Ag Biotech & Rural Developmentin a Globalizing World:Policy Considerations

Robert L. ThompsonGardner Professor of Agricultural Policy

University of Illinois

September 8, 2005

Rural Development

• Narrowing the income gap between rural and urban residents

• “It’s (nonfarm) jobs, stupid!”• Diversify economic base (both income

generation and tax revenue) of rural communities to reduce dependency on farming, a risky business.

• Rural America is regionally very diverse – generalization impossible.

There Are Only Five Ways to Increase Farm Family Income

• Increase productivity in present crops• Get access to more land (own or rent)• Change to higher value per hectare crops• Member(s) of the family get non-farm

income (e.g. cottage industries, non-farm jobs; remittances)

• Leave agriculture all together (migrate to city or get full-time non-farm job within commuting distance)

Research Has Raised Ag Productivity Faster than Demand Has Grown

• For 2+ centuries prophets of doom have argued population growth would increase food demand faster than ag production could grow.

• Public and private sector investments in agricultural research have increased productivity faster than demand growth.

• Where adaptive research investments have been made, surplus, not scarcity, has prevailed

• The result: 150 year downward trend in real price of grains

Adjustment to Change Has Been the Norm in Rural America

• Historically rural America was farm dependent• Rapid productivity growth in agriculture

– Farm production grew with fewer total inputs – Redundant farm labor– Ag supply grew faster than domestic demand– Technology “treadmill”

• Farm & agribusiness consolidation• Commodities vs. differentiated products • Outmigration and the rise of part-time farming• Declining fraction of rural community incomes

from agriculture

Size Distribution of U.S. “Farms,” 2003Size in $ thousand

Thousand

farms

% of all

farms

% with

payment

Ave $/ pay farm (000)

<10 1,227 58 20 2

10-49 398 19 53 6

50-99 172 8 71 10

100-249 165 8 78 19

250-499 86 4 78 34

500-999 45 2 70 55

>1000 29 1 56 82

All 2,123 100 39 13

Source: ERS

Ag Biotechnology

Agricultural Biotechnology

• “Techniques of modern biology that employ living organisms (or parts thereof) to make or modify living products, improve plants or animals, or develop microorganisms for specific uses.” Cornell University College of Agriculture and Life Sciences

• It may involve the use of genetic engineering, as well as many other techniques that have been commonly used for generations

Biotechnology Opens New Frontiers • Opportunity for new ag-based rural industries,

e.g. pharming; biofuels.• Greater opportunity to increase productivity of

food system– Improve nutritional content of grains, etc.– Increase tolerance to drought, wetness, temperature,

salt, aluminum toxicity, …. (to increase yields and/or planted area under adverse or variable conditions)

– Internalize resistance to diseases; viruses– Reduce pesticide use, esp. insecticides– Herbicide-resistant varieties– Slow down product deterioration

Public vs. Private Agricultural Research

• Historical public support of biological research key to agricultural development (“public good”)

• Private sector did most of the mechanical, pesticide & animal pharmaceutical research (could patent resulting intellectual property)

• Private sector role in biological ag research only took off after late 1970s (coincidentally with development of biotech research tools) when U.S. Congress & European parliaments cut appropriations and encouraged private sector to take on this role

Intellectual Property Protection

• Necessary for private sector to be able to internalize return on investment in ag research

• If public sector doesn’t pay for the agricultural research, farmers must pay for it (both successes and failures) in the price of the inputs they buy each year

• Need hybrids, “terminator,” or enforceable “no reproduction for sale” contract (like music CDs)

• How to benefit low income countries?

Most Opposition to GMOs Based on Political Agenda, not Science

• Oppose economic growth and anything that might facilitate it, e.g. building dams.– Environmental protection has been an effective vehicle for

retarding economic growth.– Assert concern for the poor and excluded, but oppose growth

• Oppose large scale in any business, including farming• Oppose private sector agricultural research• Oppose intellectual property protection in agriculture• Oppose globalization and free trade • Assert concern for consumer choice, but work to deny it

The Global Context: Need to Double World Food

Production by 2050

Expect World Food Demand to Double by 2050

• World population projected to increase 50% between 2000 and 2050, from 6 to 9 billion

• 1.25 billion people live on less than US$1 per day; of them, 840 million suffer under-nutrition. Hunger is mainly caused by poverty.

• 3 billion (half the world’s population) live on less than US$2 per day.

• Broad-based economic growth that reduces this poverty could add another 50% to world demand for food

The World’s Arable Land (left)Is Distributed Very Differently

than Its Population (right)

South Asia15%

Middle East and North Africa

4%

Latin America and Caribbean

10%

Europe and Central Asia

20%

East Asia and the Pacific14%

Africa11%

OECD Countries26%

OECD Countries14%

South Asia22%

Latin America and Caribbean

9%

Middle East and North Africa

5% Europe and Central Asia

8%

East Asia and the Pacific31%

Africa11%

The Land Constraint

• There is at most 12% more arable land available that isn’t presently forested or subject to erosion or desertification – and degradation of many soils continues.

