World economic and agricultural situation
31st North American - European Union Agricultural Conference
Jerez de la Frontera, Spain, 19-23 October 2003
By David King, Secretary General of IFAP
The world economy
USA, China and rest of Asia driving a global in 2003
Overall, 2003 is a better year for world agriculture and for the world economy than was 2002. It may not seem like that to European farmers who have suffered a widespread drought and heat wave this summer, on top of a third agricultural policy reform in only10 years, and a European economy that is on the edge of recession.
However, the situation has improved. This year, for the first time since the global economic slump of 2001, there is a feeling of optimism about the world economy. Growth is picking up again in the USA and in the emerging economies of Asia - particularly in China. The stock markets in Asia, excluding Japan, are at their highest levels for three years. Wall Street is at a 16-month high. Even in Japan, which has been in and out of recession since 1998, the economy is growing at again. Japan is largely an export economy, and it is being pulled along by economic growth and increased demand in the United States, China and other Asian economies.
The world economy is expected to grow by 3.2 per cent in 2003 and by 4.1 per cent in 2004. The figures for some of the major players are as follows. As a guide, a GDP growth rate of 4 per cent is good for an industrialised country, and a growth rate of 7 per cent is good for a developing country.
Economic growth forecasts
for table see pdf version
2003 2004 Comments
World 3.2 3.9
USA 2.6 3.9
Canada 1.9 1.3 Appreciating Can$ reducing growth
Mexico 1.5 3.5 Depreciating peso stimulating exports
Euro area 0.3 1.8
EU accession countries
3.9 4.3 Strong investment inflows
China 8.0 8.0 Could be as high as 11 per cent
India 5.6 5.6
Russia 6.0 5.0 Growth affected by a decline in oil prices
Brazil 1.5 3.0
Africa 3.7 4.8 Only 1% growth on a per capita basis
Global economic growth is very unbalanced
The world economy may be growing again, but it is doing so in a very unbalanced way. Essentially, it is the recovery in the USA that is providing a market for growth in Asia, especially China. To pay for all the imports that it is taking in, the US is running a large current account deficit - equivalent to five per cent of its GDP. The USA has a trade deficit of $150 billion with China, and China is accumulating reserves at a rapid rate.
The US deficit will have to come down a one-day, and it will be accompanied by a drop in the value of the dollar. The forecast is for the US current account deficit to fall to 4 per cent of GDP by 2008. Meanwhile, most of the Asian countries that are running a trade surplus with the USA have had to intervene to stop their currencies from appreciating too much. This is a case for Japan, Korea, Taiwan and more recently China. Japan, for example, purchased a record $75 billion in US government securities in the first half of this year to try to hold down the yen. So basically, Asia is providing the US with a lot of low-cost funds to fuel its economy.
The renewed growth in the United States is largely policy driven. Interest rates have been reduced to a level of only 1 per cent. There have been substantial tax cuts, and there have been higher defence expenditures. To keep his expansion going in the future, the US will now need to ensure that there is increased investment in capital equipment to create jobs.
Currency adjustments as the US $ falls
The current account deficit is putting pressure on the dollar. As the dollar falls, most of the adjustment is being carried by the Euro, which has risen by 20 per cent over the last year-and-a-half. The Australian dollar has also risen by 20 per cent - its highest level for six years. The South African rand and the New Zealand dollar have risen by over 30 per cent in relation to the US dollar. These large exchange rate adjustments will make European, Australia, South African and New Zealand exports more expensive, and so less competitive on world markets.
Other currencies have risen less strongly against the US dollar. The Canadian dollar, British pound and Japanese yen have appreciated by 10-12 per cent.
There has been a lot of discussion about the US exchange rate, and as it goes down which currencies should be going up. The finger is being pointed at China.
China is the biggest exporter to the USA after Canada and Mexico. The Chinese currency should be appreciating, but the government is maintaining a fixed exchange rate with the US dollar (8.28 renminbi to $1). This very competitive exchange rate is leading to a large level of US investment in China, which is supporting industries that export to the US. As a reaction, there is an increasing protectionist feeling in the USA against Chinese exports. China has reacted by announcing that it will reduce the level of tax rebates on its exports from 16 per cent to 13 per cent on 1st January 2004. However this reduction will mainly apply to industrial exports. For agriculture, we understand that export rebates will actually be increased from 5 per cent up to the 13 per cent level. China is a centrally-controlled economy, so the government has many ways of managing the effective exchange rate. A decrease in export rebates will make Chinese exports more expensive, and help to cut China’s trade surplus next year.
