Global Agriculture Industry

Introduction Since 1960, the world population has more than doubled, from approximately 2.9 billion in 1960 to more than 6.7 billion today. The demands placed on global agricultural production arising out of population and income growth almost tripled. Global agriculture has been successful in meeting this increase in demand. Steady growth in agricultural output and a long-term decline in real commodity prices attest to this success. While the 820 million undernourished people in developing countries must not be forgotten, it should also be recognized that the proportion of people suffering from hunger has fallen by half since the 1960s, from more than on-in-three to one-in-six, even as worlds population has doubled. Progress is possible. Agricultural growth contributes directly to food security. It also supports poverty reduction. And it acts as an engine of overall economic growth in much of the developing world. The success of the agricultural sector has not been shared uniformly across regions and countries, however, and it is unclear whether this success can be sustained much less extended to those left behind.By 2050, world population is projected to grow to between 9 and 10 billion people. Most of the growth is expected to occur in poor developing countries, where income elasticity of demand for food continues to be high. The population increase, combined with moderately high income growth, could result in a more than 70 % increase in demand for food and other agricultural products by 2050. Without modern agricultural techniques, current population levels could not be sustained and projected near-term population growth would create stresses that would destabilize the current global social and political order. Relatively recent innovations in seeds, chemicals and fertilizers have enabled agricultural producers to meet the ever-growing demands of a hungry world population. Even with the rapid increases in agricultural productivity, however, challenges for the agriculture industry to supply the growing global economy with sufficient supplies of agricultural staples are greater now than ever before. A new green revolution similar to the one that took place during the latter part of the 20th century is taking place all over the world to meet the expected demand by the growing world population and its increased standard of living.

Problem setting
The economic, political and climatic conditions in which farmers around the world have to make their production and investment decisions are changing quite dramatically. On the one hand, world agricultural demand continues to grow rapidly. On the other hand, it is apparent that global agricultural supply is not keeping pace with the growth in demand. Several global trends are directly and indirectly affecting agricultural markets globally.

Trends and changing terms of agricultural trade:

Trade
Since the early 1960s the value of agricultural exports has increased by tenfold, while the share of agricultural trade in total merchandise trade has followed a long-term downward trend from above 20 % in the early sixties to less than 10 percent in recent years. Over this period the net flow of agricultural commodities between developed and developing countries has reversed direction (Figure 11). In the early 1960s, developing countries had an overall agricultural trade surplus of almost US$ 7 billion per year. By the end of the 1980s, however, this surplus had disappeared. During most of the 1990s and early 2000s, developing countries were net importers of agricultural products. Without Brazil, the deficit of the rest of the developing world would have been considerably bigger. It would have grown from US$ 20 billion in 2000 to US$ 27 billion in 2004.

Prices
Agricultural commodity prices over the past 40 years reveal some striking features: Real prices of agricultural commodities relative to prices of all manufactured goods have declined significantly, even as nominal prices have risen; Real prices have fluctuated considerably around the long-term downward trend; Both the fluctuations and the long-term decline have been less pronounced since the mid-1980s. Several factors have contributed to the long-term decline of almost 2 percent per year. Technological advances have reduced costs and made it possible, at given prices, to expand production at a rate that has outstripped both population growth and increases in demand spurred by rising incomes. Prices of some commodities have also been driven lower by oversupply, fuelled by intense global competition in production, reduced transportation costs and new technologies that have increased productivity and introduced synthetic alternatives to some commodities. In some cases, the appearance of major new producers, such as the rapid increase in coffee production in Vietnam, has also affected the market balance. Subsidies to producers and for export in some developed countries have also contributed to pushing down world prices for many agricultural products grown in temperate zones, reducing the export earnings of developing countries that export commodities such as cotton, sugar and rice.

Sources of agricultural growth

The past four decades have seen solid growth in agricultural productivity. This productivity increase has been particularly strong in developing countries, and especially for cereals such as rice in Asia, wheat in irrigated and favourable production environments worldwide, and maize in Mesoamerica and selected parts of Africa and Asia (Pingali and Heisey, 2001). Other crops have also seen productivity increases. Agricultural growth occurs if i) the amount of arable land increases, or ii) the cropping intensity increases, or iii) output per unit of input (i.e. workers, land or water) increases, or iv) the composition of output changes towards higher valued products with a constant value of inputs. The relative importance of these factors depends on the situation

faced by a particular country. A country like the United States, which has 1.4 hectares of agricultural land per head, can continue to rely on land as a source of agricultural growth in a manner that is not open to a country like India, which has only 0.2 hectares of agricultural land per head. For the latter, growth has to come primarily from sources that economise on land and water, the two main constraints. This in turn implies that cropping intensity must increase or yields have to grow, i.e. there has to be an increase in productivity.

