Trends in Global Market and Implications
for Farm Policy and Cooperatives
The market in
which you had
prepared to
compete no
longer exists!
Now what?
Materials presented by
Materials presented by
Terry
Terry
N. N.
BarrBarr
Chief
Economist
Chief
Economist
National
Council
of Farmer
Cooperatives
National
Council
of Farmer
Cooperatives
50 F St.. NW, Suite 900
50 F St.. NW,
Suite 900
Washington,
DC 20001
Washington,
DC tbarr@ncfc.org
20001
202-626-8700
/ e-mail:
202-626-8700 / e-mail: tbarr@ncfc.org
8th Annual Farmer
Cooperatives Conference
November 7-8, 2005
All segments of the global food, natural fiber
and agriculture system are undergoing
dramatic change and the pace of change is
accelerating with global integration!
Competition is intensifying and customers are
increasingly demanding more services and
product attributes.
Maturation/saturation
of developed markets
Restructuring
of U.S. and
non-U.S.
policy
The interaction
among these forces
is reshaping the
food, natural fiber
and agriculture
system
Globalization
driving a new world
marketplace
Competitive
restructuring
in mature
markets and
new strategies
for emerging
markets
(customer
focus)
Information
technology
Life science
technology
Fundamentally, globalization is the closer
integration of the countries and peoples of
the world which was brought about by the
enormous reduction of costs of
transportation and communication, and
breaking down of artificial barriers to the
flow of goods, services, capital, knowledge
and people…….
Joseph Stiglitz, “Globalization and its Discontents”
Globalization is Enigmatic Catalyst:
Fall of the Berlin Wall in 1989.
Breakup of Soviet Union in 1991.
End of the cold war
Completion of the Uruguay GATT Round (1986-94).
World Trade Organization established in 1995
Completion of North American Free Trade Agreement in
1994.
The path took a decided turn for trade sensitive sectors of
the U.S. economy with
the Asian financial crisis in 1997-98
the U.S.-China centric growth pattern that
emerged and continues today!
The final ingredient was the rapid spread of the internet
which redefined marketplace!
The rise of China and India is the most
important economic force in the world!
Breadth & Speed of Change Undermined Policies
Global labor pool has increased by 1.5 billion and the Internet
has redefined non-tradable services.
Developed countries must now reassess the globalization
tradeoffs (manufacturing vs services) to redefine a labor
retraining and deployment strategy.
Note: French are trying to hold on to 35 hour week while
workers in India are competing for 18 hour per day jobs.
Price setters at the margin are in China, India, etc. Reality is
pricing to the market rather than cost markup model! Internet
has made price discovery an instantaneous global process.
Global capital markets have enable countries with export led
growth strategies to redirect savings to promote external
demand rather than indigenous growth strategies. (U.S.
taking in $3 billion per day).
Profiling the Global Marketplace
United
States
European
Union
Japan
China
India
2005 population (millions)
297
365
128
1,304
1,104
Share of world population
5%
6%
2%
21%
17%
Population growth rate
to 2025
0.9%
0.1%
-0.1%
0.5%
1.3%
Percent Urban
79%
80%
79%
37%
28%
Population age 65 & over
12%
17%
20%
8%
4%
Income per capita (US$)
$39,710
$29,410
$30,040
Share of world GDP (PPP
basis)
21%
15%
7%
13%
6%
Trade- weighted avg.