While we are talking about exchange rates, it should be noted that the Mexican peso has fallen by 17 per cent against the US dollar since February 2002. This has made Mexican exports very competitive. Agricultural exports from Mexico have risen by 10.6 per cent in the first half of 2003. Mexico is particularly competitive in fruits and vegetables, e.g. avocados, limes, onions, hot chilli peppers and tomatoes. Since the NAFTA Agreement was signed in 1994, Mexico's exports of fruits and vegetables to the USA have increased by 82 per cent, reaching $2.5 billion. However, other sectors have not done so well. On December 12th, US counter-terrorism regulations come into effect, and Mexican exports will face some constraints, e.g. the requirement to give prior notice of shipments.
Latin America: improved performance
Mexico is the only country in Latin America, along with Chile, to have "investment grade" borrower status. This status means that they have access to international capital markets. As a result, Mexico and Chile are the strongest economies of the region.
Continuing with the other main economies in Latin America, Brazil had a $30 billion rescue package from the IMF in 2002. Argentina has rolled over its $12.5 billion debt to the IMF this year. Both countries have to generate a government fiscal surplus of 4 per cent per year just to service this debt. Both Argentina and Brazil have benefited from very competitive exchange rates following the devaluations in 2002. As their economies grow, the exchange rates for these currencies are now appreciating.
Russia: remarkable recovery
Russia has benefited from strong oil prices of around $30 per barrel in 2003, and a rise in commodity prices for minerals and metals. It also benefited from a fourfold devaluation of its currency in 1998. The Russian economy is now growing strongly at 6 per cent per year. The government has reformed its tax legislation to increase tax revenues and has paid back much of its debt. As a result, earlier this month Moody's upgraded Russia to "investment grade" status. Nevertheless, some observers feel that Russia is not nearly as safe for foreign investors as Mexico or Chile, only five years after it defaulted on a $40 billion loan from the IMF. However this development will support increased investment, particularly in the Russian oil industry. Russia is seen by many oil importing countries as a reliable alternative source of supply to the Middle East. Further, Russia is not a member of OPEC. Oil prices are not expected to drop below about $25 per barrel until the Iraqi oil infrastructure is rebuilt and its oil comes on stream.
Euro zone: stagnation
The Euro zone economies are not performing very well. Germany, France, Italy and the Netherlands are technically in recession, is spite of a cut in interest rates by the European Central Bank of half a per cent in June, bringing rates down to 2 per cent. Overall growth in the Euros zone will not likely exceed 0.3 per cent in 2003. Germany and France are running government budget deficits above the three per cent of GDP limit of the EU Growth and Stability Pact. However, in order to boost their economies, both countries envisage tax cuts, even though this would add to their fiscal deficits. In comparison, it is interesting to note that the USA is currently running a fiscal deficit of six per cent of GDP.
The strength of the Euro will not help a European recovery. Growth in the EU economy is being held back by lack of investment owing to what the IMF calls "structural rigidities". Several EU countries are therefore involved in difficult structural reforms to make their economies more flexible. For example, the German government has just adopted a law to reform labour markets, and France, Italy and Austria are reforming pension schemes so people would work longer.
EU Accession Countries: investment led growth
In May 2004, ten countries from Central and Eastern Europe will enter the European Union. Their economies are already dependent on the European Union. For example for Hungary and the Czech Republic, about 35 per cent of their GDP is generated from exports to the Euro zone. Economic growth in these Accession Countries is presently very respectable at about 4 per cent year owing to strong investment flows. However, the weakness of the EU economy could hurt their expansion in the future.
In the three EU countries outside the euro-zone - the UK, Denmark, and Sweden - interest rates have also been increased to stimulate their economies, and their currencies have also appreciated.
Africa: still haunted by political and economic instability
Finally, to Africa. The economy of the African Continent as a whole is growing by about 4 per cent per year. This is an improved performance, but is still below the 7 per cent annual growth rate needed to stay ahead of population growth and to reduce poverty. The African Continent suffers from political and economic instability. For example, as a result of military conflict in Côte d'Ivoire, the economy is in recession (-3 per cent GDP growth in 2003); continuing instability in Zimbabwe means that the deep recession there continues (-11 GDP growth in 2003, accompanied by 480 per cent annual inflation). Africa also suffers from drought e.g. Ethiopia, where the economy is in recession (-3.8 per cent GDP growth in 2003). Drought hits Ethiopia very often, and the international community regularly supplies food aid. However, what is needed for a long-term solution is investment in water management infrastructure. At present only 1 per cent of the water in Ethiopia is being exploited, yet sufficient overseas investment in water management systems seems difficult to obtain.
South Africa, the largest country of the region, is expected to grow by 2 per cent in 2003 and 3 per cent in 2004.
