Agriculture Mitchell

Agriculture and the WTOWorkshop on International Trade and the Doha Round, UNITAR: 

Agriculture and the WTO Workshop on International Trade and the Doha Round, UNITAR Donald Mitchell Lead Economist World Bank July 10, 2007 The views expressed are those of the author and should not be attributed to the World Bank or its Executive Directors.

Importance of agriculture: 

Importance of agriculture One-third of population and three-quarters of poor live in rural areas in developing countries Agriculture accounts for 30-60 percent of GDP Agricultural trade reforms are key to global trade negotiations and are expected to generate large welfare gains Donald Mitchell World Bank

Agricultural export led growth: 

Agricultural export led growth Agr. has strong linkages to rest of economy Backward linkages when farmers purchase farm inputs (fertilizer, chemicals, machinery) Forward linkages when farm output provides raw materials for food and fiber processing Growth in agriculture allows capital accumulation and supports the transition to a more diversified economy Stimulates growth in overall economy

Slide4: 

Stimulus for increased agricultural exports come from improved incentives for local production of tradables through: Devaluation, marketing liberalization, improved technology, or higher world prices Sustained export growth requires: Macroeconomic stability, adequate infrastructure, access to inputs and sale of outputs at world market prices, reasonable taxes and access to appropriate technology

Examples of rapid growth: 

Examples of rapid growth Agricultural Export Growth (%) 1970-79 1980-89 1990-99 Malaysia 20.4 4.0 4.9 Thailand 21.2 8.5 2.7 Vietnam 27.3 22.5 15.7 Source: FAOSTAT. Note: Growth rates are average annual growth rates in U.S. dollars.

Growth of agricultural exportsreduces rural poverty: 

Growth of agricultural exports reduces rural poverty In Vietnam, agricultural GDP grew by 4.6% per during 1990-1998 (partly due to a boom in coffee exports) and rural poverty declined from 66% to 45% In Uganda, export crop production surged following marketing liberalization in the early 1990s, and rural poverty fell from 60% to 39%

Historical perspective on agriculture: 

Historical perspective on agriculture Agriculture is very cyclical and known for its booms and busts in commodity prices We are currently in a boom, but if history is a guide it will be followed by a bust Lets begin with an historical perspective Donald Mitchell World Bank

Agriculture characterized by:: 

Agriculture characterized by: Falling real prices and high correlation between prices Donald Mitchell World Bank

Agriculture characterized by:: 

Agriculture characterized by: Falling real prices Surplus production and burdensome stocks Donald Mitchell World Bank

Agriculture characterized by:: 

Agriculture characterized by: Falling real prices Surplus production Price spikes and overshooting Donald Mitchell World Bank

Agriculture characterized by:: 

Agriculture characterized by: Falling real prices Surplus production Price spikes Policies to support prices & restrict trade OECD countries provided $385 billion of support in 2005 Tariffs in agriculture are double those of manufacturing Donald Mitchell World Bank

Agriculture characterized by:: 

Agriculture characterized by: Falling real prices Surplus production Price spikes Policies to support prices & restrict trade Poverty higher in rural than urban areas In Mexico extreme poverty is 30% in rural areas vs. 10% in urban In Morocco rural poverty is 25% and urban poverty is 8% In Uganda rural poverty is 39% and urban poverty is 12% Donald Mitchell World Bank

Price declines due to:: 

Price declines due to: Total Factor Productivity Agr. Man. World 3.41 1.50 Developed 3.41 1.89 Developing 2.19 .77 Source: Martin and Mitra 2001 Productivity growth TFP in agriculture twice that of manufacturing Rapid yield increases Donald Mitchell World Bank

Price declines due to:: 

Price declines due to: Productivity growth TFP in agriculture twice that of manufacturing Rapid yield increases Donald Mitchell World Bank

Price declines due to:: 

Price declines due to: Productivity growth Slowing demand Due to slowing population growth and declining income elasticities Donald Mitchell World Bank

Price declines due to:: 