applied tariff levels (Ag
& food 2001)*
2.4%
14%
29%
38%
50%
Average tariff over all
tariff rate quota (TRQ)
lines
12%
30%
58%
Rest of
World
46%
$5,530 $3,100
26%
Eroding U.S. Agriculture Trade Balance
Reflects Changing Global Food Market
U.S. Ag Trade: A Disappearing Surplus
Billion dollars per fiscal year
70
Exports
Imports
Balance
60
50
40
30
20
10
0
80
82
84
86
88
90
92
94
96
98
00
02
04
06
U.S. Trade in High Value Products
Billion dollars
60
Exports
50
Imports
Imports
40
Exports
30
20
10
0
Trade balance
-10
-20
80
82
84
86
88
90
92
94
96
98
00
02
04
06
U.S. Agricultural Imports by Type
Billion dollars
60
50
40
% of total
Type
Consumer
Intermediate
Bulk
Commodity
Horticulture
Livestock/meats
Total
71%
17%
12%
48%
14%
30
Consumer-oriented
20
Intermediate
10
Bulk
0
90
92
94
96
98
00
02
04
06
U.S. Agricultural Exports by Type
% of total
Type
High value
63%
Bulk
37%
Commodity
Grain and feed
25%
Horticulture
25%
Oilseeds & prod.
18%
Livestock/meats
12%
Billion dollars
70
60
50
40
High value
30
20
Bulk
10
0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
Bulk Commodities Facing
Increasing Competition, China
and New Market Realities
World Grain and Soybean Exports
Million metric tons
120
Wheat
100
80
Coarse grains
60
40
20
Soybeans
0
80
82
84
86
88
90
92
94
96
98
00
02
04
Net Grain Trade of Former Soviet Union
Million metric tons of wheat and coarse grains
40
30
30 mil. ton
swing in
3 years!
20
10
0
-10
-20
-30
-40
30 mil. ton
swing in
3 years!
2003/04 crop
was 24% below
year ago levels!
-50
87/88 89/90 91/92 93/94 95/96 97/98 99/00 01/02 03/04 05/06
Net Grain Trade of European Union
Million metric tons
35
EU-15
EU-25
30
25
20
15
10
5
0
C. Grains
Wheat
-5
87/88
89/90
91/92
93/94
95/96
97/98
99/00
01/02
03/04
05/06
China Soybean Demand Remains Strong
Million metric tons
50
Production
Ending stocks
40
Domestic use
30
20
10
0
-10
-20
Net trade
-30
-40
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
China Cotton Use Surging
Million 480-pound bales
50
Production
Ending stocks
40
Domestic use
30
20
10
0
-10
Net trade
-20
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
Cotton: U.S. Mill Use and Exports
Million bales
18
15
Exports
12
9
6
3
U.S.
mill use
0
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05
High Value Commodities Facing
Changing Market Realities
Only 10 Percent of Global Processed
Food Sales are Traded Products
Intra-EU - 3%
Nontraded - 90%
Traded - 10%
U.S. exports - 1%
U.S. imports - 1%
Rest of world - 5%
World Trade in Processed Foods Stagnates
Billion U.S. dollars
225
200
175
150
Rest of World
125
100
European Union
75
50
Japan
25
North America
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
Supermarkets' Share of Retail
Sales by Country
Historical
United States
40% (1985)
2001
80% (2000)
Latin America
Argentina
17% (1985)
57%
Brazil
30% (1990)
75%
Mexico
-----------
45%
China (urban)
30% (1999)
48%
Indonesia
20% (1999)
25%
Korea
61% (1999)
65%
Malaysia
27% (1999)
31%
Thailand
35% (1999)
43%
Asia
Processed Food Sales
Billion dollars
175
Foreign affiliate
sales of U. S. firms
150
125
100
75
50
25
U. S. exports
0
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Why Foreign Direct Investment?
Mature markets are the base but emerging markets
have greater growth potential.
