbott* Al Akhawayn University and Purdue University1, Department of Agricultural Economics 1145, Krannert Building—Rm 576, Purdue University, West Lafayette, IN 47907-1145, USA
Abstract Deficiencies in the balance of the American diet have been identified which could necessitate changes in agricultural production and trade. International trade has played only a small role for the products in deficit–fruits, vegetables and dairy products–but will be critical to future market adjustments. The potential to fill food supply gaps via increased imports and from US producers in the future is substantial, as seen in recent worldwide trends for these products. Transportation costs, which encouraged self-sufficiency in these products in the past, have declined. The producer bias of agricultural policy has diminished following reforms in the 1992 and 1996 Farm Bills as well as in the US GATT offer. Evidence that potential exporters of these products may expand sales to the US and that world supplies can cope with the necessary adjustments is presented. Whether and how markets adjust will depend more on changes in consumer preferences than on production technology or policy. An example of trade in tomato juice is used to show that New Trade Theory, and particularly how firms market their products, more so than traditional determinants of comparative advantage, will dictate the path of those adjustments. 1999 Published by Elsevier Science Ltd. All rights reserved. Keywords: Food supply gap; Dietary recommendations; Trade; Production; Agricultural policy
* Corresponding author. Tel.: ⫹ 765-494-4274; fax: ⫹ 765-494-9176; e-mail: [email protected] 1 Professor Abbott is currently Visiting Professor, School of Business Administration, Al Akhawayn University, Ifrane, Morocco. He is on sabbatical leave from Purdue University, USA. 0306-9192/99/$ - see front matter 1999 Published by Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 6 - 9 1 9 2 ( 9 9 ) 0 0 0 3 4 - 2
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Introduction Improvement in the American diet and filling of the food supply gaps identified by McNamara et al. (1997) will necessitate some rebalancing or increase in available food supplies, and thus agricultural production, either in the US or elsewhere. Deficiencies were identified, at least in the balance of the current American diet, particularly for fruits, vegetables and dairy products. International trade and agricultural production overseas have historically played only a small role in meeting US food needs, especially for the categories of products which are in deficit. There is an enormous, as yet unrealized, potential for filling any food supply gaps in the future from international markets as well as from US producers. Trade will play a critical role in how agricultural markets, and hence production, will evolve. Consumer preferences, not policy or production potential, however, will be key to determining whether dietary guidelines are met in future US consumption patterns. This paper explores this general thesis by first investigating why international trade has been relatively unimportant in the supply of certain agricultural products, both in the US and worldwide. High shipping and handling costs of the products in deficit, along with agricultural policies promoting self-sufficiency and encouraging exports, explain historical trade patterns. Recent trends show rapid growth in food trade, especially for fruits and vegetables, so factors underlying these trends are explored. Factors driving this growth highlighted here include improvements in the transportation system, policy reform following the Uruguay Round GATT Agreement, and evidence of potential exporters ready to supply the US market. A subsequent section considers the potential impact on food supplies and the quality of diets elsewhere in the world should American diets improve. Hence, the actual capacity of the world to respond to increased US demand is explored. Trends in high value and processed food trade are then examined in order to make the case that demand patterns are paramount in determining international trade patterns and thus agricultural production trends. Conclusions emphasize the role of consumer preferences in driving agricultural production increases here and elsewhere, as well as the manner in which adjustments are likely to unfold, based on evidence from the past and from recent shifts in world market demand and trade. The recent trade trends in high value and processed food products (Henderson et al., 1996) provide the basis for optimism, at least on the supply side, in meeting American food needs if reflected in improved demand patterns.
