LOW WORLD FARM PRICES TO PERSIST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85-01156R000100050041-7
• Release Decision: RIFPUB
• Original Classification: U
• Document Page Count: 12
• Document Creation Date: December 21, 2016
• Document Release Date: October 6, 2008
• Sequence Number: 41
• Publication Date: January 4, 1983
• Content Type: REPORT

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MEMORANDUM FOR: C/NIC ?
DDI
DCI
An outstanding INR paper. They
have a.first rate agricultural economist.
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Report 527-AR
January 4, 1983
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LOW WORLD FARM PRICES TO PERSIST
summary
The world's agricultural exporters face a
bleak picture. Technology and investment continue
to raise world farm output while consumer demand
has been hit by economic stagnation. As a result,
farm export earnings are down sharply, and inter-
national farm trade problems are flaring into open
warfare.
The real price of sugar has just hit a 10-year
low. The world's grain carryover this year will be
the biggest in history--despite crop failures in
the USSR and Australia. World animal feed produc-
tion will set a record, but hard-pressed consumers
cannot afford more meat. The coffee surplus is
reemerging, and the cocoa surplus continues.
The agricultural boom of the 1970s was created
by the demand for livestock products. This
required major increases in production of feed
grain and protein meal, which are the raw materials
for meat, milk, and eggs. World grain and oilseed
markets have lately lost virtually all their growth
as world meat consumption has plateaued and even
fallen in some important markets, owing to weak
consumer buying power. At the same time, produc-
tion cycles and investment have created current or
prospective surpluses for many other important farm
export commodities including meat, dairy products,
sugar, coffee, cocoa,.and cotton.
Farm exporters probably will continue to be
burdened with a general surplus of agricultural
output until economic recovery regenerates growth
in the effective demand for livestock products.
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Rising Production
The world is currently turning out record or near-record
crops of wheat, coarse grains, rice, sugar, and dairy products.
Heavy carryovers have been depressing prices in grain, sugar,
cocoa, and cotton. Meanwhile, increases in farm output are still
being encouraged by:
--past investments in irrigation, land development, and mar-
keting infrastructure;
--continued adoption of new farming technology;
--some decreases in the costs of important production inputs,
especially fertilizer, the price of which has dropped more
than 20 percent on the world market in recent months;
--the critical need in many countries to maximize foreign ex-
change earnings from farm exports;
--the equally critical need in some food-importing countries
to maximize domestic food production and thereby conserve
foreign-exchange spending on food imports; and
--major national programs that encourage surplus farm produc
tion and/or suppress consumption (high price supports in the
European Economic Community--EEC--and import quotas in Japan
are perhaps the largest of these distortions).
Farm production costs have fallen somewhat from their recent
highs. Fertilizer and interest rates are down and the chemical
and farm machinery industries have excess capacity. Despite these
lower costs, the sharp drop in prices for farm output means that
farmers in many countries are suffering from reduced incomes. As
a result, real farm land values in the US have dropped some
20 percent since 1980.
Agricultural Expansion To Continue
A number of countries are pursuing what they perceive to be
long-term comparative advantages in agricultural production. For
example:
--Canada is making major investments in hopper cars and west
coast port facilities to raise its west coast export capacity
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from 23 million metric tons (mmt) per year to 30 mmt annually
by 1985-86. The Canadians also have repealed an outdated
rail rate which had discouraged railroads from hauling grain
west and have signed larger grain sales agreements with the
USSR, China, Brazil, and Algeria.
--Brazil has expanded production in a broad array of export
products--including soybeans, sugar, cocoa, orange juice,
beef, and poultry. Brazil also expects to resume its annual
30-35 million bag level of coffee production, up from the
17-25 million bags produced in 1976-81.
--Malaysia is developing more of its tree crop potential,
including rubber, palm kernel, and cocoa.
--Thailand has sharply increased its output of rice and feed-
stuffs (primarily corn and manioc) and is rapidly extending
its network of farm-to-market roads.
--High European Common Market price incentives are continuing
to stimulate EEC farm production. United Kingdom grain pro-
duction in 1982, for example, will be up some 2 million tons,
owing to higher yielding varieties and a shift from spring to
winter barley. EEC dairy production is rising by 6 percent
per year.
--China, which had been concentrating on increasing grain
production at any cost, is encouraging more production of
other crops. China's overall farm productivity is expanding
rapidly as a result.
