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Global food security prospects and impact on EU agriculture Alexandru Marchis Policy Team Coordinator OPERA Research Center Herning, January,10th 2012 1. Considerations on global food security and agricultural markets 2. EU Agricultural production and trade – virtual “land grabbing” 3. Policy recommendations for market stability 4. CAP Reform Perspectives for global food security • Continued growth in global food demand – Population growth – Per capita income growth in developing countries • Limited growth in global food supply – Limited growth in agricultural area – Declining annual productivity growth Changes in global crop area arable land + 5 % between 2000 and 2020 Change in global crop acreage by region 2000-2020 (von Witzke, 2008) Region Change in acreage (mill. ha) European Union 4 Russian Federation & UA 13 USA 15 Canada 2 Latin America 45 Sub-Sahara Africa 6 Asia and Australia -4 Other challenges • water - ever scarcer and more expensive • public demand for environmental protection • development of bio-economy • increasing energy prices • climate change Perspectives for global food security – higher prices • OECD-FAO • 15-40 % higher over the next 10 years • COM Communication on commodities prices • Prices higher than their historical averages • High volatility • Input prices to remain higher • COM – “Prospects for Agricultural Markets and income in the EU” commodity prices are expected to stay firm due to: – growth in global food demand, – development of the biofuel sector – the long-term decline in food crop productivity growth. COM – “Prospects for Agricultural Markets and income in the EU 2011- 2020” “High prices at world level would support EU agricultural exports in spite of the decline in competitiveness.” • Arable crops: tight market conditions, 150 to 170 EUR/t, low stock levels and prices remaining above long term averages • Meat: net trade position of the EU is projected to deteriorate over the outlook period, driven by an increase in meat imports • Milk: expansion of world demand and preference for dairy products are the main drivers. Sustained import demand, from emerging countries, have a positive impact on dairy commodity prices Real commodity price indices (World Bank nominal price indices, 2000 = 100) 600 500 400 300 200 100 Agriculture Energy Fertilizers Metals & minerals 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1968 1966 1964 1962 1960 0 Energy, agriculture and fertilisers… (World Bank nominal price indices, 2000=100) 600 525 Fertilisers + 163 % Energy + 223 % 450 375 300 Agriculture + 50 % 225 150 75 Source: World Bank. Composition: Beverages, food and agricultural raw materials. 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 0 …EU agricultural terms of trade… (real price index, 1996 = 100) 110 100 90 80 70 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Output prices - EU-27 Source: Eurostat Input prices - EU-27 2. EU AGRICULTURAL PRODUCTION AND TRADE: Can more efficiency prevent increasing ‘landgrabbing’ outside of Europe? Methodological framework: Coverage of the study • 240 tradable products are converted into commodities. • SITC categories: - Food and live animals; - Beverages and tobacco; - Oilseeds and oleaginous fruits; - Cotton and wool; - Animal and vegetable oils. • More than 40 commodities are included for the EU-27 and the time period 1999-2008. Theoretical framework: Trade in virtual agricultural land • When agricultural commodities are traded, the inputs used in their production are traded „virtually“. – Concept of virtual input trade: developed for water (Allan,1993). • Relevance of virtual land trade: Quantification of negative economic externalities (side effects) through expansion of acreage: - loss of natural habitat - greenhouse gas emissions. The EU together with China is the worlds leading agricultural net importer 1999-2008 EU net imports in 2008: 45.5 billion US$ – Export quantity: decrease by 3 mill. tons – Import quantity: increase by 25mill. tons Net trade quantities, EU-27, 1999-2008 (in million tons) China net imports in 2008: 44.5 billion US$ Source: von Witzke et al, figure based on EUROSTAT (2010). Change in EU-27 agri net trade (mill. tons), 1999/2000-2007/08 Source: von Witzke and Noleppa, 2010 Wheat Corn Other grains -2.56 -7.66 -9.65 Veg. oils Dairy Sugar -6.49 -0.20 -4.79 EU virtual net land import 2007/08 • Net land import: 34.9 mill. ha. – Territory of Germany 35.7 mill. ha. Evolution 1999/2000-2007/08 • Virtual land exports: Decline to 14 mill. ha. • Virtual land imports: Increase to 49 mill. ha. Virtual net import: Increase by almost 10 mill. ha. (+40%) Territory of Portugal 9.3 mill. ha EU virtual land net trade by selected crops, 2007/08 (mill. ha) Source: von Witzke and Noleppa, 2010. Soybeans -17.53 Other oilseeds -7.68 Coffee, cocoa, tea -6.28 Fruits -2.36 Corn -1.92 Wheat, coarse grains 2.23 Total -34.90 EU virtual land net imports 2007/08 under alternative scenarios (mill. ha) (+ 0.3 %) (20%) (10%) 34.9 - 5.3 +3.2 +10.2 Conclusions • EU is one of the largest net importer of agricultural land – Should strive for balance not necessarily for autonomy • EU and world productivity growth have declined. • Productivity growth is the key for: – – – – agricultural growth fighting hunger and malnutrition mitigating climate change preservation of natural habitats. • Reduction in EU virtual land imports: Productivity growth • Source of productivity growth in EU agriculture: Technological progress 3. Policy recommendations for market stability “Agricultural Market Stabilization System - policy instruments to be included in the CAP” Nature and causes of market instability Market instability is one among a set of interconnected risks agriculture is subject to: • Production risk: unpredictable weather and performance of crops and livestock; climate change. • Market risk: uncertainty about the price of outputs and inputs at the time decisions are taken. • Institutional risk: unforeseen government actions and change in rules. • Financial risk: interest rates rise; loans become unavailable. • Other risks, as the rapid loss of confidence due to food safety