Why trade has been unimportant as a source of US supplies Most countries in the world, including the US, are largely self-sufficient in the production of agricultural commodities (FAO, 1998). Table 1 demonstrates this point by presenting supply–utilization data and calculating gross and net contributions of imports to food supply for the major aggregate categories of agricultural products. In the US, production exceeds food supply, so self-sufficiency exceeds 100%, except for fruits (other than citrus), dairy (where only 4% of production is needed as
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Table 1 Contribution of International Trade Toward Meeting 1994 Dietary Recommendations Food supply US Grains Vegetables Potatoes Others Fruit Citrus Other fruit Dairy Meat Poultry Fish Eggs World Grains Vegetables Potatoes Others Fruit Citrus Other fruit Dairy Meat Poultry Fish Eggs
Production Net imports*
Imports
⫺71.2 ⫺0.5 ⫺0.3 ⫺0.3 6.0 1.1 4.9 3.0 ⫺1.1 ⫺1.6 1.5 0.0
8.4 2.7 1.0 1.7 12.9 4.0 8.9 4.3 1.5 0.0 3.1 0.0
30.3 30.5 16.0 14.5 33.1 13.4 19.7 67.5 31.6 11.6 5.8 3.5
354.2 32.7 21.1 11.6 31.9 13.1 18.8 69.7 32.8 13.2 5.9 4.4
877.4 430.9 152.8 278.1 345.1 73.3 271.8 422.6 193.6 49.1 78.0 40.0
1780.9 478.3 270.7 207.6 443.9 85.7 358.2 533.1 196.4 49.1 104.5 45.1
239.1 28.2 14.3 13.9 69.5 24.7 44.8 63.8 17.8 4.2 38.4 1.0
Gap (%)
10.5% ⫺47.9% 31.0% 68.8% 64.3% 46.8% 14.5% 14.5% 15.4% 13.6% ⫺19.2% 15.4% 44.6% 552.8% 151.9% 396.0% 294.2% 472.1% 81.5% 110.3%
% Self % Import sufficient** contribution***
335.0% 101.6% 101.6% 101.7% 81.9% 91.8% 75.1% 95.6% 103.5% 113.8% 74.1% 100.0%
27.7% 8.9% 6.3% 11.7% 39.0% 29.9% 45.2% 6.4% 4.8% 0.0% 53.4% 0.0%
72.7% 93.5% 90.6% 95.0% 79.9% 66.3% 83.5% 84.9% 90.8% 91.4% 50.8% 97.5%
27.3% 6.5% 9.4% 5.0% 20.1% 33.7% 16.5% 15.1% 9.2% 8.6% 49.2% 2.5%
*Net imports ⫽ (gross) imports-exports; Animal feed use, seed use, waste and industrial use not presented. **Self-sufficiency equals 1-(net imports/food Supply), expressed %. *** % Import contribution is (gross) imports/food supply, expressed in %. Food supply, production, imports, and net imports are in million metric tons. World gap is based on US pyramid requirements and the ratio of world to US population. Sources: FAO (1998), Agrostat Database Collection for production, imports, exports and food supply McNamara et al. (1998) for US food supply gap and calculations by the author for remaining entries.
imports) and fish. These same product categories stand out as ones where trade is more important for the world. Self-sufficiency is generally above 90% for other products in world trade. These data strongly suggest that neither the US nor the world generally has been significantly reliant on trade in food, with the exception that the world exhibits significant trade in grains. Never-the-less, the food supply gaps computed by McNamara et al. (1997) for the US, and shown in Table 1, are generally much larger than import contributions to supply. A second important aspect of international agricultural trade illustrated by Table 1 is that the US both exports and imports virtually all agricultural products. This
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two-way trade is especially important for fruits and vegetables, where net imports (imports less exports) are much smaller than gross imports. In several cases, for a single product or category, the magnitude of imports and exports is roughly equal. While seasonal differences account in part for this two-way trade, variety in diets is also augmented by this phenomenon. When evaluating the role of trade in the world, these two-way trade patterns must also be taken into account, remembering that in many cases the same regions are often both the world’s largest importers and exporters of particular commodities (Abbott and Bredahl, 1994). Moreover, while the US is showing a “gap” in supplies of certain products, it is also exporting significant quantities of those very same products. Thus, calculating a “food gap” as the difference between production and need may not be a very useful way of looking at the American diet problem. One explanation of the importance of self-sufficiency in international agricultural markets is the importance, more than for other goods, of transportation costs (Trypus, 1995). Food products suffer greater losses due to perishability, and quality can deteriorate in transit. To preserve quality, air freight may be required, which is substantially more expensive than sea freight. Transportation costs are more important for vegetables, dairy products, and to a lesser extent fruits, while bulk ocean shipping is relatively more cost effective for grains, accounting in part for the greater importance of international trade in grains. Since fruits to some extent have “natural packaging” which makes international shipments more feasible, and since climate is important in determining production capacity for particular fruits, there is more trade in fruits than vegetables, dairy products or other agricultural goods except grains. The form in which products are traded is also dictated by this concern with shipping costs, especially for dairy products. There is relatively little trade in fresh milk. Processed products like cheese, UHT processed milk, and non-fat dry milk, which are more amenable to transport, are traded instead. Another explanation behind the existence and importance of exports as well as self-sufficiency, particularly of those foods where supply gaps exist, is the producer bias inherent in agricultural