Opportunities and challenges in the future:

Population growth Global population growth has been the major driving force for growth in world food demand and production. The population will continue to grow, but longer term projections suggest that population growth may slow down by the middle of this century. World population is expected to increase from the current 6.7 billion to 9.2 billion by 2050 (UN 2007). From 2050, world population will be increasing by 30 million per year. Almost all of this increase is expected to take place in developing countries, and especially in the group of the 50 least developed countries. These countries may still have inadequate consumption levels in 2050 and therefore there is significant scope for further increases in demand for food even when population growth slows down. Growth in agricultural production slows down World agriculture is expected to fall to 1.5 percent p.a. in the next two and a half decades and on to 0.9 percent p.a. in the succeeding 20 years to 2050, compared with 2.1 percent per year since 1961. This slowdown reflects the lower population growth and the gradual achievement of medium-high levels of per capita consumption in a number of countries. All the major commodity sectors (except for the milk sector) are expected to take part in the deceleration of agricultural growth. The cereals sector has already been in such downward trend for some time now, and is expected to continue to have the lowest growth rate of the major commodity sectors during the next 50 years. Food security Historical trends towards increased food consumption per capita as a world average and particularly in the developing countries will, according to FAO scenarios, continue in the near future, but at a slower rate than in the past as more and more countries approach medium-high levels. The average of the developing countries may rise from todays 2650 kcal per person per day to 3070 kcal by 2050. By the middle of the century more than 90 percent of the world population may live in countries with more than 2700 kcal per day, up from 51 percent at present and only 4 percent three decades ago. As in the past, the great improvements in China and a few other populous countries will continue to carry a significant weight in these improvements. However, not all countries are likely to achieve appropriate food consumption levels. This is especially the case for countries that already have high rates of undernourishment, high population growth rates, poor prospects for rapid economic growth and often meagre agricultural resources. Today 32 countries are in this category with an average undernourishment rate of 42 percent. The population of these poor countries is expected to increase from the current 580 million people to 1.39 billion by 2050, and food consumption will under fairly optimistic

assumptions increase from the current 2000 kcal/person/day to 2450 kcal in the next 30 years. This is still not enough for good nutrition in several of these countries. Hence the conclusion that reducing undernourishment may be a very slow process in these countries. Despite the slow pace of progress in reducing the occurrence of undernourishment, the FAO projections do imply considerable overall improvements. In the developing countries the numbers well-fed could increase from 3.9 billion in 1999/01 (83 % of the population) to 6.2 billion (93 %) in 2030 and to 7.2 billion (96 %) by 2050. The problem of undernourishment will tend to become smaller in terms of both absolute numbers affected and, even more, in terms of the proportion of the population. Increased energy prices12 As the availability of fossil fuels declines, the only renewable carbon resource large enough to substitute for or replace fossil resources for the production of fuels and electricity is biomass (MEA 2005). Recent high energy prices are now creating new markets for products which can be used as biomass feedstocks for the production of biofuels as substitutes for petroleum-based fuels. Brazil, after a period of shrinkage during the 1990s when oil prices were low, has now reverted to using some 50 percent of its sugar cane output to produce fuel ethanol, both for domestic use and export. Ethanol in Brazil is considered to be competitive vis--vis traditional fossil fuels at oil prices of US$ 35-40 per barrel. In the USA a growing share of maize is used to produce fuel ethanol (in this case with subsidies). EU has a target of a 5.75 percent market share of biofuels in the petrol and diesel market by 2010. The use of vegetable oils to produce biodiesel is expanding in certain EU countries (again with subsidies). The latest projections of the European Commision foresee that 1.5 million tonnes of grain and some 10 millions of oilseeds may be used to produce bioenergy in 2012. There is also growing interest in countries with real or potentially abundant production potential of suitable feedstocks (like palm oil for biodiesel in Malaysia and Indonesia, cassava and sugar cane for ethanol in Thailand) for producing biofuels, both for domestic use and export. Africa, with its significant sugar cane production potential is often cited as a region that could profit from Brazils experience and technology, though obstacles to realizing it (infrastructure, institutional etc) should not be underestimated.The competitiveness of biofuels may be further enhanced if the savings of greenhouse gas emissions resulting from substituting ethanol for gasoline were to be monetized in the form of tradable carbon credits (Certified Emission Reductions of greenhouse gases) through the Clean Development Mechanism under the provisions of the Kyoto Protocol. If world agriculture is to become a major source of feedstocks for the biofuel industry, this might have implications for food security if feedstocks become a competitor to food, and for the environment if further deforestation takes place from the eventual expansion of land under the feedstock crops. Water shortages It takes 1,000 litres of water to grow a kilo of wheat, between 2,000 and 5,000 litres to grow one kilo of rice, and 16,000 litres to grow the feed it takes to make one kg of beef (Pearce 2006, MEA 2005). Agriculture accounts for 70 percent of all water use in the world and as much as 95 percent in many developing countries, almost all of this is for irrigating crops (MEA 2005, FAO2007). Per capita use of water has decreased from about 700 to 600 cubic meters per year since 1980 (MEA 2005), and water productivity in agriculture increased by at least 100 percent between 1961 and 2001 (FAO 2003), but total water use is still increasing and is expected to

