Farm Journal Forum
Thursday, December 6, 2012
By Thomas C. Dorr, president of Thomas C. Dorr & Associates, a firm that specializes in the development of food and agricultural trade, both domestic and international, with a specific focus on China
Thanks for the kind introduction. The Forum really gained traction under the leadership of Sonja Hillgren and now has become an ag policy holiday legacy in D.C. I’ve attended a number of them over the years, mostly as an observer trying to gain knowledge. It’s a privilege and honor to join you on this side of the podium, but I must warn you I insisted they place me before lunch rather than after lest I risk putting you to sleep.
I’ve been asked to speak on the impact of the election on regulatory reform and trade. Let me begin by saying that I don’t have a crystal ball.
That said, the challenges in both these areas are primarily political, not technical. In both areas, at the level of high platitude, it is easy to say the right thing. But the devil is in the details... navigating the maze of cross- agendas, hidden agendas, interest group pressures and interest group vetoes, and, sometimes, the need to balance short-term costs with long-term benefits. A lot of political leaders talk the talk. They don’t necessarily walk the walk.
At a very high level of abstraction, there IS a common denominator to the political struggles over regulatory reform and trade. This is simply the tension between those who trust the capacity of free people, acting voluntarily through free markets, to make generally good decisions...versus those who believe deeply, as a reflexive default option, that free choice and free markets are untrustworthy, and that expert guidance and control through regulation is a better approach.
It would be an overstatement to reduce that tension to an absolute either-or position on either side. Free marketers generally acknowledge a role for regulatory safeguards, and regulators more often than not pay lip service to markets. Again, the devil is in the details, hidden somewhere in the shades of gray.
So: what can one say about the election? Clearly, whatever else was at stake … and a lot was … this election was not fought out at the national level on issues of agricultural or trade policy. There were scattered congressional districts where ag issues played big, but they were few and far between. So I am not sure that we saw a mandate emerging on either side of ag issues.
And frankly, with Democrats retaining the White House and the Senate, and Republicans retaining the House of Representatives, the same political gridlock that existed on November 5 still exists today.
As you have probably noticed, as we hurtle towards the fiscal cliff … but let’s not drift off topic.
Nevertheless, President Obama is still at the wheel. So I would suggest, with regard to regulatory issues, that if you want more oversight and regulation in the day- to- day use of your time producing agriculture and food products, as well as oversight in how they are processed, distributed, and consumed, you will be delighted with the administration’s view of regulatory reform.
If, on the other hand, you’re inclined to believe that our basic system of laws, property rights and their accompanying responsibilities, ongoing peer pressure and the more traditional impact of social mores are reasonably effective, then you will probably be sympathetic to those in Congress who are seeking to restrain the regulatory juggernaut that the current administration clearly embraces.
How that will play out politically, I don’t know. Collectively, I suspect you are all better equipped to evaluate this than I, so I’ll leave the regulatory reform prognosis at that.
With regard to the question posed as to what impact the election will have on international trade—particularly food and agriculture trade—again, probably not much...although, I would suggest, for different reasons.
Again, at the level of high platitudes, both parties are committed to an expansion of U.S. exports. Both parties recognize that agriculture is one of the bright spots in the U.S. trade balance. The election was billed by both parties as a referendum on the economy and job growth. While agriculture was not a central focus, the growth of ag exports was and is recognized by both parties as an area of opportunity.
But again, the devil is in the details. Much to my consternation, there was considerable demagoguery, by both parties, of China, our trade relationships with her, as well as that of other emerging economies.
The special-interest pressures kept crowding in. Any suggestion of free trade and the aggressive reduction of existing trade barriers tends to be portrayed as stimulating outsourcing, which is assumed to automatically result in job loss. No trustworthy politician wishes to appear collegial to that issue.
Since the election the fear of the fiscal cliff has shifted the debate to how to increase tax rates/revenue (depending on how you define it) and subsequently grow government. Again, the importance and value of trade to the growth of the economy and the ability to grow jobs does not appear to be on anyone’s public agenda.
Yet I would suggest that this oversight, at least with regard to agriculture, may be as much our responsibility as that of those we’ve elected.
Why? Because, we’ve not focused on, or developed a real appreciation of, the accelerating growth of the global middle class.
If we assume continued growth of the global middle class, and I do, than the food and agriculture trade opportunities are exciting and imposing. Further, there simply is no way we can access these opportunities without aggressively engaging in trade and trade policy….and it’s not difficult to justify.
Here is why.
- 95% of the world’s population lives outside the U.S. It is a very old observation that Americans tend to be a bit self-centered, perhaps inward-looking, and therefore tend to overlook many self-evident facts. This is one of those most significant facts!
- Significant logistic and technology changes are taking and have taken place over the past 7 to 10 years, which completely restructure the costs of exporting and importing value-added, high-quality food stuffs.
- We must recognize that during the period of 1990 through 2009, after the fall of the Iron Curtain, over 1billion people have migrated into the global middle class ($20,000 purchasing power parity per household). I don’t know if Secretary Vilsack brought along his slides from the Foreign Agricultural Service, but if he did, he will tell you the same story.