policy (Young et al., 1991; Swinnen and van der Zee, 1993). That is, historically agricultural prices have tended to fall and technical improvements increased supply faster than demand. In the face of these market forces, government intervention has transferred income to producers in ways which lower consumer welfare. Producer subsidies either require increased taxes or alter market prices in favor of producers. This makes products more expensive to consumers and so provides an incentive to lower consumption. The extent of these effects on consumption depends strongly on how sensitive consumer demand patterns are to price and income, however (Kinsey and Bowland, 1999). The dairy program is the best relevant example of this producer policy bias (Blaney and Fallert, 1990). A combination of price supports, marketing orders, and import quotas have raised dairy prices in the US, both regionally and nationally. Higher prices have surely diminished consumption of dairy products, but only to the extent that price matters in demand. For dairy and other agricultural goods, price responsiveness of demand as well as income responsiveness can be low, so the actual extent to which this discourages consumption may be limited. This effect is muted
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further due to the fact that commodity values at farm gate prices are only a fraction of consumer food costs. Trade policy has been coordinated with domestic policy, and so has reinforced the producer bias of agricultural policy at the expense of consumers and taxpayers (Young et al., 1991). Import quotas on dairy products raise domestic prices by limiting available supplies. In the cases of fruits and vegetables, non-tariff trade barriers, including grades and standards on imports, are set not only to protect the safety of US food supplies, but also to raise producer prices and incomes, and to limit supplies (Buckley, 1990). In fact, for fruits and vegetables, this aspect of trade policy—limitations due to quality controls at the border—is likely to be much more important than are any domestic support policies (Hillman, 1978, 1997). Trade policy has also explicitly promoted exports of the key commodities in question here. The Dairy Export Incentive Program (DEIP) explicitly subsidizes exports of dairy products, in part to dispose of surpluses which have accumulated as a result of domestic price support programs, and in part to augment foreign demand (Blaney and Fallert, 1990). While explicit export subsidies are not given to fruits and vegetables, these commodities are eligible for and receive credit guarantees through the USDA GSM 102 program (and other similar programs) administered by the Foreign Agricultural Service [FAS]. These have been shown to act as implicit subsidies on exports by permitting credit to importers who would not otherwise be able to obtain credit, or who would have paid substantially higher interest rates. In addition, FAS explicitly acts as a promoter of exports by providing market information, services to US agricultural exporters, and even identification of contacts and leads to exporting organizations (FAS, 1998a, b, c). A brief examination of the FAS web page should convince one of the export orientation of this agency, both by the nature of data available and by the emphasis in articles contained there. Whether the activities of the FAS are simply a public good which would not otherwise be provided by the private sector is a debatable point, but the importance of this agency as a promoter of US agricultural exports cannot be denied. Thus, high transportation costs and an agricultural policy, especially trade policy, which in the past has promoted producer income at the expense of consumers, has led to self-sufficiency in many agricultural commodities, two-way trade, expansion of exports and barriers to imports. Trade and trade policy have been diminishing US food supplies for products in deficit (on the basis of nutritional standards) rather than contributing to increased supplies or availability of food.
Why trade may play a greater role in the future in filling any US food supply gaps Fruits and vegetables are among the most rapidly growing US agricultural imports, in spite of continued exports and policy promoting exports (Henderson et al., 1996). These trends are driven by rapidly increasing high value and processed product trade throughout the world, and more recently in the US, as shown in Fig. 1. Thus, these recent trends contrast with some observations cited above, which are based on a
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Fig. 1. US trade trends in agricultural products. Source: FAO (1998) Agrostat database collection.
much longer historical period. Moreover, lack of dynamics in dairy trade may reflect import quotas, which must increase under GATT commitments but today are not significantly higher than historical levels (IATRC, 1994; FAS, 1998c). As a result, dairy trade remains low and slowly growing, whereas fruit and vegetables imports (and exports) are increasing rapidly, and have been for over a decade. Recent trends in high value and processed food product trade are driven by a number of factors leading to the phenomenon labeled “globalization”. Three factors of particular importance to the fruit, vegetable and dairy trade, and which resolve some of the problems cited above, are highlighted here. These include improvements in transportation, policy reform, and the potential of other countries to increase exports.