continue to increase due to population growth, urban expansion and increasing industrialisation. Today, more than 1.2 billion people live in areas of physical water scarcity (Comprehensive Assessment of Water Management in Agriculture 2007) and by 2025 over 3 billion people are likely to experience water stress (UNDP HDR 2006). The gap between available water supply and water demand is increasing in many parts ofthe world, limiting future expansion of irrigation. In areas where water supply is already limited, water scarcity is likely to be the most serious constraint on development, especially in drought-prone areas (MEA 2005). In some water basins the water tables have been falling at an alarming rate. In large areas of India and China ground water levels are falling by one to three meters a year (WB 2006). This can lead to irreversible land subsidence, salt-water intrusion and pollution of the water resource in addition to increased pumping costs. This presents an important risk to world food production, as 10 percent of the worlds food is produced in areas experiencing groundwater depletion (WB 2006). Areas that are already relatively dry, such as the Mediterranean basin and parts of Southern Africa and South America will likely, due to climate change, experience further decreases in water availability. Increases in the frequency of droughts and floods due to climate change are projected to affect local production negatively, especially in subsistence sectors at low latitudes. Other regions, such as South Asia and parts of Northern Europe are likely to experience increases in water availability (IPCC 2007 b, Stern 2006). If todays food production and environmental trends continue, we will probably have to face crises in many parts of the world (Comprehensive Assessment of Water Management in Agriculture 2007). To avoid this we need to act to improve water use in agriculture. The hope lies in closing the gap in agricultural productivity in parts of the world through better water management and changes in production techniques, including the use of new drought resistant crops. Climate change. Climate change is a serious and urgent issue. The earth has already warmed by 0.7 1900, and based on current trends, average global temperatures could rise by 2 3 C since C within the

next 50 years (Stern 2007) (or 2-4 C by the end of the century according to IPCC (2007 a)). Food production is particularly sensitive to climate change, since crop yields depend in large part on climate conditions such as temperature and rainfall patterns. There are still large uncertainties as to when, how and where climate change will affect agriculture production and food security. But recent research (i.e. Stern 2007 and IPCC 2007 a and b) has suggested that the impacts will derive primarily from: Higher temperatures. It is virtually certain13 that temperatures over most land areas will increase. We will have fewer cold days and nights, and more frequent hot days and nights. This might lead to increased yields and larger agricultural areas in colder environments where the planting season will become longer and more favorable for crop production. But in warmer environments, and especially in arid and semi-arid areas higher temperatures and increased evaporation will lead to decreased yields. More frequent heat waves. We will very likely13 experience more frequent warm spells and heat waves. Increased heat stress will lead to reduced yields in warmer regions. Heat waves will also cause more frequent fires.