Price declines due to: Productivity growth Slowing demand Supply chain efficiencies Lower transport costs from economies of scale More efficient ports Better communications Better management Lower prices for consumers and higher prices for farmers (as demand increases) Donald Mitchell World Bank

Price declines due to:: 

Price declines due to: Productivity growth Slowing demand Supply chain efficiencies Policies that encourage overproduction and subsidize exports U.S. price supports, target prices and Export Enhancement Program (EEP) EU Common Agricultural Policy and Export Restitution Donald Mitchell World Bank

What’s different this time?: 

What’s different this time? High energy and fertilizer prices Policy changes in key producing countries Rapid growth in developing countries, especially China and India Increased biofuel production Donald Mitchell World Bank

Surge in Biofuels Production: 

Surge in Biofuels Production Now account for: one-fifth of U.S. corn production half of Brazil’s sugar cane production 40 percent of EU’s rapeseed production Driven by subsidies and mandates Donald Mitchell World Bank

Biofuel basics: 

Biofuel basics Ethanol produced from: Starch crops – corn, wheat, cassava, etc. Sugar crops – cane or beets Cellulose – wood chips, grasses, municipal waste Donald Mitchell World Bank

Biofuel basics: 

Biofuel basics Ethanol produced from: Biodiesel produced from: Vegetable oils – rapeseed, soybean, palm Animal fats – recycled cooking oil Donald Mitchell World Bank

Biofuel basics: 

Biofuel basics Ethanol produced from: Biodiesel produced from: Biofuels yields per ton of feedstock: Corn yields 110 gallons of ethanol Sugar cane yields 20 gallons of ethanol Soybean oil yields 300 gallons of biodiesel Donald Mitchell World Bank

Biofuel basics: 

Biofuel basics Ethanol produced from: Biodiesel produced from: Biofuels yields per ton of feedstock: Production costs per gallon from: Ethanol from sugar cane in Brazil $.90 - 1.00/gallon Ethanol from corn in U.S. $1.65/gallon Ethanol from cellulose $2.65/gallon Biodiesel from soybean oil in U.S. $3.10 – 3.15 Biodiesel from rapeseed in EU $3.25-3.30 Source: LMC and World Bank Donald Mitchell World Bank

Recent price trends: 

Recent price trends Grains Donald Mitchell World Bank

Recent price trends: 

Recent price trends Grains Oilseeds Donald Mitchell World Bank

A period of high prices seems likely: 

A period of high prices seems likely Unless biofuel polices change, energy prices fall sharply, or technology breakthroughs occur in cellulosic ethanol production. Donald Mitchell World Bank

But, high prices may not last because production potential is large: 

But, high prices may not last because production potential is large U.S. has 35 million acres in the Conservation Reserve Program (10% of cropped land) Brazil has 175 million acres of natural pasture suitable for crops (double the U.S. land used for corn) Donald Mitchell World Bank Surplus land or underutilized land

But, they may not last because production potential is large: 

But, they may not last because production potential is large Donald Mitchell World Bank Surplus land or underutilized land Yields respond to price incentives Yields in France grew 2.2% per year vs. 1.2% in U.S. due to higher support prices

But, they may not last because production potential is large: 

But, they may not last because production potential is large Share of GM crops in U.S. Corn 61% Cotton 83% Soybeans 89% (Source: USDA Briefing Room, 2007) Donald Mitchell World Bank Surplus land or underutilized land Yields respond to price incentives Biotechnology allows more drought and disease resistance and higher yields

Agricultural trade reforms are still a priority: 

Agricultural trade reforms are still a priority Agricultural protection is complex and widespread Ongoing reforms in most developing countries, little change in industrial and some middle income countries Protection leads to reactive protection by other countries Supply expansion without trade reforms will lead to further price declines and pressures for greater protection Donald Mitchell World Bank

Developing countries’ tariffs have declined: 

Developing countries’ tariffs have declined Source: TRAINS data

OECD protection has not (percent): 

OECD protection has not (percent) Source: OECD protection estimates (except ABARE for 1965-1974, Author’s calculation for 2000-2002).