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187
Transportation—containerization Improvements in transportation services are an important and often overlooked factor contributing to recent trends in high value and processed food product trade (Trypus, 1995). The first important technical innovation was containerization. This has allowed shipment of a wider variety of goods by boat, which is more economical than air freight, now for more perishable goods such as fruits, vegetables, dairy and meat. Improvements that allow accurate climate control (temperature and humidity) inside containers have also permitted maintenance of high quality and minimization of losses at an economical cost. In addition, regularly scheduled shipping between more ports, more timely deliveries, and modern port handling equipment speed deliveries, reduce transportation charges, and simplify the logistics of agricultural exporting. Trade in processed foods is a way of addressing shipping problems, and consumer demand for variety and “service” embodied in food products. It is provided through imports of both high value (e.g. fruits and vegetables as well as meat) and processed foods from foreign firms. Processing can also be a way of packaging products to ship at lower cost, or with less risk of losses, as for cheese. It provides products in forms demanded by consumers, incorporating an element of “service” in the delivery of products. Processed food trade is also expanding rapidly (Henderson et al., 1996). Agricultural policy reform Agricultural policy in the US has also been undergoing significant reform in a manner which may continue producer support, but with less distortion introduced into consumption patterns. The 1996 Farm Bill reduced producer support via the price mechanism (Young and Westcott, 1996; Stovall and Hathaway, 1995). This continued the process fostered by GATT and begun in the 1991 Farm Bill of “decoupling” farm income support from prices, and so it is borne by taxpayers instead. Thus, consumers will not in the future be discouraged as much by price incentives from consuming critical foods. Dairy price supports in particular are to disappear by 1999, and there are now no price supports for fruits and vegetables. The Uruguay Round GATT Agreement limits both domestic support and export subsidies, and permits no new explicit export subsidies (IATRC, 1994). This will directly constrain existing dairy export subsidies (DEIP) and will not permit fruit or vegetable export subsidies in response to a push for promotion of exports. The Agreement on Agriculture also adopted principles based on decoupling producer support from the price mechanism. Many actual country offers and commitments to GATT deviate somewhat from this principle, and in many cases retain high protection (Ingco, 1995; Dixit, 1996). The US was among the most faithful to the principles of the GATT agreement, especially to the extent that decoupling was part of the 1991 and 1996 Farm Bills. Another initiative in the Uruguay Round of GATT focused on sanity and phytosanitary rules governing agricultural trade (Roberts, 1998; Orden and Roberts, 1997; Unnevehr et al., 1994). Harmonization of grades and standards under the World
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Trade Organization (WTO), and basing those standards more on scientific evidence rather than as a vehicle for disguised producer protection, should help with the US trade policies most significant in hampering imports of fruit and vegetables. In addition, some compromises were reached under the NAFTA Agreement with Mexico and Canada which also limit non-tariff barriers to fruit and vegetable imports, and require that existing regulations are intended to protect the food supply rather than producer incomes (Raney and Shagam, 1997). Hence, this aspect of trade policy is less likely to be a deterrent to imports in the future, with trade rules both more transparent and better directed to the function they are intended to serve. Certainly problems with US agricultural policy, which raises prices for critical foods, may persist. Dairy marketing orders may continue to raise consumer prices. Low international commodity prices may cause future farm policy to revert to old institutions. The tariff rate quota under GATT has permitted effective continuation, at least for a time, of the dairy import quota regime. Some regulations on fruit and vegetable trade clearly remain protectionist, but improvements in key areas have been reached and debate on remaining protectionist policies continues. Potential exporters