Global inflation is low
The complete this section on the world economy, it important to note that the situation concerning inflation is very satisfactory. Inflation rates in the industrialised countries are below 2 per cent, and are expected to fall to 1.3 per cent in 2004 – the lowest level for 30 years. Inflation is still relatively high in the EU Accession Countries at 10 per cent. In the developing countries, inflation is also very low, under 6 per cent per year on average. Japan has a problem with deflation, where prices and incomes are falling every year. The effect of deflation is also to increase the value of debt. This is a drag on the Japanese economy.
Summary on the world economy
To summarise this section, the world economy is pulling out of the slump of 2001, as a result of the strength of the US economy, and China. China now accounts for 15 per cent of world economic growth and 60 per cent of the growth in global trade. China has now overtaken the USA as being the recipient of the largest level of foreign direct investment, at $52.7 billion last year.
To place the size of the Chinese economy in perspective, it is instructive to compare it with the size of the economies of other large countries. China accounts for 12.7 per cent of global GDP. This compares with the USA, which accounts for 21 per cent of global GDP, and the EU, which accounts for 20 per cent of global GDP. Russia is far behind with 2.7 per cent of global GDP.
The agricultural economy
The global agricultural economy has also improved in 2003. You will recall that last year there was a serious drought in the USA, Canada and Australia. For Australia it was the worst drought in 100 years. Also the monsoon rains failed in several parts of Asia. World cereals production fell substantially and prices rose.
Cereals
In 2003, crops in the USA, Canada and Australia have recovered from the drought, and the monsoon was good in Asia. Also, good rains in North Africa have led to record harvests in Algeria, Morocco and Tunisia. As a result, overall cereals production in 2003 is expected to be 33 million tonnes above the reduced level of last year. This is the overall situation. This summer it was the turn of Europe to suffer from drought. A heat wave hit the continent from Spain right through to Russia, and cereals production there fell by 10 per cent.
World cereal stocks have been falling since 2000, mainly due to China destocking. In 2002 there was a substantial drop in cereals stocks (-33 per cent) owing to the North American drought, and there will be another substantial draw down in stocks in 2003 (-30 per cent) owing to the drought in Europe, Russia and the other countries of the CIS. Carry over cereals stocks in 2003 are likely represent 19 per cent of world consumption, compared with 24 per cent in 2002.
Wheat - The poor cereals harvest in Europe has affected most the international wheat market, since the EU produces more wheat than Canada and the US combined. World wheat production is at its lowest level since 1995, with world production at 556 million tonnes. This reduced harvest will leave the EU feed wheat market short of suppliers. With strong feed demand in Europe and a strong Euro, the US is shipping wheat to the EU, especially to Italy and Spain. The EU has a 572,000 tonne import quota with the USA for feed wheat. Wheat prices have increased to $150 per tonne, up by $10 per tonne over last year.
Coarse grains - In the coarse grains market, increased production in the USA (+13 per cent), Canada (+ 68 per cent) and Australia (+ 80 per cent) has more than offset the 10 per cent fall in coarse grains production in Europe and the 6 per cent fall in Russia and other countries of the CIS. In fact, the coarse grains harvest has returned to a normal crop of some 893 million tonnes. Maize prices are running $10 per tonne less than last year at $105 per tonne. Brazil had a record maize crop this year, and a record maize crop is also expected in the USA.
Rice - World rice production increased by about 3 per cent in 2003 owing to good monsoon rains. Rice production in India was up by 14 per cent this year, and rice production in Thailand increased by 4 per cent to a new record. However, some of the other monsoon countries of Asia suffered from typhoons and flooding, e.g. China where rice production fell by 1 per cent. Cold, overcast weather in Japan resulted in a poor growing season in that country, and this was accentuated by a government policy towards liberalising the rice market. Rice production in Japan fell by 7 per cent in 2003. World rice prices are stable.
Oilseeds
Moving from cereals to oilseeds. Oilseed markets are well supplied. There have been large increases in plantings of soybeans in Brazil as parts of the Amazon forest is cleared for agriculture. Also, in Argentina there has been some switch from maize to soybean production. India is expecting a record soybean crop following good monsoon rains. However the US soybean crop will be down by 10 per cent this year owing to dry weather in August and an early frost in September. Overall, world oilseed supplies are expected to be around 40 million tonnes in 2003, compared with 41 million tonnes in 2002 and 37 million tonnes in 2001.
In spite of a relatively well supplied global market, soybean prices in the USA are at their highest levels since November 1997 ($7.40 per bushel). There seem to be two reasons for this. First, demand from China is very strong. Second, there are shipping problems for soybeans from Brazil. Farmers in Brazil are holding off deliveries since traders are offering them only $12.20 per bag compared with the market price of $12.50 per bag.
