Global Agriculture and the Law of Unintended Consequences, July 21, 2003

Gregory Page - President and Chief Operating Officer, Cargill, Inc.
Address to the U.S. Grains Council 43rd Board of Delegates Meeting and 4th International Grain Marketing Conference

It’s certainly a pleasure for someone who grew up in rural North Dakota to be here with people from across rural America. And, as someone who works for a company that serves customers globally, it’s a double pleasure to address so many grain users from around the world.

Since most of you are at least somewhat familiar with Cargill, I’m going to provide only a few background comments on the company. Cargill is a 138-year-old firm headquartered in suburban Minneapolis. We were one of the founding members of the U.S. Grains Council some 43 years ago. We have roughly 100,000 employees working in about 60 countries. We do business with perhaps another 100 countries.

Cargill began as a grain marketer, but it now has a number of businesses that support grain production and consumption. For instance, we: produce nitrogen and phosphate fertilizers; buy and sell grains worldwide; process barley into malt; convert corn into sweeteners, starches, ethanol, lactic acid polymers, livestock feeds and a host of other products; operate livestock feed mills around the globe; and process beef, pork and poultry. Corn, sorghum and barley – the three grains promoted by the U.S. Grains Council – are of considerable interest to Cargill. The Council and Cargill share the mutual objective of building global demand for those commodities.

That means that we are striving to do the same thing – to think about markets (consumption and production) globally. That is one challenge in my job – to stop thinking as a Midwesterner from North Dakota and to take a truly global view. As I do that, I find myself confronting more unintended consequences of government intervention in those global markets. What are unintended consequences? They are not the reasons that most supporters have for a given for a policy. Rather, they are the things that happen because of the policy – usually to other people than those the policy was intended to help.

But, not all unintended consequences are bad. I’d like to start with a good one that is tied to the market development work the Council does. We believe, as you do: “U.S. agriculture is better off when people in developing countries become better off.” Let me illustrate how that happens.

About 50 percent of the world’s population – around 3 billion people – lives in countries with per-capita incomes of less than $1000 per year. In other words, half of humanity lives in abject poverty. Many of those people spend 70 percent of their incomes on food yet often do not have enough to eat or else eat only poorly balanced diets. They are malnourished not because there’s a shortage of food but because they have a shortage of purchasing power.

When people are spending 70 percent of their incomes on food, even a modest rise in incomes generates a significant increase in food consumption. It also generates a shift up the dietary curve away from basic starches and toward more nutritionally dense foods, such as high-protein livestock products. Those changes translate quickly into increased demand for feed grains and oilseeds.

We have seen this process unfold in developing countries. The results have been quite remarkable. Developing countries now absorb an additional 80 million metric tons of grain imports beyond what they had been buying in the early 1980s. In fact, developing country demand has offset both the 40 million tons of imports lost when the Common Agricultural Policy (CAP) transformed the EU from a grain importer into a grain exporter, and the 40 million tons lost when Communist nations changed in ways that first curtailed their imports and now have turned them into exporters.

Despite considerable progress raising incomes and boosting food demand in developing countries, at least half the work remains to be done because more than half the world’s people remain poor. Their economic development can be frustratingly elusive. You at the Council and we at Cargill have seen promising markets fade because of poor governance in important parts of the developing world. It’s hard for an economy to grow when corruption is rife, when laws to protect investments and enforce contracts do not exist or are not properly enforced, when infrastructure is inadequate and when people are poorly educated.

However, it’s not fair to blame all the difficulties on developing countries. Often, to protect jobs in this country, we have imposed import restrictions on developing country exports like textiles, poultry, shoes and sugar. As policies like these in the U.S. and other developed countries INTEND to protect jobs, they have the UNINTENDED consequence of keeping people in other countries poor, choking demand overseas for U.S. agricultural exports. That, in fact, is one of the core challenges for the Doha Development Round. If we in the U.S. are not prepared to engage in substantial changes in our protectionist policies, then how can we expect that from others? We should not be trying to divide a static economic pie. Rather we need to find ways to grow the size and benefits of that pie. Far too many people still believe that economic development is a zero-sum game – that if a dollar is earned in another country it will mean one less dollar will be earned in the United States.

