The Drivers of Global Agricultural Production

With the Food and Agriculture Organization of the United Nations warning in its latest report, Food Insecurity in the World, that food price volatility is here to stay, what are the driving forces in global agriculture in the world today?

A study by Johns Hopkins University’s Paul Nitze School of International Studies points out that with the global population projected to grow by 2.6 billion between now and 2050, “farmers everywhere will be asked to increase production sufficiently to feed the equivalent of two more Chinas,” causing world demand for agricultural products to possibly double by the middle of the century.

For the very short term, the forces seem to be driving prices down, with global commodity prices falling a further 0.3 percent last week, according to the Shanghai-based research firm Research-Works, which tracks commodities. While the falls in food prices are primarily due to the collapse in confidence that the Eurozone can stay together in the wake of the Greek economic debacle as well as over Chinese economic concerns, plantings are up sharply as a result of skyrocketing prices kicked off by the 2006-2008 food crisis.

According to the FAO, climate change, increased frequency of weather shocks, increased linkages between energy and agricultural markets due to growing demand for biofuels and increased financialization of food and agricultural commodities all suggest that price volatility is here to stay.

The US Department of Agriculture’s Foreign Agricultural Service identifies eight key factors that will dominate global agriculture through 2020. The report is cited in the current issue of Rice Today, the publication of the International Rice Research Institute based in the Philippines.

At the top of the list is the rise of the middle class, which is expected to double across the planet, with developing countries leading the growth, expanding by an estimated 104 percent, compared with a 9 percent expansion of the middle class in Europe and North America. That is expected to dramatically change consumption patterns as those with rising incomes shift from subsistence foods such as rice and millet to more meat and more-expensive foodstuffs. China already consumes more than 25 percent of all the meat produced worldwide. China’s meat consumption has skyrocketed from 8 million tonnes in 1976 -- a third of U.S. consumption of 24 million tonnes – to 71 million tonnes today, more than double that in the US, according to an April 254 study by the Earth Watch Institute.

Second is the seemingly inevitable fall in the US dollar against other currencies despite the dollar’s current strength as other currencies such as the euro take a beating from the continuing financial crisis. Putting upward pressure on commodity prices, which are mostly denominated in US dollars, thus raising foreign buyers’ purchasing power and hence demand for the products they wish to buy.

Biofuel demand, which is third, is not expected to slacken as grains, vegetable oils and sugar have all been converted into fuels at an increasing pace, especially in the United States and the Eurozone. Biofuel production in fact is considered one of the factors behind the 2006-2008 food crisis, with 30 percent of cereal price increases laid to biofuel demand. Led by the United States, Europe, Australia and Brazil, global biofuel production doubled in less than six years, reaching 140 billion liters in 2011. In the United States and Europe alone, biofuel production has continued to increase, growing by 70 percent since the 2007–08 food crisis, according to FAO statistics.

Fourth is trade liberalization despite the near two-decade paralysis in talks over the Doha Development Round of the World Trade Organization, which are meant to liberalize agricultural trade. Even without the ratification of the Doha Round, trade liberalization has risen by150 percent, with total trade reaching US700 billion and expected to cross the US$1 trillion mark by 2020. Despite concerns over the so-called “noodle bowl” of bilateral trade agreements, the free trade pacts are expected to continue to fuel rising agricultural trade between countries.

By contrast, and in expectation of what could go wrong the USDA cites the possibility of “policy errors” – rising protectionism as the global financial turndown continues to bite. The WTO reported in June 2011 that the world's trading nations were beginning to limit exports of food and raw materials and installing new import barriers, including Indian cotton, Ukrainian wheat and other commodities.

Sixth, the USDA cites high input and energy prices, which will continue to rise. Agriculture is about planting, harvesting, transporting, and processing. When energy-intensive inputs such as diesel, fertilizers and other agricultural chemicals become more expensive, farmers’ profits and output are affected. The limited sources of energy and global growth of the middle class are anticipated to drive prices of inputs – primarily fertilizer and agricultural chemicals – and fuels for planting, harvesting, transporting and processing food. The Iowa State University Extension Service forecast in January 2012 that non-land costs would increase approximately 15 percent over 2011, led by higher fertilizer, fuel, seed and crop protection costs, affecting soybean rotation and corn.

Seventh, the USDA cites the increasing role of biotechnology. Between 1996 and 2010, the agricultural agency said, biotech crops increased by 87-fold, making them the fastest-adopted technology in the history of agriculture. The US alone planted 170.43 million acres' worth in 2011, with Brazil in second at 75 million acres under cultivation. Other countries are catching up rapidly, however. Growth by developing countries was up by about 50 percent in 2011 despite environmentalist’s fears of so-called “Frankenfoods” and concerns that crop diversity was being destroyed.

Finally, the USDA cites eighth the increase in production area. The world does not appear to be running out of planting land. Production, the USDA says, is expected to increase in South America, particularly in Brazil, and in the former Soviet Union countries including Ukraine, where land was taken out of production with the collapse of collective farming with the fall of the communist bloc. Africa, the report notes, “offers a massive land resource, but given its poor infrastructure, high transport and distribution costs, its role appears limited for now.” However, there is not a lot of slack in the amount of amount of arable land, according to Johns Hopkins Nitze School, which says the amount of land can’t increase by more than about 10 percent, given population pressures, desertification and lack of water.

The USDA report doesn’t cite climate change. It is unsure just what role climate change is going to play, although climate scientists forecast the increased chance of weather incidents. Perhaps the most notable was last autumn’s torrential rains, which appear to have been triggered by the landfall of Tropical Storm Nock-ten and subsequent rains which put more than 20,000 square kilometers of farmland under water and did US$1billion of damage to Thai agriculture. On the other side of the planet, the damage was worse. Rice farmers in Arkansas in the United States, which usually account for 42 percent of US output, also were flooded, then faced drought, reducing their crop by 32 percent according to the USDA. Desertification is expected to increase in some areas, but growing seasons could increase in northern climates where Canada, Russia and other countries depend on agriculture for a major part of gross domestic product.