Globalization and the Opportunities and Challenges for Agriculture

1
Globalization and the Opportunities and
Challenges for Agriculture

• Robert F. Wescott, Ph.D.
• Confagricoltura Conference
• Taormina
• 22 March 2007

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Todays Topics

• 10 economic, social, and business trends shaping
  the world in the next 10-20 years
• Opportunities for agriculture
• Accelerating demand for more and better quality
  foods
• The biofuels challenge
• Political pressures
• Economic pressures
• What does the future hold?

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1. Centers of economic activity will shift
profoundly globally and regionally

• Today Asia (excluding Japan) represents 13 of
  world GDP the E.U. represents 30.
• In 2025 Asia and the E.U. will each be 20-22 of
  the world economy.
• The U.S. will remain the worlds largest economy.
• Regional shifts toward regional capital cities
  (Kansei, Kanto)

4
Chinas Trend Has Been Sharply Upward
Source IMF
5
GDP, of World Total, PPP Basis
U.K., 1820-1870
U.S., 1860-1913
China, 1980-2006
Japan, 1950-1974
Sources Angus Maddison, The World Economy A
Millennial Perspective and International Monetary
Fund
6
2. The consumer landscape will expand
significantly

• 5,000 in income is a threshold above which
  spending can go to discretionary items (like
  Italian silk scarves)
• Spending power in emerging markets will jump from
  4 trillion today to 10 trillion in 2025.
• Already Poland has more people with a Danish
  income level than Denmark.
• Soon China will have more people with a German
  income level than Germany.

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Vehicles Registered per Capita
8
The Sweet Spot for Car Ownership is between
4,000 9,000 Per Capita Income
Average of Japan, Taiwan, Korea, Thailand, China,
and Mexico
21,000
19,200
Per Capita Income-US PPP Basis
18,000
Korea
(2002)
Taiwan
15,000
(2001)
Japan
12,400
(1976)
12,000
China
Mexico
(1997)
9,100
(2000)
Korea
9,000
Korea
Korea
(1973)
6,700
(1995)
India
(1991)
Korea
Japan
6,000
(2002)
Taiwan
4,900
(1991)
(1971)
(1987)
China
3,400
Taiwan
Thailand
(2002)
3,000
(1987)
(1996)
Korea
Thailand
(1981)
(1996)
0
1
0.01
0.02
0.05
0.1
0.2
0.3
Vehicle Registration per Capita
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3. Public sector activities will balloon, making
productivity gains essential

• Populations, especially in the E.U. and Japan,
  are aging.
• Without change, tax rates will jump sharply.
• Challenges paying for retirement and health care

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Italy is Rapidly Aging
Note There were almost no Italians aged 100 or
older in 1970, and about 1,000 in 1980. There
will be 65,000 by 2030.
Source U.N. Population Division
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4. Technological connectivity will transform how
people live and interact

• The technology revolution is just starting, not
  ending.
• Already
• 15 of U.S. newlyweds meet online
• 2 billion cell phone users
• 9 trillion emails per year
• 1 billion Google searches each day, with fewer
  than 50 in English
• Geography is NOT the primary constraint on social
  and economic organization.

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Internet Usage
World
Europe
Sources World Internet Statistics, International
Telecommunications Union
13
5. Battleground for talent will shift

• Shift from production to knowledge-intensive
  industries (science, technology, culture, arts,
  entertainment)
• In U.S., 5 of jobs were in these industries in
  1900, but 40 today are.
• In Italy, 13 are today, but this will increase.
• 33 million university-educated young
  professionals in developing countries today (more
  than twice the number in advanced countries)
• RD spending and science will be key

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Talent
Percent of population ages 25-64 with a B.A.
degree or above
Source Florida and Tinagli, Europe in the
Creative Age, Feb. 2004
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Technology
RD expenditure as a percent of GDP (latest
available year)
Source Florida and Tinagli, Europe in the
Creative Age, Feb. 2004
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6. People will eat better and enjoy better health

• There is a strong correlation between economic
  growth, rising income levels, and caloric intake
• The story of Japanese and Koreans in the 1960s,
  1970s, and 1980s.
• China now poised for a 30 increase in caloric
  intake in coming 20 years.
• Also, richer societies eat more meat, so demand
  for animal feed increases rapidly.