Another reason for optimism that trade and agricultural production worldwide could contribute to providing food supplies needed to meet any improvements in US diets is that potential exporters exist in Latin America and the Mediterranean region who could expand output. Evidence from policy debates, evidence of those suppliers seeking access to new markets, and relative producer prices support this claim. Policy worldwide has favored agricultural producers at the expense of consumers, especially to diminish reliance on imports, elsewhere as well as in the US (Swinnen and van der Zee, 1993). Producer biases in the European Union and Japan are even greater than in the US. Many agricultural exporting countries in addition to the US have sought, through GATT and bilateral negotiations, to reduce barriers to entering those markets (IATRC, 1994). In addition, some countries who served the European market under special provisions (generally due to their status as former colonies— such as through the Lome Convention) have lost that privileged access under the new GATT Agreement. They will lose traditional export markets, and so are actively seeking alternative outlets for their production capacity. Real reform, lowering prices and increasing market access opportunities in the EU and Japan seem limited, based on the content of their GATT offers and negotiated free trade agreements. The demands and dilemmas of exporters to those regions is evidence of at least a perceived capacity to profitably increase world output and exports, especially for fruits and vegetables. Countries exist where producer prices for vegetables, fruits and dairy products are even lower than in the US, in spite of our status as a leading exporter of these goods. Table 2 reports such price data (FAO, 1998), highlighting countries where producer prices are currently less than 90% of comparable US farm gate prices. This table can be viewed as a simple, crude test of comparative advantage. Agricultural trade policies now serve as barriers to prevent the free trade outcome, and any price differ-
6.29 0.48 2.11 3.58
1.32
Asia Japan China Indonesia Thailand
New Zealand
5.06
16.53 0.31 0.89 1.70
2.03 8.49 5.70
1.27 0.95 0.71 0.44
1.34 2.13
1.00 0.88
6.03 0.13 0.43 0.66
1.09 3.15 2.73
0.89 0.34
1.14
0.46 1.34
1.00 0.73
4.85 0.10 1.68
1.29 3.64 1.58
0.86 0.23
0.76
0.99 0.71
1.00 1.06
6.90 0.17 0.21 0.47
1.71 1.12 3.05
0.44 0.46 0.61 0.14
0.43 0.71
1.00 0.48
6.50 0.23 0.62
0.81 1.61 1.32
0.96 0.99 0.67 0.17
0.62 0.64
1.00 0.58
Entries are local producer prices, converted to US dollars, and divided by US producer prices. Sources: FAO (1998), Agrostat Database Collection, for producer prices in local currency. IMF (1997), International Financial Statistics, for exchange rates.
3.86 0.17 0.44 0.87
1.19 2.77 0.91
2.22 0.92 1.36
Europe Spain Netherlands France 1.00 5.43 2.87
0.33
0.91 0.26
0.46 1.57 1.27
0.53 0.87
1.00 1.70
0.97
2.63 1.35
Latin America Mexico Chile
1.00 0.77
North Africa and Middle East Israel 3.50 Morocco 1.87 Tunisia 1.88 Egypt 1.91
1.00 1.18
USA Canada
8.20
12.80 1.09 4.74 4.02
1.43 3.27 3.52
0.98 1.72 2.03 0.99
0.39 1.25
1.00
1.34
8.01 0.80
1.08 3.99 2.00
2.58 3.01 1.77 0.73
0.89 0.57
1.00 1.06
1.53
12.16 0.72
1.48 9.08 2.46
2.29 3.45 2.07 0.78
1.21 0.69
1.00 2.16
Table 2 Vegetable, fruit and dairy producer prices in 1994 relative to U.S. producer prices Country Potato Cabbage Lettuce Tomato Cucumber Peppers Gr bean Carrot Orange Apple Pear
3.07
13.67 0.61
1.67 11.64 3.71
1.92 1.56 1.91 0.65
1.60 0.75
1.00 1.69
1.22
2.83
25.03 0.71
1.57 5.30 4.26
1.34 1.38 1.04 0.53
0.63 0.87
1.00 1.04
11.17 0.23
1.10 2.00 3.75
1.11 1.09 0.87 0.41
0.54 0.93
1.00 0.66
0.67
3.00 0.47 0.90 1.11
1.25
1.16
0.88 1.10 1.11 1.13
0.68 0.79
1.00 1.41
Peach Grape Melon Milk
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entials which exist indicate profit opportunities which should lead to greater trade (from countries with low prices) if trade barriers are reduced or eliminated in the future. The countries reported here were selected among those clamoring for market access opportunities, and who have traditionally exported substantial shares of these crops. In conclusion, improvements in the transportation system, reform of US agricultural policies both in the recent Farm Bills and under GATT, and evidence of countries willing and able to expand as exporters provide strong evidence of the capacity of international markets to meet any increase in US demand. Indeed, recent trends in agricultural trade patterns show that this is already happening in spite of continued US exports.