Because you and Cargill have been in the market development business for many years, we both understand that two-way trade can make all sides better off. Poor people in low-income countries earn money that enables them to consume more and better foods, and we in this country sell more grains and protein products. Their gain is our gain, not our loss.

Even though the agricultural sector is among the first to see the effects of their increased purchasing power, other sectors are not far behind. After people are reasonably fed, their interests turn quickly to things such as cell phones, motorbikes and air conditioners. In this way, income increases spread quickly across the broader economy. Many people’s boats are lifted by that rising tide. We need to do a better job telling this important market development story; it would help broaden the support for freer trade.

Some unintended consequences are neither good nor bad; they simply are what happen. Roughly two-thirds of the world’s poor people live in rural areas and depend on agriculture for their livelihoods. With global agricultural land area largely fixed, rising productivity on that land means fewer farmers can produce the same output. And, while food demand rises with increasing incomes, it rises slower than those incomes. That economic law is what enables people to spend a smaller share of their rising income on food and a larger share on, first, other necessities and, later, nicer amenities. But it also means that productivity – which is the key to higher incomes – brings necessary changes for individual farmers. Those individual farmers can only do certain things to increase their income:

(1) increase the farm’s own productivity;
(2) grow higher value crops on the farm;
(3) enlarge the farm; or
(4) add off-farm income.

Higher prices are not a permanent path to higher farm income. Why? Because all farmers respond to higher prices. They bid up the cost of land and other capital inputs, so that one-day’s higher price becomes the next day’s higher cost.

In other words, it is really only the individual actions of individual farmers that make individual higher incomes possible. Yet, farm policy has seldom focused on helping individual farmers be better off. It has always tried to make all farmers better off by guaranteeing better prices. The 2002 U.S. Farm Act is a good illustration of unintended consequences.

I’ve already heard farmers express concerns about the increase in land values and rental rates that have been built into their cost structure as a result of the 2002 Farm Bill. It’s fair to say that this is helping landowners in the near term, but it also is making it harder for young people to get started in farming, and it is making it more challenging and riskier for those who rent land, as no doubt some of you do.

As price guarantees impact the fixed-cost structure for farming in the United States, another unintended consequence is that they risk making us less competitive against farmers in other countries. Will our farm economy, like that in Europe, become perpetually dependent on price and income supports to maintain a high-value land base? Or, will ways be found to restructure U.S. policies so that farm asset values will more closely reflect the market income that can be earned from farming in a global marketplace? If we don’t get the answers to these questions right, we will be facing rural economic problems and even greater loss, if those land values ultimately deflate.

Of course, the U.S. and EU farm supports are not for all farmers but only for American and European ones. Billions of poor farmers abroad do not receive guaranteed prices. Farmers in countries with little or no government support are forced to make painful adjustments when prices fall. For example, the plight of poor African cotton farmers has been much in the news lately. They truly are hurt by the U.S. cotton program, which is intended to protect U.S. cotton producers. But what it really does is shift the global adjustment burden offshore by encouraging continued production in the United States even when prices are very low. So, while U.S. cotton policy is inflating U.S. cotton production costs, it simultaneously is having the unintended consequence of making some of the world’s already-quite-poor people even poorer. Also, it prevents demand for grains and proteins from growing, because those farmers’ standards of living are not increasing.

Economists can tell us all day that consumers are better off because of low prices, and they are. But consumers are not better off because of artificially low prices, and producers are not better off being displaced by subsidized prices. So, it is important to look at both intended and unintended consequences. In this case, it helps us see both the gains from trade that can be achieved through liberalization and the pain from trade that is subsidized or protected. Hopefully, the Doha Development Round can bring that assessment into sharper focus, as large gains in market access – for agriculture and for other goods -- would mean more opportunities for the U.S. feed grains industry.