Consumer preferences
local/national customization
Cost factors
lower raw material costs
lower regulatory costs
achieves dominant position more rapidly
facilitates creation of regional distribution systems
Market access
tariff escalation limits high value access to markets
Major U.S. and European Multinational
Sales by Regions
Nestlé SA
Danone, Groupe
W estern Europe
Unilever Group
Eastern Europe
Cadbury Schweppes Plc
Latin America
Asia Pacific
Heinz Co, HJ
Africa and Middle East
PepsiCo Inc
Australasia
North America
Kellogg Co
Kraft Foods Inc
General Mills Inc
ConAgra Foods Inc
0%
20%
40%
60%
80%
100%
Global Networks with Partnerships among
Major Dairy Companies
Fonterra
Europe, Africa, and Asia
Arla Foods
Largest European
dairy cooperative
(Scandinavian based)
Clover Industries
Largest South
African dairy
company
Britannia Industries
Leading dairy company
in India affiliated with
Danone (French based)
World’s largest dairy
exporting company
(New Zealand based)
North and South America
“Arla Foods Fonterra”
“DairiConcepts”
Dairy Farmers
of America
Joint venturemarketing distribution
of branded products
Joint venture -first U.S.
Commercial operation for
milk protein concentrates
U.S. largest
dairy
cooperative
“Clover Fonterra Ingredients”
“Dairy America”
Joint venturemarketing bulk
ingredients in subSaharan Africa
Federated
marketing company
-Fonterra exports
U.S. nonfat dry milk
“Britannia/Fonterra
”
Joint venture to
market dairy
products in India
Nestlé
Largest multinational supplying
brands and distribution expertise
“SanCor/Fonterra”
Fonterra exports
cheese and
powders from
Argentina
“Dairy Partners America”
Joint venture–sourcing fresh
milk from South America with
ingredients from New Zealand
Alliance with 7 U.S
dairy cooperatives
SanCor
Argentina’s largest
dairy cooperative
Trade Negotiations Setting Stage for
Farm Bill and Market Strategies
The World Trade Organization: Doha Round
(November 2001 and the Doha Ministerial Conference)
Without prejudging the outcome, member governments
commit themselves to comprehensive negotiations
aimed at:
market access: substantial reductions in barriers
exports subsidies: reductions of, with a view to
phasing out, all forms of these
domestic support: substantial reductions for
supports that distort trade
The Doha Round of The WTO
No progress in Geneva and agenda for Hong Kong in December
is in doubt. Expiration of Trade Promotion Authority in mid-2007
may become an issue. Look for announcements in coming
weeks from major players!
U.S. will give up subsidies if competitors do the same.
EU wants negotiations to move toward their CAP reform which
emphasizes environmental payments.
Elections in Britain, Germany and France indicate lack of
concensus!
Japan playing “prevent defense” to limit internal adjustments
China has “developing nation” status and is aligned with G-20.
Brazil leads the G-20 and victories with WTO dispute panels has
embolden efforts to eliminate export subsidies and gain
greater access to developed markets. Also want to preserve
developing country “special and differential treatment”.
From Doha to Capital Hill
Budget Pressures Will Impact Agriculture
Billion dollars
Current CBO projections* with phaseout funding for Iraq and terrorism.
240
160
Current CBO projections* with
extension of expiring tax provisions
and phase out of Iraq commitment.
80
0
2002
farm
bill
1996
farm
bill
-80
-160
-240
-320
2007 farm
bill and
Doha!
-400
-480
70
75
80
85
90
95
00
05
10
* August, 2005 adjusted for Hurricane funding. Assumes discretionary spending increases at rate
of inflation.
Smaller Share of Budget to Find Offsets!
FY 2005
FY 2010
Social Security
21.0%
Social Security
26.5%
21.9%
30.9%
Discretionary
and other
mandatory
Discretionary
and other
mandatory
20.9%
Medicare /
Medicaid
19.9%
Defense
7.4%
Net
Interest
15.4%
25.8%
Defense
Medicare /
Medicaid
10.3%
Net
Interest
Where's the Policy Momentum and
Where Will It Take Us for 2007?
Budget deficit pressures will define the battlefield
Commodity program beneficiaries will define initial
allocations but specialty crops may have voice.
Doha Round progress will provide some longer term
parameters or it could change timeline!!
globalization realities will pressure public attitudes
global political climate will limit progress
Conservation and environmental interests will key on
budget availability and Doha Round commitments.