Will improving US diets create problems for food supplies elsewhere? In Table 1 food supply gaps are also computed for the world, based on the US nutritional standards established in McNamara et al. (1997), and using world population relative to US population. These calculations suggest a larger problem with food consumption balance elsewhere than now exists in the US, since world food supply gaps are a greater fraction of production. This scarcity in the rest of the world raises a (false) concern that increased food demand in the US might face an unresponsive world market, and so high prices rather than greater US imports. First, such a concern is in contradiction with the major international agricultural policy concerns—how to cope with agricultural surpluses and so rising farm program costs—as reflected in the debate over the Uruguay Round GATT Agreement on Agriculture. Only a couple of times over the last four decades have concerns with the capacity of the world to produce enough food been at the forefront of policy debate. Issues in the GATT debate, which spanned the 1986–94 period, concerned market access and producer support, with scant attention devoted to supply adequacy concerns or consumer subsidies (IATRC, 1994). Second, the US nutritional standards may well reflect a cultural bias, especially with the relatively high consumption requirements for meat which are not met elsewhere. These world food supply “gaps” suggest a larger world malnutrition problem than is reported in typical global assessments by international organizations, such as the Food and Agriculture Organization of the United Nations (FAO, 1996) and International Food Policy Research Institute [IFPRI] (Islam). Food problems, however, are more often the consequence of a lack of effective demand (due to poverty or poor consumer choices) than the inability of world agricultural production to meet demand. Numerous studies have recently explored the capacity of world agriculture to meet future demand, in light of rapidly growing population and significant income increases leading to diet improvements, especially in Asia prior to its recent economic problems. While a few pessimists (Brown, 1995) are concerned with the capacity of the world to keep up, others (Avery, 1996) are decidedly optimistic about the world’s ability to expand production to meet whatever market demand
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materializes, albeit with concerns about environmental degradation. The more cautious, institutional studies by FAO (Alexandratos, 1995), IFPRI (Islam, 1995), the World Bank (Mitchell and Ingco, 1995), and USDA (WAOB, 1996) can all be characterized as guardedly optimistic. They emphasize that supply has generally kept ahead of demand, in spite of any slowdown in production growth rates which may have been observed. While these studies have focused largely on cereals production, and never specifically on fruits, vegetables or dairy products, their conclusions, and more importantly the forces driving those conclusions, are important and relevant to the commodities in question here. They emphasize the responsiveness of agricultural production to price incentives, driven largely by demand, and the importance of agricultural research in meeting any future demand increases. The decline in expenditures on agricultural research in recent years must in part be attributed to the perception of low world prices and surplus capacity in world markets. In very recent years, when demand surged, supply followed, if with a lag of a year or so. The research dimension also suggests that lags in supply response may be even longer. The self-sufficiency story of these key markets is also relevant here. Table 1 shows that US food supply gaps, as well as current US imports, are small fractions of worldwide production in fruits, vegetables, or dairy products. This suggests that the capacity exists in the world to respond to any increased US demand, since the US gap is only a small fraction of the world supplies, even if it is a larger fraction of trade. Higher world prices might be necessary to encourage greater exports, and a smaller degree of self-sufficiency elsewhere, however. As was found in the studies of world food supply capacity, supply response to price incentives is critical, and historical evidence is that agricultural production is quite responsive to price signals. Lessons from famine management and past food crises reinforce this same position (Islam and Thomas, 1996). Effective demand more often than supply shortages leads to such food problems. Increasing supply without an accompanying increase in demand will likely only lead to disincentives to future production. In a similar vein, there were suggestions that one solution to the world food problem of the 1970s would be reduction in meat consumption in richer countries. Critiques of this idea were based on the notion that it was demand, not agricultural production capacity, which determined output levels. Hence, reduced meat demand would simply impoverish farmers, not raise consumption of the poor by freeing supplies. The bottom line is that we live in a world where, in spite of poverty and malnutrition, effective demand for food has often been inadequate to maintain prices of agricultural commodities, and so does not provide incentives for increased production. Thus, increased US demand, if it occurs, for fruits, vegetables and dairy products is likely to be met with increased supplies in the medium to long run. If supplies are increased, but not demand, prices will fall with little increase in consumption.