• Keen competition is coming for available land among food and fiber production, commercial forest production, and conservation of forests.

Growing Demands on Forests

• The same forces of population and income growth that increase demand for food also increase demand for things made out of wood, e.g. paper, furniture, building materials; poles.

• In rich countries, growing demand for environmental amenities and preservation of (especially old-growth) forested areas.

Water A Growing Constraint

• Farmers use 70% of the fresh water used in the world. They are both the largest users and the largest wasters of water.

• Water is priced at zero to most farmers, signaling that it is much more abundant than in reality. Anything priced at zero will be wasted.

• With rapid urbanization, cities are likely to outbid agriculture for available water.

• The world’s farmers need to double food production using less water than today.

The Only Sustainable Way Ahead

• The area of land in world food production could be doubled…

• But only by massive destruction of forests and loss of wildlife habitat, biodiversity and carbon sequestration capacity

• The only environmentally sustainable alternative is to double productivity on the fertile, non-erodible soils already in crop production – unlikely without use of biotech research tools.

Globalization and Trade

Why Trade?

• Increase standard of living by obtaining goods that others can produce at lower cost in exchange for things we can produce relatively cheaper– By lowering the cost of living, makes a

household’s purchasing power stretch further– Increases a country’s GNP by employing its

land, labor & capital where they are most productive

Globalization• Increasing integration of economies (from the

most local level) around the world– Trade– Technology/knowledge– People/labor– Financial capital

• Result of technological advances that reduce cost and increase speed of international transactions

• Creates unprecedented opportunities for specialization and exchange of goods and services (global sourcing & supply chains)

• Exposes previously isolated markets to competition

Exports Are Key to U.S. Agricultural Profitability

• American agriculture exports ¼ to 1/3 of its production of many commodities.

• Without these exports, U.S. agriculture would have to downsize significantly.

• Exports can grow by expanding the total size of the market or by increasing market share.

• The only large potential growth market is in presently low income countries

• The outcome of the WTO trade negotiations will determine how much of this “potential” is realized

Exports vs. Energy Supply?• Many farmers and politicians are enamored with

potential for agriculture to supply energy– e.g. ethanol and bio-diesel

• Ethanol and biodiesel are economically viable only with:– subsidies and mandated use in fuel blends– protection from imports from lower-cost suppliers in

era of trade liberalization (cheaper to produce ethanol from sugar cane and biodiesel from palm oil)

– continuous lobbying and campaign contributions to sustain the above

• Petroleum industry controls access to gas pumps & has deeper pockets than farm groups.

• With doubling of world food demand by 2050, likely to question morality of burning food for fuel

U.S. Farmers’ Changing World View

• Losing confidence in their international competitiveness (benefits of Uruguay Round Agreement on Agriculture oversold)

• See world market as a zero-sum game (If you increase your exports, I have to reduce mine.)

• Don’t recognize potential growth in LDC markets• Reluctant to accept that being a large exporting

country constrains our freedom of action in domestic policy making. You cannot have it both ways.

Policy Considerations

Ag Commodity Policy• Much ag commodity policy is rent-seeking by

farm organizations and commodity groups and fails to achieve stated objectives– Subsidies tied to output of specific commodities

stimulate larger production in less efficient locations– Facilitate consolidation of farms, not creation on new

employment opportunities– Subsidies justified on basis of low farm income but

distributed in proportion to sales are ultimately bid into land prices, benefiting large farmers & land-owners and undermining long term cost competitiveness of U.S. agriculture.

• 2007 Farm Bill provides opportunity for change, but…

Rural Development Policy• Rural America is not likely to secure larger

allocation of Federal funds, but most is going in form of farm program payments.

• How to sell the need for Federal investments to facilitate rural development by investing in public goods:– Infrastructure– Human capital

• Need to find ways to smooth the progress of welfare-enhancing structural change while reclaiming the productive potential of workers and communities bearing the costs of job losses and local economy contraction associated with globalization.

Trade Policy• Should we be creating new rural industries

whose future depends on restricting imports while negotiating freer trade?

• Economic theory tells us that the gains of the gainers from trade liberalization exceed the losses of the losers– It does not tell us there are no losers!– The challenge is to define policy interventions to

compensate losers for their losses:• to facilitate the adjustment • to neutralize opposition of politically powerful opponents who

could stop liberalization dead

Environmental Policy

• Long term conservation reserve, which pays farmers to take environmentally sensitive land out of production for 10 years, has contributed to rural economic decline in some places.

• Policies that subsidize farm production in drought prone areas and under-price water to agriculture lead to misallocation of water to lower value uses.

Energy Policy

• Appropriate mix of energy sources?

• Energy pricing policy?

• What role renewable energy sources?

• How much import dependence?– Petroleum– Renewables, e.g. ethanol and biodiesel, if

foreign production lower cost

Science Policy

• What is the right level of oversight of genetic engineering research?

• What is the right balance between public and private investment in ag biotech research?– Intellectual property protection essential to

extent rely on private sector