- Further, by 2020 another 1billion people will have made a similar transition into the middle class.
- In China alone, a recent report from the Boston Consulting Group pointed out, by 2020 nearly 290 million people will have emigrated into the affluent social class, defined as possessing individual annual incomes of $20,000 to $1,000,000 per person. That is an affluent sector in China almost as large as the entire U.S. That’s individual income; for this affluent group, it equates to minimum household income of $38,000.
Yet for all this there is, in my opinion, little truly serious debate about these growing economies and how we can grow our economy through trade.
The old European Union, with perhaps the exception of Germany, is a great example of how countries can become insular and overlooked these opportunities. The old EU has focused on designing programs to provide social benefits with minimal risk, protect jobs, and drive policy common denominators regarding trade, technology, and social agendas in such a way as to insulate themselves from competitive pressures. They’ve lost the growth, innovation, and entrepreneur battle. They are still affluent today, thanks to legacy investments, but they will lose the future.
CAN THE U.S. AVOID THESE PITFALLS?
The question is, can the U.S. avoid similar results without reinvigorating and elevating the policy debates surrounding trade? The present administration has paid great lip serviced to doubling U.S. exports of all goods by 2015. To do that will require a commitment to developing transparent, defensible, and consistent trade policies. Has it?
To develop these policies will require significant political support and a depth of commitment and understanding regarding the value of trade. In recent years, I would suggest, agriculture, itself, has not conveyed this kind of commitment nor sense of appreciation to the long-term value, benefit, and necessity of trade to our industry.
The significant price gains attained over the past five years for oilseeds and grains were driven by the emergence of a robust middle class largely in East and South Asia. Although early trade policy and market development efforts were essential, I don’t think it is dismissive of these efforts to suggest the more recent robust gains were as much a result of rapidly increasing demand driven by exponential and unprecedented growth in the global middle -class.
The volumes required and the price scope of this new demand for energy and improved diets were largely unpredicted.
The meat, poultry, and dairy industries are benefitting from this new demand. They are working to expand their international market presence. Yet much of their initial response to increased prices for protein meal and grain has been to focus inwardly. They and many of their customers lashed out at price gains of feed materials which were driven by energy demand. Their business models weren’t and in many cases are still not designed to accommodate these emerging global middle-class expectations.
The Obama administration was slow to complete the passage of the Panamanian, South Korean, and Colombian free-trade agreements. They did not get serious about their passage until after the 2010 elections. Even agriculture was slow at best, and reluctant at worst, to push aggressively for their passage. Again, this related to the perception of how passage of the FTA’s would impact U.S. job growth, as opposed to looking at what is clearly a growing economic pie.
Now the discussion has begun with regard to the Trans-Pacific Partnership and an EU/U.S. FTA proposals. It appears most ag-policy leaders are already in the trenches staking out what should or should not be accommodated—if ag is to support the proposed FTAs. My observation is that, as opposed to developing strategies for new opportunities, we tend to fight last year’s battles. That doesn’t seem to be a sound strategy.
We need to stay focused on the big picture. We’ve not done a very good job of that. And by "we," I mean all of us, the ag community, as well as traditional political and policy leaders..
Since the passage of the agriculture agreement, which was part of the Uruguay Round GATT agreement, and the first- ever major broad international agricultural trade agreement, our commitment to these policy discussions has been worn down by a multitude of failed discussions and agreements, topped off with a host of new non-tariff trade barriers and santiary and phytosanitary issues.
But if we are going to participate in this exciting new global food and agricultural trade opportunity, we must step back, regroup, rethink, and reposition ourselves with respect to the importance and value of food and agricultural trade.
This is just starting to occur. While I was at the U.S. Grains Council, we, in conjunction with our Tokyo FAS colleagues, Geoff Wiggin, still with FAS, and Jeff Nawn, now with DuPont Pioneer, initiated a research study entitled FOOD 2040.
It is on the Grains Council and FAS websites. I urge you to download and read it. Its purpose was to illuminate the opportunities and challenges confronting agriculture and food, particularly in East and South Asia, over the next 30 years.
I’ve gleaned three basic insights from the study. When reading it you may define others, that is the beauty of the study.
- 95% of the world’s population lives outside the U.S. We pay lip service to this realization. The question is whether we will seriously acknowledge this simple fact and make the effort to define the new policies and business models necessary to capture the opportunities.
- We must begin by redefining the meaning of food security. Historically, food security has been defined as "self-sufficiency,", particularly among economically and politically challenged countries. There was logic for that. But in today’s world economy, driven by cheap technology along with the mass and inexpensive movement of knowledge, as well as goods and services, it is no longer justified. The most effective and inexpensive means of obtaining food security is through free trade. We know that and we pay lip service to it, but our goal must be that of enabling food security through free trade.