An illustration of how world food markets now function An anecdote on international food markets functioning in today’s “globally competitive market place” is instructive on how food markets can and will respond to
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demand pressure, and how borders and policy are decreasingly important in this process. In this case, the author was recently served a can of tomato juice by Royal Air Maroc, the state owned airline of Morocco, on flights between Marseille and Casablanca. The tomatoes were grown and the juice manufactured in California. What seemed startling about this case is that tomatoes are an important Moroccan export and one of the major contentious commodities traded between Morocco and France. This trade issue was emphasized in recent headlines when the Uruguay Round GATT agreement cut Morocco’s share in the French market in favor of higher cost Spanish suppliers inside the European Union. Tomato import policy was then an important issue which Morocco lost further ground on in more recent negotiations over its free trade agreement with the EU. Yet the Moroccan government is effectively importing tomatoes from California. It should be borne in mind, however, that the specific product provided—canned tomato juice—is not common in either French or Moroccan diets, and that the can provided a service for the airline, as a vehicle to serve the juice. Indeed the can (as well as shipping it) may well have cost as much to produce as the tomatoes inside. It is also relevant to note that this is an export of one of the commodities in a category potentially in deficit in the US. However, processing and transportation/distribution (facilitated here by canning) are increasingly important components of food products in these categories exported overseas, or imported into the US for that matter. Target markets for products in this case are also exporters, where a well focused differentiated product can succeed. The driving force behind this transaction was the demand for a product in a particular form by a customer (in this case the airline), likely helped by effective marketing strategy on the part of the California manufacturer. Profit opportunities will be taken by food manufacturers and distributors, in spite of seeming comparative advantage elsewhere based on farm production costs. Competitiveness in international markets is seen increasingly as being driven by such theoretical concerns as economics of scale, imperfect competition, and product differentiation, resulting in significant two-way trade (Ethier, 1994). This case demonstrates the practical relevance of that theory, and in particular the importance of product differentiation and its relation to marketing. Demand pressure is strongly dependent on marketing and distribution efforts, affecting transportation costs, wholesale–retail margins, and so profitability of trade in cases where resource endowments would seem to play against such trade flows. As noted earlier, these marketing and distribution margins are significant portions of final values of consumer foods, often much more important than the values of commodities which make up the food products. The case cited above is just one example of successful international marketing efforts, an aspect of trade badly treated in traditional economic analysis (Abbott, 1998). This case highlights the importance of these new concerns, and serves as a concrete illustration of how the issues from New Trade Theory lie behind what drives trade. What this case, and the lessons derived from it, mean for the thesis of this paper is that food processors and manufacturers are very likely to find ways of supplying markets should changing demand patterns call for (or consumers can be sold) such
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products, and so profit opportunities arise. They will not passively await such opportunities, but will use marketing strategy to bring them about. Effective marketing strategy is in part to blame for the problem which gave rise to this conference, but if consumers demand a more balanced diet, these same forces will drive agricultural production to meet that demand, and not necessarily from the US.
Conclusion The evidence cited above demonstrates that consumer demand, much more so than production potential, is key to how food markets will evolve and whether improvements in US diets will be accommodated by increases in agricultural production. Inadequate effective demand has been the source of most food problems, as well as the low prices that agricultural policy are intended to cope with. Consumer preferences, and education programs intended to alter in desired ways those preferences, will determine effective demand. Marketing and distribution efforts of food manufacturers can also influence those demand patterns. Production will follow, due to the incentives that new demand patterns put into place. While adjustments in the mix of agricultural production may not be immediate, and price increases will most likely lead any supply adjustments, production in both the US and abroad can accommodate the needs projected by the US food supply gaps. Due to the inelasticity of demand relative to supply, and the time involved for supply adjustments to fully take place, past abrupt changes in demand