Protection is mostly at the border(rate of protection, percent): 

Protection is mostly at the border (rate of protection, percent) Source: OECD

Average tariffs mask protection in industrial countries and overstate it in developing countries (percent): 

Average tariffs mask protection in industrial countries and overstate it in developing countries (percent) Source: OECD and WTO IDB (MFN applied tariffs) Note: MPS figures are calculated using 2000 and 2001 average except Slovakia

Border protection is not transparent(Percent of non-ad-valorem tariff lines): 

Border protection is not transparent (Percent of non-ad-valorem tariff lines)

Tariffs escalate in final products : 

Tariffs escalate in final products Source: WTO IDB (MFN Applied Duties)

Tariff escalation: 

Tariff escalation Average MFN applied out-of-quota duties (%)   Source: WTO IDB

Decoupled support provides some reform: 

Decoupled support provides some reform Move to replace production subsidies (and to a lesser degree tariffs) with decoupled support. Examples are US (1996 Farm Bill); EU (1992 and 2002 CAP reform); Mexico (1994 Procampo); Turkey (2001 DIS) However … Not all support was replaced by decoupled payments No limits on the time horizon Requirement that resources remain in agriculture One time buyouts – peanuts, tobacco, exit grants in New Zealand, transportation in Canada – more successful Donald Mitchell World Bank

Slide39: 

Preferences The benefits are limited because most exported products either have zero/low tariffs or are excluded from preferences Small number of products (mostly in EU) have large benefits (sugar, bananas) but to a very limited number of countries Products and rules by major industrial countries are very different, so global benefits are limited Structural change and diversification has been slowed due to preferences In Caribbean the preferences have held back diversification (sugar) Donald Mitchell World Bank

Standards: 

Standards Proliferation and tightening of standards, both official and private sector Rising level of border rejections due to tighter standards and much greater enforcement Yet, there is no scope for ‘special and differential treatment’ or for slowing the trend toward higher standards Donald Mitchell World Bank

Standards, demanding but manageable: 

Standards, demanding but manageable Application of high standards tends to amplify underlying strengths and weaknesses in agro-food supply chains The ‘costs of compliance’ depend upon the starting point, size of the sector, and available support systems New demands are manageable and/or beneficial to middle-income countries and well organized industries in poorer countries Donald Mitchell World Bank

Despite Tightening Standards, Developing Country Non-Traditional Exports Surged: 

Despite Tightening Standards, Developing Country Non-Traditional Exports Surged

Some reason for optimism: 

Some reason for optimism WTO ruling on cotton and sugar cases led to policy reforms Biofuels demand has raised prices and may lessen the pressure for protection in EU and U.S. Donald Mitchell World Bank

EU sugar policy reform: 

EU sugar policy reform EU sugar policy reform followed WTO ruling and internal pressures for reform Ruling concluded that EU subsidized exports Led to 36% cut in intervention prices and 4-5 million tons reduction in subsidized exports Provides greater export opportunity to low-cost developing countries Donald Mitchell World Bank

Slide45: 

U.S. domestic cotton subsidies exceeded WTO commitments. U.S. farm program Direct Payments and Production Flexibility Payments did not qualify as fully decoupled income support. U.S. farm program Step-2 payments are prohibited export subsidies. U.S. export credit guarantees are effectively export subsidies. U.S. domestic support measures resulted in excess production and depressed international prices and caused ‘serious prejudice’ to Brazil. Cotton ruling against U.S. Donald Mitchell World Bank

Implication of Cotton Case: 

Implication of Cotton Case U.S. must change cotton program or face WTO authorized retaliations. Raises questions about the WTO compatibility of many U.S. commodity programs which contain similar provisions as the U.S. cotton program. Donald Mitchell World Bank

References:: 

References: Monthly commodity price data (pink sheet) google search “world bank commodity price data” Global Agricultural Trade and Developing Countries google search title and download free Development Prospects Site www.worldbank.org/prospects

Thank You: 

Thank You Donald Mitchell World Bank