--Nicaragua is completing a new sugar mill and plans two more to
increase export earnings.
--Australia is expanding plantings of grain sorghum, to take
advantage of the expected long-term growth in world feed
demand, and of sugar, because of relatively low production
costs in its tropical northern region.
--Pakistan continues to broaden its use of high-yielding seeds
and fertilizer and has now become an exporter of both wheat
and rice.
Slumping Demand
A demand for better diets--especially the demand for more
livestock products--fueled the agricultural boom years of the
1970s. A kilo of bread takes essentially a kilo of grain to pro-
duce. But if the grain is fed to a chicken, it takes at least
2-1/2 kilos of graijl to produce a kilo of food. A kilo of pork
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requires 5-6 kilos of feed. The feed requirement for beef varies.
greatly with the forage ratio in the animal's diet, but beef
unquestionably requires far more farming resources per human cal-
orie than bread. This livestock multiplier has sharply increased
world farm product demand in recent years as economic growth has
permitted millions of additional consumers to afford more live-
stock products in their diets.
From 1970 to 1980, when the world's population was rising
20 percent, world meat production rose 42 percent. Trade in feed-
stuffs increased by 130 percent (93 mmt) in order to supply the
raw materials for the increase in meat production. By contrast,
trade in wheat used directly as food--rather than for meat produc-
tion--increased only about 60 percent.l/
Since 1980, however, economic growth has slowed sharply in
the world. A doubling of oil prices in 1979, the lack of foreign
exchange of East European countries (which were borrowing to
finance a large volume of feed imports), and a plateauing of meat
consumption in countries where it had been growing rapidly (such
as the USSR, Spain, Taiwan, and Japan) all played a part in the
slowdown. Moreover, meat consumption has fallen significantly
in the past three years in such important markets as the US,
Australia, and Canada. As a result, feed grain trade--even with
high Soviet grain imports--has increased only about 5-7 mmt per
year since 1980. Surplus. production is now being stockpiled at
great expense instead of being converted into high-value foods.
Trade Barriers Intensify Problems
The EEC, which formerly imported about 20 mmt of grain per
year, now exports perhaps 5 mmt--in large part because of its
highly protective Common Agricultural Policy. In addition, high
EEC food prices have constrained consumption. This year the EEC
is expected to spend $13 billion on its farm support program--and
export the resulting surpluses of wheat, flour, sugar, butter,
nonfat dry milk, red meat, and poultry at the expense of other
sellers.
Japan has also. followed a protectionist farm policy. Its
import quotas foster high internal prices for many foods. High
meat prices, for example, indirectly limit Japan's feedstuffs
demand: In the mid-1970s, Japan and Taiwan had similarly low per
capita meat consumption, but Taiwan's consumption has since-risen
to 20 percent more than Japan's. Estimates suggest that if meat
1/
Because the Soviet Union produces enough wheat for its own
bread and other direct cereals consumption, its imports are
basically to support its livestock production.
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consumption in Japan rose to the Taiwanese level,-Japanese demand
for feed grain would increase by about 4 mmt per year.
High-cost producers of beet sugar are protected in such major
markets as the EEC, the US, and Japan. Along with substitution of
corn sweeteners, sugar protection is one of the major price- -
depressing factors in the world sugar market, particularly in the
case of the EEC where it has encouraged a massive increase in
sugar exports in recent years.
With world farm export markets under such intense pressure,
trade issues are being contested much more fiercely:
--More than a dozen nations have joined in formal protests
against the EEC's Common Agricultural Policy.
--The US Congress has authorized farm export subsidies for the
first time in nearly a decade--and has even threatened to
dump its surplus dairy products in retaliation against EEC
subsidies.
--The EEC is counterattacking with threats to slap duties on
US soybeans and such nongrain feedstuffs as corn gluten feed.
--Producer members of the International Coffee Agreement are
contending for larger shares of the coffee quota; millions of
new coffee trees may soon produce a potentially huge c-)ffee
surplus.
--The French Government is offering below-market financiig for
grain sales that in most years would require cash payment.
--Japan's tight restrictions on farm imports are again under
attack.
International Commodity Agreements
International commodity agreements are under extreme pres-
sure. The International Sugar Agreement faces a.big world sur-
plus largely caused by:
--subsidized beet sugar production in some developed countries;
--increasing competition from substitutes, especially high-
fructose corn sweetener; and
--large production increases stimulated by high world prices in
1980.