Other wild card factors
Shift in US-China centric global growth pattern
Energy policy crossover with commodity programs
U. S. elections in 2006 and 2008
Globalization in combination with the
other structural drivers is reshaping
every sector of the food system!
Consumer Sector:
Consumer is demanding more attribute specific products
that are customized to the national and/or local market
rather than a global generic market.
Consumer wants these products on a 24/7 basis with
increasing services in both the retail and food service
segments. Significant urbanization in developing countries
is creating a new consumer class while aging populations
in developed regions are seeking new product mixes.
(different strategies)
Retail and food service providers are consolidating rapidly
to achieve economies of scale and establish control of
consumer access points and information. Focus is on
urban centers in global marketplace.
Control of access points and information enables
providers to define supply chain of business relationships
to satisfy consumer demands.
Food Processing / Manufacturing Sector:
Food processing and manufacturing companies are
consolidating rapidly to countervail the consolidation at
the retail level and to structure supply chains on a
national and/or regional basis to meet the demands of the
evolving system. Local firms will remain a strategic joint
venture resource and regional distribution centers will be
located strategically.
Companies are customizing food products for regional
preferences by utilizing brand names and increasingly
private labels of major retailers.
New food technologies and product innovations will key
increasing use of partnerships and joint ventures to
spread risk and create interdependent food structures.
Knowledge, information and unique skill sets will
displace brick and mortar as key strategic resources.
Production Sector:
Sector will become increasingly competitive for all
products as new global and national market suppliers are
emerging with rising consumer demand. Local sourcing
is strategic to the current evolution in global markets.
Agriculture production will become increasingly
consolidated with larger and larger operations that wil
seek direct linkages to the supply chains created by retail
and food processing sectors. Linkages to input sector
will evolve with proprietary life science technologies.
Output will need to be differentiated by product attribute,
delivery capability or some unique value to a supply
chain.
Production agriculture will seek to enter new market
segments by using life science technologies. New
products in the food, energy, industrial, health and
pharmaceutical sectors will emerge.
Input Sector:
Input manufaturers will continue aggressive
consolidation and focus on global sourcing and
distribution strategies. Escalation in natural resource
prices and availability/access issues will grow as
Asian markets absorb more resources. Brick and
mortar must be strategically located to raw material
base.
Life science technologies will play increasing role in
defining product attributes at production level and
intellectual property issues will escalate as
companies seek to protect returns.
Distribution systems will become increasingly direct
as larger and larger entities emerge in production
agriculure throughout the world. Regional distribution
strategies will emerge.
Implications for farmer cooperatives:
Understand what the cooperative does better than anyone
else ... this represents the value you bring to any business
relationship.
Know the market value the cooperative brings to a domestic
or global business relationship .... what would it cost to
duplicate what you bring to the table.
Solidify position in #1 world market .... the United States.
Deploying scarce capital resources and capital in world
market should not take precedence over domestic
strategies. Need to be integrated stategies.
Keep board informed of competitive changes in the
marketplace and supply chains .... there is a global
dimension to every business even if you are not directly
imvolved in trade. A board that is aware of potential
competitive challenges will be more responsive.
Implications for farmer cooperatives:
Develop a structure for management and boards to evaluate
the strengths and weaknesses of potential and existing
joint venture partners. Periodically update those
evaluations.
Dialogue with current customers / suppliers regarding their
global strategies in order to identify potential business
opportunities or emerging risks.
Take a longer view of what strategies the cooperative needs
to employ to serve the needs of its farmer members.
Recognize the challenges and opportunities that changes in
domestic farm policies will bring to members. As the safety
net is reduced and/or redeployed the role of the
cooperative in support the financial well-being of the
members will change!
The realignments we are discussing are part of an
ongoing evolutionary process which is continuing
to accelerate ! There will be no "right" strategies
for participants in the food and agriculture system.
The life span of business strategies will become
shorter and shorter as this dynamic, knowledge
and capital driven environment changes!