concern. Causes of market instability • The global balance between supply and demand and tight global stocks for many commodities • Climate change is increasing market volatility because of the greater frequency of extreme climatic events. • Trade liberalization traditionally was expected to contribute to greater world price stability, albeit it can reduce it at local level. • Food markets are increasingly interlinked with energy markets. Particular impact is expected from quantitative targets for policy on biofuels, reducing the price elasticity of demand for agricultural feed stocks and exacerbating volatility in the relevant food markets. Which system for market stability An approach following five main directions: • Develop the existing CAP instruments in order to realize Supply stabilization mechanisms Price and income stabilization instruments Market transparency Cooperation and structural improvement Global dimension for food security Supply stability In the current/recent CAP: public intervention, private storage, quotas, mandatory set-aside. Budgetary contraints, market orientation and competitiveness concern lead to phase out these instruments. Management of production risk must aim at: – reducing yield volatility, – improving crop and animal products quality; – achieving sustainable intensification of production. This calls for a substantial policy move toward innovation and diffusion of R&D results. Price and income safety net Adapt existing instruments to better respond to extraordinary market situations: • Intervention purchasing and withdrawals - should be applied only as a last resort, in exceptional circumstances. • Aid for private storage - there should be the option of encouraging additional private storage, through targeted aid. • Avoid subsidies designed to promote internal consumption - possible short-term use for counter-cyclical purposes. • State aids - rules recently amended, should remain unchanged. • Income safety net - an instrument should be made accessible, to provide farmers with financial compensation for significant reduction of their income; compatibility with WTO rules Market based risk management instruments New instruments should be promoted to reduce farmer exposure to risks: • Forward contracting has always played a role in helping producers to manage price risk. • Futures markets play an important role, but a number of drawbacks must be addressed • Revenue or income insurance - Interesting also as included in the WTO Green Box (government financial participation in income insurance programs, and payments for relief from natural disaster). • Mutual funds: a pro-active attitude in supporting the development of such mechanisms is needed wherever they are appropriate and feasible. Market transparency Need to avoid unjustified practices and obligations along the food chain and possible local/regional demand-supply imbalances due to lack of trade/transportation infrastructures or disparities in marketing and food safety standards. • Price monitoring at different steps of the food chain - a major tools to better understand markets and improve transparency. • More frequent systematic projections on food prices - Transparent to the public and farmers, should take into account different spatial scales and vertical levels in the food chain. • Competition law- more usable guidelines over competition policy are needed Cooperation and structural issues • There is still very little dialogue between farmers, traders, processors and supermarkets. Most of the products are processed, which makes it difficult to ensure that agricultural producers are aware how to deal with their purchasers. • The CAP needs to develop pro-active mechanisms to promote cooperation and integration on the food chain. Improving the producer-processor-consumer relationship, even through financial incentives, is one possible solution to empower farmers to be able to respond to a rapidly changing market. The global dimension for food security • At global level the EU should avoid that the reduction in domestic price volatility translates into increased volatility of international prices. • It should actively participate in developing effective solutions, on a multilateral basis, to reduce the volatility of the international agricultural markets and address food security issues. 4. CAP Reform Conclusions and Recommendations CAP reform key issues: Competitiveness • Reaffirm food production as a benefit for society – food security • Access to best production tools • Promote sustainable intensification of agriculture • Gain consumer confidence on sustainable production standards • Support R&D CAP reform key issues: Research and innovation EU policy must address five major problems faced by the agricultural research and development activities in Europe: • horizontal coordination of research priorities across the EU and vertical coordination with the needs of agriculture; • financial support to agricultural R&D to a level comparable with the resources employed by main competitors; • creation of a business environment to promote public and private research and public-private partnerships, • information campaigns to change public perception of the results of biotechnological development; • delivery mechanisms at farm level to increase and accelerate the uptake of the results. CAP reform key issues: Market volatility • • • • • • • • “liberal” market, but extreme volatility is to be avoided CAP should not “export volatility” Price and income safety nets for low prices Develop productive capacity as to take advantage of high prices Reduce yield volatility Develop market risk management instruments Stimulate cooperation vertical and horizontal Improve market transparency CAP reform key issues: Sustainable use of resources and public goods • Using the available land and resources more efficiently to avoid “land grabbing” and expansion into natural habitat; • Promote simple and pragmatic management measures to achieve sustainable production; • Promote partnerships in delivering sustainable production methods; • Promote innovation and technological development Thank you for your attention! www.opera-indicators.eu