The agreement has been unable to keep prices within its agreed
price band.
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The coffee industry faces a huge surplus in coming years as -
expanded coffee plantings, put in after the disastrous Brazilian
freeze of 1975, clash head-on with resurging production from
350 million new trees in Brazil. Consumer demand is virtually
stagnant. The International Coffee Agreement will face increasing
pressure as importing countries are forced to hold even larger
excess stocks.
The International Cocoa Agreement has been struggling for the
past two years with a large cocoa surplus encouraged by the high
prices of the late 1970s. The Ivory Coast, the world's largest
cocoa producer, has refused to join the agreement because it
believes the agreement's price targets are too low. On the other
hand, the US, the world's largest consumer, also has refused to
join because it believes the price targets of the agreement are
unrealistically high. Market prices have been well below the
lower intervention price of $1.02 a pound.
The International Rubber Agreement is less than a year old
and already in deep trouble with weak prices, a fast-growing
buffer stock, and sharp internal disagreement.
Outlook
The price outlook for most agricultural commodities remains
bleak for at least the next year.
World agricultural production will probably continue to
increase in the near future at least as rapidly as it has in the
past. Should the Soviet Union get a good grain crop, world farm
production could soar to new highs. New land has continued to
come into production in Brazil and Argentina, and there is a great
deal more farmland available in such currently remote areas as the
Amazon and Sudan. Most of the world's farmland is also being used
more intensively with higher yielding seeds, heavier fertiliza-
tion, newer machines, and better pesticides. Such new investments
as irrigation wells, sugar projects, and tree planting will add
production in the years ahead. Competition from substitute and
synthetic products will also continue to be stiff, especially in
sugar and hard fibers.
Long-term factors affecting demand are increased population
and economic development. Much of the population growth, however,
is in countries with weak buying power. It will be several years
before the East European economies achieve enough growth to become
good-farm customers again. The Soviet Union will continue to be a
major importer, but its purchases will be erratic. Many of the
less developed countries (LDCs) will increase their farm product
imports in future years to improve their diets--but only after
they have improved their trade balances.
UNCLASSIFIED
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Moreover, the huge consumer markets in the EEC and in Japan
remain largely hidden behind protective walls. These walls may
gradually crumble--in the EEC because of high budget costs and in
Japan because of the overriding need for market access for its own
industrial exports. The process, however, will probably take
years. -
For the immediate future, world farm production will continue
to outstrip effective demand, as most farming resources cannot be
refocused in the short term. Thus, agricultural prices will
remain under severe pressure on a broad front, perhaps for several
years.
Prepared by Dennis T. Avery
x28600
Approved by Emil P. Ericksen
x22186
UNCLASSIFIED
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APPENDIX
Commodity-by-Commodity Outlook
Grain
Total world production of wheat and coarse grains in 1982-83
will increase by nearly 60 mmt over 1980-81, while demand for
livestock feed is slacking off because of worldwide recession.
World rice production continues to set records as additional
farmers adopt "Green Revolution" technology and new varieties.
Carryover grain stocks are projected to reach 238 mmt by the end
of this year--equal to 16 percent of annual consumption, compared
with a recent average of 14 percent and a recent low of 12 percent
in 1980-81.
The short-term outlook for grain prices continues to be
bearish. Stocks will rise this year despite a Soviet crop at
least 40 mmt short of "normal" and a drought in Australia that is
cutting grain production another 8 mmt. Grain prices are unlikely
to recover soon, barring crop disasters in the world next year or
a sharp economic recovery with resurging demand for meat.
Key Players
USSR. The Soviet crop is the largest variable in the world
grain outlook. Soviet grain crops have recently ranged between
170 and 230 mmt.
US. American farmers have made the largest response to
rising world feed demand, raising their annual cereals production
by as much as 100 mmt since 1970. The US is trying to reduce
farmers' plantings through land diversion programs while it still
supports farm prices slightly above market-clearing levels.
Canada. Canadian farmers have increased annual grain output
by more than 15 mmt in the past three years. Government programs
are now aimed at increasing Canada's share of the world grain
market again through aggressive pursuit of long-term sales
agreements and expanded grain-handling capacity.
Argentina increased its grain production by 3.5 mmt over the
past three years, stimulated by a long-term sales agreement with
the Soviet Union.
Thailand planted an additional 500,000 hectares to feedstuffs
in recent years, primarily corn and manioc. The Thais have just
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agreed to limit manioc marketings in the EEC and are looking for
alternative crops or markets.