- We must develop trade policies around new market definitions. Among other things, this will challenge U.S. leadership in several areas. Our technologies and systems are often built around 20th-century legacy systems. New markets and newly emerging middle- class economies will build on their own expansive needs. It is not assured that the new opportunities can be shoe-horned into our legacy production, processing, marketing, and distribution systems.
- Our food industry was built on and led by domestic consumer demand, in the context of a relatively sparse population and an abundance of natural resources.
- This resulted in the development of a commodity grain and oilseed sector, which allowed for the build out of an efficient commodity animal protein sector— – which in turn drove the development of an ever- evolving processing, branding, marketing, distribution, and food safety system.
The newly emerging middle-class markets don’t have the luxury of sparse populations, adequate resources, and the time to replicate the evolution of our 150-year agriculture and food system miracle.
More significantly, their economies have been led by industrial production for export—which in turn generates economic growth and income to be used for the consumption of higher- quality foods and energy and other goods and services. They have built these economies on a more aggressive urbanization model and dissimilar to that of the U.S. Yet they have created substantial wealth and purchasing power.
They cannot replicate our system. But they will have the resources to buy what they need. They will build a system to accommodate their demands for nutrition, taste, food safety, distribution, dietary requirements, and convenience… on their own terms, within their own regulatory systems, to which we will have to respond if we wish to serve these markets.
What these three points suggest is that if we are to succeed in these markets, we must rethink, recommit, and reposition ourselves, to new types of trade policies which are sustainable and effective.
CONCLUSION: WE MUST REASSESS
So, as I wrap up, I would like to inject a few observations and facts about the China food and agriculture market. It is where the strongest new demand exists. By all accounts, particularly those coming from the FOOD 2040 study, China is who will drive these markets for the next 25 to 30 years. If we learn how to navigate this market, the U.S. food and ag community will be a competitive global force for several more decades.
This is a significant opportunity for U.S. agriculture, perhaps the equivalent of two to four ethanol opportunities. The following facts help identify the scope of the challenges and the opportunities.
- As I already stated, the Boston Consulting Group just released a report indicating that by 2020 China’s affluent class will approximate nearly 290 million people. China is now internally acknowledging that Chinese food security will most likely be secured by solid trade relationships. Yet if you don’t listen carefully, you’ll miss this.
- According to a spokesman from one of the think tanks which report directly to China’s Standing Committee as reported in either Xinhua or the China Daily News, China’s grain production in 2012 will have increased for the ninth straight year. That is significant and impressive.
- Yet urbanization is the engine driving their economic and social growth. As such, they acknowledge that 50% of world soybean exports will be shipped to China. JUST THINK ABOUT THAT! Would a statement like that have been considered 10 years ago by Chinese leaders? That is a major change in their public dialogue on this issue.
- Another source suggests that in 2012/13 China may import nearly 60 MMT of corn, rice, and wheat. I haven’t been able to verify the quote. It is a sizable number, if true, and a major positive shift in China’s Ffood Ssecurity policies.
- China is actively developing an overseas corn supply chain. They have or are in the process of negotiating corn supply agreements with Argentina, South. Africa, and the Ukraine.
- China’s corn imports in 2011/12 have been 5.5 MMT
- By 2015 they will be from 10 to 20 MMT and more likely 20 MMT
- Who will become the major China corn supplier? Probably the U.S.
- But who will become our major competitor in the raw corn market? Probably the Ukraine.
- They’ve figured out how to scale production from 3.6 MMT in 2001 to 22.5 MMT in 2011.
- Their corn acreage in 2012 may have reached 4.4 M hectares.
- Ukrainian corn is cheaper than U.S., upward of US$30 MT, and cheaper than Argentinian by US$3 MT Dec. 2012 delivery.
- No GM corn supposedly out of the Ukraine.
- 1Q 2012 Ccorn imports to Japan
- U.S. 1.5 MMT
- Brazil, ArgentinaRgy, Ukraine, and others 1.18 MMT
So the bottom line is this:
The opportunity is enormous. So is the competition. And the question is whether we have our eyes on the prize, or are looking inward, in the great American tradition of navel-gazing. Is U.S. trade policy, as currently framed, adequate to secure an ongoing major role for U.S. producers and the entirety of the food sector in these new emerging global markets? Should we not get serious about our policies and how we may or may not compete in these new global markets?Or are we going to allow domestic interest group vetoes to stall progress across the board? Are we going to focus on growth, which means looking to free trade to access growing foreign markets, or are we going to focus on domestic redistribution, in the context of a mature, slow- growing domestic market?
And to win the free trade battle, are we willing to commit to competitive excellence, or will we adopt tax and regulatory policies that place ever-increasing burdens on producers?
Finally, if we are willing to address these issues, will we be willing to commit policy, economic support, time, and leadership resources to the development of this new world trade order…..or in the final analysis will we simply elevate an old playbook designed to protect legacy systems as opposed to elevating our traditional American genius for innovation and entrepreneurship?.
Those are the questions. And remember: it is easy to talk the talk. But pay close attention to who walks the walk. Thank you.