Sugar
In world sugar markets, record crops in Brazil, China, India and Thailand arriving on an already oversupplied market are keeping prices under pressure. Currently world sugar prices are at 7 cents per pound, which is below the cost of production of most countries in the world. Thailand increased sugar production by 20 per cent this year, in line with its policy to expand agricultural exports as the vehicle for growth of its economy. There were declines in sugar production in the Caribbean, especially in Cuba which is diversifying away from sugar. Demand for sugar is increasing in the Far East, driven by population growth. However demand from Russia, the world's largest sugar importer, is falling.
This review of world agriculture will be concluded by an examination of the livestock sector.
Meats
In 2002, world meats markets were oversupplied and prices fell. The price falls were 8 per cent for pigmeat, 5 per cent for poultry meat and 3 per cent for beef. Meat producers not only faced falling prices last year, but also a rise in feed costs owing to drought. Many producers liquidated their herds, especially in the industrialised countries. This year, meat production is growing slowly, by 1 per cent.
Pigmeat trade was very buoyant in 2002, owing to BSE concerns in beef, particularly in Japan. The rapid increase in pork imports into Japan triggered a safeguard mechanism and Japan increased its tariffs. Russia and Mexico also brought in TRQs (tariff rate quotas) to control meat imports. In 2003, pigmeat production has fallen in the US and EU, owing to lower prices and higher fee costs. Also, demand for pork into Japan is falling as a result of the recovery in beef consumption after last year's BSE outbreak. However Canada's pork production continues to grow, driven by export demand. Canada has become the world's number one pigmeat exporter.
For poultry meat, weak prices and falling supplies in the US and EU have decreased the growth in world poultry meat production to only 2 per cent - half the level recorded in a previous 7 years. However, poultry production is increasing in Brazil. Trade in poultry meets is being affected by health measures such as increased residue testing of exports from China and Thailand, import bans from certain countries in response to disease outbreaks, and the imposition of import quotas.
For beef, supplies from industrialised countries fell by 3 per cent in 2003. In North America and Oceania, producers are in a herd-rebuilding phase. EU production has been hit by drought. However, beef production is growing in Latin America. Brazil is now the world's second largest beef producer, behind the EU, producing 7.2 million tonnes of beef per year. Beef exports are very competitive from Argentina and Brazil, following the currency devaluations in 2002 (32 per cent devaluation in Argentina and 23 per cent devaluation in Brazil). Asia is the growth market for beef, notably China, Taiwan, Philippines and Korea.
In the USA, cattle prices are at record high levels. Speculators are active on the Chicago Mercantile Exchange and have driven the prices of live cattle for delivery in October to a record 98.8 cents a pound. Cash prices have risen as high as $1.08 per pound. Part of the explanation for the high US cattle prices could be the ban on imports of live cattle and beef from Canada, which was imposed on 20th May 2003 following the discovery of a single cow with BSE. Canada accounted for 7 per cent of US beef suppliers last year. It was interesting to see that this case of BSE in Canada did not deter Canadian consumers from eating beef, nor did it result in a fall in beef prices in supermarkets.
For sheep meat, lamb prices are at their highest levels since 1997, as a consequence of drought in Australia in 2002. Decreased sheep meat supplies in Australia more than offset the increases in New Zealand. Sheep meat trade in 2003 decreased for the third consecutive year, owing to higher prices. However, markets for sheep meat are growing in Asia and North America.
Dairy products
Finally, in the dairy sector, much of the production takes place under quota system and so it changes little. However, on international markets, prices continued their recovery in 2003 owing to reduced exports supplies from Oceania and South America. Compared with the depressed price levels of August 2002, skim milk powder prices have increased by 60 per cent, butter by 30 per cent, and cheese by 20 per cent. Cheese prices are expected to show the greatest increase in 2003. Unfortunately, dairy farmers in Australia and New Zealand have not been able to benefit from these world market price increases due to the strong appreciation of their currencies (+ 20 per cent for Australia and + 30 per cent for New Zealand). In fact returns to New Zealand dairy farmers in 2003 are below the levels of 2002.
Conclusion
In conclusion, one can again see the effects of four factors on the changing fortunes of agriculture. These are:
1. Harvest failures due to changes in weather conditions, which are becoming more pronounced with climate change (droughts last year in North America and Australia, and this year in Europe)
2. The substantial effects of disease problems on trade in meats (e.g. BSE)
3. The effects of exchange rate changes, which have helped Brazil to become a leading agricultural exporter
4. The effects of economic policies and economic growth, with China emerging as a major import market for agricultural commodities.
None of these are related to the negotiations in WTO.
Thank you