Food Security: Balancing the race to caloric sufficiency with rural sociology

By Greg Page, Cargill Chairman and Chief Executive Officer

Food Security: Balancing the race to caloric sufficiency with rural sociology was presented at the Stanford University - Program on Food Security and the Environment, February 10, 2011. 

Good afternoon. Let me begin with Cargill and the role that we play in food and agriculture, covering the key segments of Cargill’s business. 

The first segment is one for which we have long been known: taking food and crops from times and places of surplus to times and places of deficit. Certainly we are living in one of those moments. Our second business segment is providing farmers with a variety of services and inputs and, importantly, access to markets. Third is our food ingredients and meat business -- everything from malt for beer, to sweeteners for beverages, to vegetable oils for cooking, to a growing list of ingredients for nutrition and wellness. Finally, we have a large risk management business where we trade agricultural commodities, ocean freight, petroleum, natural gas, electricity, iron ore and a list of base metals. The prices of all of these commodities interact with each other and shape the world in which we live. 

Stanford President John Hennessy already shared with you Cargill’s long relationship with Stanford, and Jeff Raikes mentioned Cargill’s relationship with the Gates Foundation. Let me share a bit more about three specific projects we are working on with the Gates Foundation.

Cargill and the Gates Foundation

Jeff Raikes, CEO of Bill & Melinda Gates Foundation and Greg Page, CEO of Cargill, speaking at the Stanford Program on Food Security and the Environment.

The first project is in the Ivory Coast, Ghana, and Cameroon, where we are working to reach out and train 200,000 cocoa farmers. That is a lot of education, and we do it one tribe and one small village at a time. We try to help farmers improve the food safety of their products, and improve quality and storage, which clearly has a benefit for Cargill and our customers later in the supply chain. The second project is the Competitive Africa Cotton Initiative.  After more than a decade of suffering under low prices, cotton farmers in the world are now in the golden era for that industry. Training programs that we are undertaking in conjunction with the Gates foundation are helping 265,000 cotton farmers in Benin, Berkina Faso, the Ivory Coast, Malawi, Uganda and Zambia. This program is going to have a really strong impact when you combine the power and the energizing effect of good price with training. The final project is the South African Soy Value Chain Program being conducted in Zambia and Mozambique. Soy has a great opportunity to enhance not just the caloric content of people’s diets but the protein density as well. We are excited about this project, albeit a difficult one.

Working with smallholders

I believe many people think of Cargill as being the company that works with large farmers. Working with farmers in California and the Midwest -- and on the plains of Canada, Brazil and Argentina -- is an important part of our supply chain. But there is another side to Cargill, particularly in tropical crops, and that is working with smallholders. In Zimbabwe last year, we purchased cotton from 47,000 different farmers -- more than 35,000 of whom received their financing from Cargill.  In Zambia, we purchased cotton from more than 41,000 farmers and two-thirds of them looked to Cargill for seeds and inputs. In the Ivory Coast and Ghana last year, we purchased cocoa beans from almost one-quarter of a million individual farmers. And in Sumatra, we run a large nucleus palm plantation surrounded by 8,000 small holders where we market, process and take to the world their crops in conjunction with Cargill’s crops. We can harvest the logistical advantage of scale by working with a nucleus farm and thousands of smallholders that surround that nucleus. 

The complexity of hunger

Our conversation today is about food security, and in particular, the insecurity suffered by so many. One billion people -- that is the Food and Agricultural Organization’s (FAO) estimate of the number of people who lack sufficient caloric intake on a daily basis.  Where are these billion people? By prevalence, nine of the 10 countries are in sub-Saharan Africa, where the largest proportion of these nation’s populations suffer malnourishment. In sub-Saharan Africa about 38 percent of all children are chronically malnourished. It is an issue of inadequate agricultural productivity, but it is more difficult than that.  Although nine of the 10 countries that have the highest prevalence of malnourishment are in sub-Saharan Africa, the two countries with the largest absolute number of malnourished people are India and China. I think this points to the difficulty of the problem when you consider that India exports corn and soybean protein and China has $2.5 trillion of hard currency reserves. These are not necessarily issues of ability to feed people but a willingness and a commitment to doing so.