Rice Producers. Rice production has been rising signifi-
cantly in China, Brazil, Burma, Indonesia, Thailand, and the
Philippines.
Oilseeds
World oilseed production will reach a record high in 1982-83,
7 percent more than last year. Soybean production has risen the
most rapidly in recent years. Rapeseed increases have also been
significant with some increases in sunflower seeds, palm kernels,
and peanuts. Oilseed prices are likely to stay at low levels at
least until the recovery of industrial economies stimulates
increased demand for meat and feedstuffs.
Key Players
US. Annual soybean and sunflower seed production has
increased 16.3 mmt over. the average of the late 1970s.
Brazil. Sharp increases in soybean yields and some increase
in peanut production will raise 1982-83 oilseed production
1-1/2 million tons higher than 1978-79.
Argentina ha" significantly increased soybean and sunflower-
seed production.
China. Emphasis on cash crops has recently raised Chinese
production of soybeans, cottonseed, peanuts, and rapeseed by two-
thirds.
EEC. The Community, under the stimulus of high price
supports, has nearly doubled rapeseed production in the past three
years. Spain, preparing for EEC membership, has more than doubled
its rapeseed production.
Sugar
Recent trade estimates put 1982-83 world sugar production at
97.5 mmt, below last year's 99 mmt record but still well above
expected world consumption. Global carryover stocks currently
represent more than 30 percent of annual demand. Consumption has
increased slowly--about 2.9 percent per year.
Key Players
Cuba. Severely hurt two years ago by an epidemic of cane
rust, Cuba's production has reportedly recovered to a more normal
UNCLASSIFIED
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8.2 mmt this year. Cuba remains dependent on sugar earnings and
must export as much as possible.
Australia continues to expand its highly efficient sugar
production in the tropical northern zones.
EEC high price guarantees to producers (currently about
the EEC has pledged
excint1982-83oofdmorevthano6ummt potential
export
to ship no more than 5 mmt).
Coffee
After Brazil's tree-killing frost of 1975, coffee prices rose
to record highs and sent the world on a coffee-planting binge.
Now the expanded plantings in such countries as Colombia,
Indonesia, and Ethiopia are running head-on into the expected
Brazilian recovery. The coffee market was temporarily saved by
another, milder frost in Brazil which cut production from 33 mil-
lion bags in 1981-82 to about 17 million this year. Even so,
the International Coffee Organization had to impose three quota
cuts during the past year to keep the price above the minimum
$1.20 per pound.
Demand has been declining slightly despite the low prices.
Next year, with Brazil likely to produce more than 30 million
bags, and even more (high-yielding) new trees coming into full
production in other countries, coffee prices will be under
tremendous downward pressure.
Key Players
Brazil. Brazil's coffee year is different from that of other
producers: the US Department of Agriculture estimates Brazil's
production: 1981-82 (last year) 33.0 million bags; 1982-83
(this year) 18.0 million bags; 1983-84 (next year) 30-35 million
bags.
Colombia. Recent production is up nearly 50 percent to
13.5 million bags--mostly the higher valued mild types.
Southeast Asia. Formerly bit players, producers in the region
have nearly doubled their production since the mid-1970s:
Indonesia has the largest plantings with India, the Philippines,
Thailand, and Papua New Guinea also making large proportional
gains.
Africa. Ivory Coast, Kenya, and Ethiopia have increased
output. Angola and Uganda, on the other hand, have lost signifi-
cant production because of internal strife.
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Central America. Costa Rican production is up, but produc-
tion in other Central American countries is stagnant or declining
owing to coffee disease problems and political instability.
Cotton
Slack demand from recession-hit textile industries and
continued expansion of Asian cotton production has softened world
cotton prices. While US producers cut 1982 plantings sharply in
response to the lack of price incentives and Central American
producers cut back because of civil disturbances, Chinese, Indian,
Pakistani, Brazilian, Australian, and Burmese producers expanded
sharply. This trend continues a long-term shift of cotton produc-
tion to LDCs. Prices may strengthen with economic recovery in the
industrial countries.
Key Players
US. Long the world's cotton production leader, it has now
been surpassed by China and the USSR.
China. Cotton output has risen nearly 50 percent in the past
three years to 4.5 million bales. Both plantings and yields are
increasing.
Pakistan. Much higher yields have increased production
42 percent in two years.
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