A topic worth a look in this consideration of unintended consequences is the U.S. ethanol policy. I know some of you may think Cargill is “anti-ethanol.” That is not the case. But, we do have some questions about the best way to develop the ethanol industry. Cargill initially resisted entering the ethanol business because we had nagging concerns about a business that requires continued government incentives to make it viable. Consistent with our market philosophy, Cargill has not advocated an extension or an expansion of ethanol mandates. We did, however, enter the ethanol business, in a relatively small way, about a decade ago because it fit our corn wet milling production configuration.

Now Congress is debating an energy bill with a Renewable Fuel Standard (RFS) that, basically, will require 2 billion bushels of corn – about 20 percent of the crop – to be converted to motor fuel use. This is turning food into fuel on a large scale. There are many intended consequences – greater energy independence, environmental gains and stronger prices for the U.S. corn earmarked for this mandate.

Are there any unintended consequences? Most certainly.

Because I have spent most of my Cargill career in our poultry, pork and beef businesses, the ones I worry about hit all of us through the livestock sector. What happens when we have a drought and a billion-bushel supply shortfall here at home?

All corn markets would be pressured, but the largest market would be pressured the most. The U.S. livestock industry, which consumes more than half the corn crop, would face a radical cutback in U.S. animal numbers – like the 25 percent reduction in U.S. feed use we suffered in the early 1970s. That not only devastated the livestock industry; it also brought on export controls and limits that still hurt America’s reputation as a reliable supplier. We do not want to face that again!

Fearful of this, the proposed RFS gives the secretaries of agriculture and energy discretion to make changes in the ethanol mandate program. How would that discretion be used? Will the ethanol mandate get scaled back based on supply projections? Or will that happen only against higher prices? The problems with each choice are different but serious. If the secretaries wait until higher prices signal real shortages, much of the damage already will have been set in motion. But, if they act on projections, they could be proven wrong by crop reversals, feed grain imports or other developments.

One answer could be to put firm triggers and clear policy directives into place at the time the RFS is enacted. This is better than discretion because at least everyone affected can see what the rules of the game are in advance. But clear triggers have their own problems. Nothing happens until the trigger is reached, and then some preordained new rules apply. Almost certainly, there will be overreactions and unnecessary shocks for all affected industries.

Replacing market judgments with discretionary actions or hard trigger points will have another unintended effect. Governmental actions can be lumpy; policy changes then are large changes and market swings get exaggerated.

The attempt to provide safety valves – whether based on discretion or fixed triggers -- for the RFS mandate could end up creating more turbulence and uncertainty. At the very least, safety valves don’t provide clear signals far enough ahead of a crisis so livestock growers, ethanol processors and export merchants can take anticipatory offsetting steps.

So, I go back to a simple question. Why include a mandate? Right now, the industry anticipates that by 2012 the U.S. will consume corn for fuel equal to the proposed mandate anyway. The reason: if the oxygenate requirement remains in place, the phase-out of MTBE as an oxygenate will open the oxygenate market further for ethanol.

Admittedly, there is more uncertainty around this oxygenate growth than there would be around a mandate. But that’s not all bad either. Guaranteed markets tend to get overbuilt, depressing margins for every participant. Risk creates opportunities for better returns. And relying on markets rather than mandates is likely to take better care of the U.S. corn farmer’s number one market – the U.S. livestock industry.

I know that many farmers disagree with these arguments against government supports and mandates. No doubt we could have a lively debate about them. My main point, however, is that attempting to think globally about grain issues is both challenging and eye-opening. It has challenged me to try harder to see how others perceive our actions both in, and outside, the United States. And, it has opened my eyes to seeing unintended consequences.

Let me close with an issue that I think we all agree on. Agricultural trade needs to be freer. Artificial barriers to farm exports are, on average, ten times higher than protection on industrial goods. That is having the unintended consequence of keeping too many people poor, hungry or malnourished around the world. The Doha Development Round was launched in hopes that situation could be changed. But, it won’t happen if we don’t change our thinking – to see globally, to think carefully.

We need to think through both what is intended from the policies we endorse and adopt, and what is unintended. That requires open ears and open minds, listening on a global basis. My pledge to you is that as a company we will listen carefully and thoughtfully as the U.S.-- and the global -- agricultural community works together to build a growing and profitable future.