In some water basins the water tables have been falling at an alarming rate. In large areas of India and China ground water levels are falling by one to three meters a year (WB 2006). This can lead to irreversible land subsidence, salt-water intrusion and pollution of the water resource in addition to increased pumping costs. This presents an important risk to world food production, as 10 percent of the worlds food is produced in areas experiencing groundwater depletion (WB 2006). Areas that are already relatively dry, such as the Mediterranean basin and parts of Southern Africa and South America will likely, due to climate change, experience further decreases in water availability. Increases in the frequency of droughts and floods due to climate change are projected to affect local production negatively, especially in subsistence sectors at low latitudes. Other regions, such as South Asia and parts of Northern Europe are likely to experience increases in water availability (IPCC 2007 b, Stern 2006). If todays food production and environmental trends continue, we will probably have to face crises in many parts of the world (Comprehensive Assessment of Water Management in Agriculture 2007). To avoid this we need to act to improve water use in agriculture. The hope lies in closing the gap in agricultural productivity in parts of the world through better water management and changes in production techniques, including the use of new drought resistant crops.

Conclusions
Total agricultural output expanded by almost 170 percent globally since 1961, an average increase of 2.2% per year, always keeping ahead of global population growth rates. Much of this growth originated in developing countries (3.4 3.8 percent p.a.). But many of the least developed countries, particularly in sub-Saharan Africa, continue to experience low agricultural productivity, rising food deficits and high levels of hunger and poverty. The recent success in accelerating growth in some Sub- Saharan African countries gives hope for the future. The growth in these poor countries must be sustained, and extended to the neighbouring countries that have not yet participated in this growth. The world made significant progress in raising food consumption per capita. In developing countries consumption increased from an average of 2100 kcal/person/day in 1970 to almost 2700 kcal/person/day today. The proportion of hungry people was reduced from 37% to 17% over the same period. But there are still more than 850 million undernourished people worldwide. In sub-Saharan Africa, the worst hit continent, over one third of the population is chronically undernourished. The composition of agricultural production and consumption has changed considerably over the last 45 years. Growth in per capita cereal consumption stagnated, while income growth and urbanization led to increased demand for livestock, oil crops and horticultural products. Meat production tripled between 1980 and today, and livestock production now accounts for almost 40 percent of the total value of agricultural production. Real prices for agricultural commodities declined by approximately two percent per year since 1961, but the rate of decline varied. Traditional commodities such as raw materials, tropical beverages, oil crops and cereals experienced the steepest decline. The fall in prices was least severe for non-traditional commodities such as horticultural and animal products. Some developing countries managed to take advantage of these trends by shifting production and trade into higher-value nontraditional products. The least developed countries, however, increased their dependence on traditional export crops. Over the last four decades, their agricultural exports earnings fell by more than 40 percent, and they have changed from being net exporters to significant net importers of agricultural commodities. Historically, area expansion was an important source of crop production growth. However, further opportunities for area expansion

are now exhausted except in Latin America & Caribbean and some parts of sub-Saharan Africa where rural population densities are still low. Increases in cropping intensity may offer a solution to the problem of how to expand area despite high rural population densities. This will require expansion of irrigation, for which there is still some scope, particularly in Latin America and Sub-Saharan Africa. Except for Sub-Saharan Africa where area expansion has continued to be a substantial source of growth, yield growth has been the major source of increase in crop production over the last 45 years. Countries with high population densities tend to be the ones with high land productivity and vice versa. Many middle income countries with well developed markets and infrastructure have both high labour and land productivity. The use of inputs such as fertilizer, modern varieties, tractors and irrigation are other determinants of yield growth. While modern varieties increasingly seem to play a more important role in yield growth, growth in the use of the other inputs appears to be levelling off, at very low levels in Africa. Research on Total Factor Productivity (TFP) is pointing in the same direction. Output growth during the 1960s and 1970s was mainly a result of increased input use, and TFP growth rates were negative for most developing regions. It is encouraging to note that TFP growth rates have become positive in the 1981-2000 period. Even Asia and Sub-Saharan Africa were showing solid TFP growth rates for this period. Increased growth in TFP might offer the only feasible solution to the problem of ensuring continued productivity growth. This will require investments in research and development as well as institutional reforms and infrastructure development. World agriculture faces many future challenges. One major challenge is to accelerate production growth in poor agriculture based countries, especially in Sub-Saharan Africa. Additional challenges will include satisfying increasing global demands for food, including that for animal products, sustaining the natural resource base (soil, water, air and biodiversity), coping with water shortages, climate change and vulnerability, and navigating the potential conflict between devoting land to animal food and biofuels relative to direct human food.