for US exports have led to substantial initial jumps in prices, followed by subsequent production increases to meet that demand. Both the World Food Crisis of 1973–74, and the recent surge in Chinese demand in 1994–95 demonstrated this pattern. Policy has been intended more often to cope with the sustained periods of low and falling prices, seeking to prop up prices in the face of inadequate demand, rather than the high prices evidenced during these two periods. In each case the longer run consequence was eventually production increases, causing low agricultural prices to re-emerge. In each of the above instances demand changes were abrupt, which is much less likely to be the case for US consumption patterns for fruits, vegetables and dairy products. Education programs will take time to have an effect and so will more gradually alter consumer preferences. Extreme price variations are less likely in this case. If changes in demand do occur, they will have the beneficial effect of both improving the health and well-being of the American population, and relieving some pressure for return to past agricultural policies. Transportation system improvements and agricultural policy reform will make the contribution of international trade toward the goal of meeting new, increased demand for foods now in deficit easier than in the past. Containerization and improvements in the logistics of shipping fruits, vegetables, dairy and other perishable food products make international trade in these goods both more feasible and less costly. Decoupling of producer support from disincentives to consume critical food products, as was accomplished in both the US GATT commitment and recent farm bills, reduce policy-induced problems for incentives to a balanced diet. Reductions in non-tariff
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barriers to trade, accomplished under NAFTA and the WTO, and evidenced by the move to grades and standards less often intended to protect producers and more often intended to guard food safety, also mean it is easier for international trade to contribute to that outcome. Rapidly increasing processed food and HVP trade, especially for fruits and vegetables, indicates that this process is already underway, and that international trade coupled with US agricultural production can provide the variety and service that consumers demand. References Abbott, P., 1998. Competitiveness: theoretical foundations versus empirical observation. Presented at the EAAE/ISHS Seminar on Understanding Competitiveness: Economic Theory and its Contribution to a Better Understanding of Competitiveness, Apeldorn, The Netherlands, 21–23 April. Abbott, P., Bredahl, M., 1994. Competitiveness: definitions, useful concepts and issues. In: Bredahl, M., Abbott, P., Reed, M. (Eds.), Competitiveness in International Food Markets. Westview Press, Boulder, CO. Alexandratos, N., 1995. World Agriculture: Toward 2010, an FAO Study. John Wiley and Sons, Chichester, UK. Avery, D., 1996. Toughest Rome Food Summit Challenge is Not How to End Famine—but Preserving Wildlife. Global Food Quarterly, 18, Hudson Institute, Indianapolis, IN. Blaney, D., Fallert, R., 1990. The World Market in Dairy Products: Government Intervention and Multilateral Policy Reform. Staff Report AGES 9053, ERS, USDA, Washington, DC. Brown, L., 1995. Who Will Feed China? Wake Up Call for a Small Planet. W.W. Norton and Co., New York. Buckley, K., 1990. The World Market in Fresh Fruits and Vegetables, Wine and Tropical Products: Government Intervention and Multi-lateral Policy Reform. Staff Report AGES 9057, ERS, USDA, Washington, DC. Dixit, P., 1996. Agriculture and the WTO: The Road Ahead. Agricultural Outlook, AO-233. USDA, Washington, DC, 18–23 December. Ethier, W., 1994. Conceptual foundations from trade, multinational firms, and foreign direct investment theory. In: Bredahl, M., Abbott, P., Reed, M. (Eds.), Competitiveness in International Food Markets. Westview Press, Boulder, CO. Foreign Agricultural Service, USDA, [FAS], 1998a. FAS Online, www.fas.usda.gov.Web Page of the Foreign Agricultural Service, FAS, USDA, Washington, DC. Foreign Agricultural Service, USDA, [FAS], 1998b. World Horticultural Trade and US Export Opportunities. Circular Series FHORT 8-98, FAS, USDA, Washington, DC, August. Foreign Agricultural Service, USDA, [FAS], 1998c. Dairy: World Markets and Trade. Circular Series FD 2-98. FAS, USDA, Washington, DC, July. Food and Agriculture Organization of the United Nations, [FAO], 1996. The State of Food and Agriculture. Rome, Italy. Food and Agriculture Organization of the United Nations, [FAO], 1998. AGROSTAT Database Collection. Rome, Italy. Henderson, D., Handy, C., Neff, S., 1996. Globalization of the Processed Foods Market. AER No. 742, ERS, USDA, Washington, DC. Hillman, J., 1978. Non Tariff Agricultural Trade Barriers. University of Nebraska Press, Lincoln, NE. Hillman, J., 1997. Non tariff agricultural trade barriers revisited. In: Orden, D., Roberts, D. (Eds.), Understanding Technical Barriers to Agricultural Trade. International Agricultural Trade Research Consortium [IATRC], University of Minnesota, St. Paul, MN, January. Ingco, M., 1995. Agricultural liberalization in the Uruguay round. Finance and Development, September, 43–45.
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