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Food Demand Rises with per capita income
GDP
Thousand Calories per Capita per Year
Source World Bank and FAO, Rome, 2006
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7. Demand for natural resources will grow put
strain on the environment

• Oil demand projected to grow 50 in the next 20
  years
• But China cannot use oil as U.S. and Europe do
• Growing demands for steel, aluminum, copper,
  minerals, water
• Pressing need for alternate fuels, new
  transportation technology

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Steel Production, Millions of tons
U.S., 1860-1913
Japan, 1950-1974
19 of world (1974)
36 of world (1900)
lt5 of world (1950)
lt10 of world (1843)
China, 1980-2005
29 of world (2005)
lt4 of world (1980)
Sources International Iron and Steel Institute,
Japan Iron and Steel Federation, Barraclough
Steelmaking, Hogan The Economic History of the
Iron and Steel Industry in the U.S, Hudson
Sadler The International Steel Industry
20
World CO2 Emissions Are Rising and Asia is the
Biggest Polluter
Source Energy Information Agency, U.S.
Department of Energy
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8. New Energy Equation 4 New Forces Reshaping
Energy Views

• Economic forces (higher prices, state oil
  companies)
• Growing foreign policy concerns (Iran, Venezuela)
• Energy security (Persian Gulf, etc.)
• Environmental concerns/global warming

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9. New global industry structures emerging

• Winners big companies and small companies
• Network of small companies inter-linked with big
  companies
• New business ecosystems flourishing, separated
  by distance, but linked by email, computer
  networks, video conferences

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10. Management shifts from art to science

• More complex business systems cannot be run by
  gut instinct.
• Good managers will take scientific approach to
  running businesses and even family farms
• Need improved technology and statistical control
  systems to run institutions

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Key Energy Policy Initiatives for Biofuels in the
U.S.

• President George W. Bush (State of the Union)
• Set mandatory fuels standard to require 35
  billion gallons of renewable and alternative
  fuels in 2017
• Securing Americas Future Energy (SAFE)
• Require 10 annual increases in the production of
  Flex-Fuel Vehicles so that all major production
  models are compatible with rich ethanol blends by
  2015.
• Hillary Clinton (National Press Club, May 23,
  2006)
• Accelerate the spread of ethanol to half of the
  nation's gas stations by 2015 by offering a 50
  tax credit for station owners who install ethanol
  pumps.
• Barack Obama (Chicago, April 3, 2006)
• Make every new car in America flex-fuel within a
  decade (if installed before the decade is up,
  provide 100 tax credit) Offer consumers 35
  cents tax credit for every gallon of E85

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Key Energy Policy Initiatives for Biofuels in the
EU

• European Commission (Strategic European Energy
  Review)
• Proposes 20 of energy requirements come from
  renewable energy
• Biofuels to make up 10 of vehicle fuels by 2020
• Develop more sustainable biofuels
• Italy (Budget 2007)
• New quota of 180,000 tonnes of biodiesel
• French President Jacques Chirac
• 10 of French fuel production to come from
  vegetables by 2015

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U.S. Fuel Ethanol ProductionBillions of Gallons
Bush State of the Union 35 Billion Gallons in
2017
1999
2000
1996
1997
2006
1998
2001
2002
2003
2004
2005
Source U.S. Department of Energy, Renewable
Fuels Association
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Corn Going to Ethanol of Corn Crop
Corn PPI
Index
Source US Department of Agriculture Economic
Research Service, U.S. Bureau of Labor Statistics
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Biofuel Energy Yields by Feedstock
Gallons of Gasoline Equivalent per Acre
Biodiesel
Source Brown, Lester. Plan B 2.0 Rescuing a
Planet Under Stress and a Civilization in Trouble
(2006).
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Ethanol Production Costs
U.S. Dollars per Gallon
Source US Department of Agriculture. Economic
Feasibility of Ethanol Production from Sugar in
the U.S. (2006).
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Ethanol Production Cost Ranges
U.S. Dollars per Litre of Gasoline Equivalent
Source International Energy Agency, Biofuels
for Transport An International Perspective
(2006).
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Biodiesel Production Cost Ranges
U.S. Dollars per Litre of Diesel Equivalent
Source International Energy Agency, Biofuels
for Transport An International Perspective
(2006).
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Net Energy Balance
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Prices of Alternative Energy
Assumes natural gas is 0.50-1/MBtu.
Assumes coal is 1-2/MBtu. Assumes (1)
ethanol energy content is equal to 79,850 Btu per
gallon, (2) oil energy content is equal to 5.8
million Btu per barrel, (3) ethanol production
costs are 0.75 per gallon.
Source EIA Annual Energy Outlook, 2006
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What Does the Future Hold?

• 2 billion people soon will eat better, consume
  more calories of foodpositive market potential
• Biggest potential, however, is biofuel
  development. Has been boosted by farmer-friendly
  agricultural policies.
• As biofuel volumes ramp up, many challenges
• Subsidy costs getting more expensive
• Demand driving up food pricespolitical reactions
  
• Pressure for global trade flows in biofuels,
  fewer tariffs, trade barriers
• Over time underlying economics and efficiency
  will determine winners and losers.