Agriculture Around the World

  • Agriculture Around the World

Vaibhav Tandon looks at the state of global agriculture, in the wake of advancing trade protection.

Sunday morning coffee conversations with my wife sometimes pivot around post-retirement plans, even though I’ll be working for another three decades. Most of those conversations involve farming as part of our lives after retirement. For my wife, farming represents a simple, bucolic ideal where days are slow.

But for many around the world, farming is a serious business. Not only is it vital to food security, but it also represents a sizeable share of some nations’ gross domestic product (GDP). Globally, the industry is valued at around $12 trillion by The Business Research Company. But agriculture has been the focus of a number of recent trade restrictions, creating doubts for both producers and consumers. Some perspective on this critical economic sector is therefore warranted.

The share of agriculture in world GDP has steadily declined over the last two decades. Overall, agriculture accounts for only 3.5% of world GDP, down from 8.3% in 1994. As national economies diversify, urbanize and industrialize (a pattern described in Rostow’s stages of economic growth), manufacturing and services rise. In high income countries, agriculture represents just 1.3% of GDP compared to 8.4% in middle income countries and 26.3% in low income countries.

But agriculture still has a strong hold on the hearts and minds of citizens around the world. The farm sector accounts for more than one-fourth (26.5%) of total global employment.

Feeding the population is a basic and central goal of an economy, and having the security to fulfill that goal in all circumstances is elemental. As a result, agriculture punches above its weight in the political arena in countries around the world.

Food also plays an important role in monetary policy. Like energy, food prices (particularly those of unprocessed food) are known to be quite volatile due to food’s perishable nature, high demand and dependence on weather conditions. Huge swings in prices of agricultural products can lead to a change in direction for central banks in emerging markets (EMs) such as India, where the food component alone accounts for almost half (45.9%) of the consumer price index (CPI) basket.

By contrast, the relative importance of food in developed market CPI baskets is quite low, generally less than one-fifth. Yet large price swings can be prove to be a drag or driver of inflation. For instance, in the eurozone in 2014, food prices depressed inflation more than energy did. In Japan, the price stability target is gauged on the CPI ex-fresh food measure and not the overall CPI.

Many countries continue to rely heavily on agricultural exports for economic growth. Agricultural products account for 10% ($1.5 trillion) of total world merchandise exports, with the European Union (EU) as the leading exporter of agricultural products followed by the U.S. EMs such as Brazil and China are also among the leading exporters. The top ten exporters collectively represent around 73% of the world’s agricultural exports.

Food security continues to remain a central issue for a lot of countries. As populations grow, food production must increase to meet their basic nutritional requirements. Food insecurity has often triggered violence and instability in countries. This was most recently illustrated in Venezuela, where a food crisis led to rise in food trafficking, violence and even deaths.

Another challenge for many low- to middle-income countries is finding a balance between food security and foreign access to agriculture markets. Agriculture is perhaps the most heavily subsidized sector in the world. The subsidies are aimed at helping farmers produce sufficient quantities, acquire modern farming tools and techniques and
achieve protection from price volatility. Opening borders to agricultural imports too soon
may leave the domestic industry immature and unable to respond if international sources
are not available.

Subsidies given to the farm sector are often large. In the European Union (EU), expenditures under its common agricultural policy amounted to around €50 billion in 2016 and 2017, equivalent to around 41% of the total EU budget. Adverse weather conditions such as droughts or floods can often lead to escalation of these expenditures by the exchequers.

Politics cannot be separated from agriculture. Farmers are an electorally active population with outsized political power in many countries (Japan’s farm lobby, for example, is a potent force in politics). Lower yields or crop prices are not only hurtful to the farmer’s incomes, but also tend to have a spillover effect on the broader economy, from banks writing down losses on farm loans to broader food shortages.

Policy measures used by various governments to protect or promote their agriculture industries include increased input subsidies (particularly for fertilizer and fuel), preferential access to credit and minimum prices. But tariffs and quotas on agricultural products are used liberally around the world to shelter domestic farmers.

Rising trade tensions globally are a cause of concern for the flow of agricultural commodities. As barriers rise, farmers in the targeted countries may cry out for support, while those who might pick up additional demand scramble to reorient production. In particular, Chinese tariffs on the U.S. soybean crop could bring “serious damage to U.S. farmers” but might prove to be beneficial for growers such as Brazil and Argentina.

Several agricultural products that have been focal points of the spreading trade conflict can’t be easily substituted, though. For example, China will diversify its sources of soybeans, but it is unlikely to fully cease importing from the United States. For those products, higher tariffs almost certainly mean that consumers around the world end up paying more for necessities.

So the atmosphere around farming is quite uncertain at the moment. I mentioned this to my wife during our most recent breakfast chat about retirement. In the end, we may end up staying in the city for longer than we originally thought.