Many of the articles you read today I think insufficiently portray the complexity of hunger. I have the opportunity to talk to audiences around the globe on this issue and invariably the first question Cargill is asked is this: Can the world feed itself? The unequivocal answer is yes. Yes now, and yes in the future.

The FAO keeps wonderful statistics. They take the one billion people statistic and break it down country by country. But they go a step further, and break it down by the number of calories per day that the people are undernourished. If you take the two databases and multiply them together you come up with a degree of undernourishment. We converted those total calories into the number of tons of grain required to extinguish that hunger. The answer is about 30 million tons -- or about one-sixth of the amount of foodstuffs that we converted into fuel last year. So did we produce enough calories last year to extinguish hunger in this world? Absolutely. Did we elect to do it? No, we didn’t. This is not an issue of caloric famine -- it is an issue of economic famine. 

In other words, this is not a food supply problem, but rather the lack of purchasing power to pay for a diet. It is an issue of the economic capacity to put enough price into the agricultural system to create sustainable agriculture. Water is important, seed is important, technology is important and agronomy is important. But the fundamental ingredient of sustainable agriculture is an adequate price to reward the farmer for her efforts and provide enough money so she can do it again the following year. 

Rural sociology challenges

What problem are we trying to solve? Are we trying to feed the world as quickly as possible or are we trying to do it in a manner that is consistent with the rural sociology challenges that confront us? I can make a good case that if Africa wanted to feed itself quickly the way to do it would be with scale farming. But if you did that you would be confronted very quickly with a rural sociology problem: enormous rural to urban migration. What we face is the need to keep smallholders on the farm -- despite the fact that they may not be the low-cost producer of foodstuffs -- in order to avoid a rural population migration that would be unsustainable. As a result, the challenge the world faces is this: who is going to pay that rural sociology premium? If it costs more to raise crops on small farms is that burden going to be borne by the urban poor or is there going to be an alternative funding mechanism that allows smallholders to succeed? 

Jeff Raikes of the Gates Foundation mentioned we had the chance to hear about an AGRA project at the World Economic Forum in Davos a couple weeks ago that is being carried out in Ghana. The model is to go to one of the richest parts of Ghana in terms of water resources and soil resources and combine scale farming with smallholder farming. Scale farmers would bring logistical power and quantity, and at the same time help raise the standard of living for 250,000 smallholder farmers who will farm in and around those nucleus commercial-scale farms. The smallholders would benefit from high-quality grain storage, the prevention of waste, and the logistical advantage of moving larger quantities of foodstuffs into Accra and the other population centers of the country. 

That leads us to this question: what is the survival price for a smallholder farmer? If you wanted a family of four on a farm in sub-Saharan Africa to receive an income commensurate with the average per capita income of the urban population, you would come up with a price near $400 a ton. To put that in context, the highest price for maize that has ever been reached here in the United States is about $275 a ton. As you can see, this rural sociology premium to sustain smallholders is not an insignificant amount of money.

Some of you are old enough to remember a famous senator from Minnesota, Paul Wellstone. He and I had different views about how agriculture might be carried out but he was always an eager debater. We had a discussion about his vision for American agriculture. I tell this story because this issue isn’t simply one of sub-Saharan Africa or South Asia. Wellstone’s belief was that a small farmer in the United States should be able to make a living wage. I asked him what his definition of a small farmer was, and he said, “40 dairy cows.” I said fair enough. I asked him to define a living wage, and this was a few years ago, and he said, “$28,000 a year.”  We sat down and with a pencil and came to the conclusion that we would have to raise the price of milk in Minnesota by about 50 percent to reach that living wage. He looked at me for a minute and said, “do that again for 60 cows.”

This Wellstonian principal is one that we face in developing nations, which is, do it again for two hectares or do it again for three hectares. In making these judgments we are going to come face-to-face with reality and the enormity of the task:  how do we achieve fairness between the revenue received by the rural smallholder and the price borne by the urban consumer?  

Agriculture in a state of disequilibrium

We live in a time of incredible volatility, and commodity prices are a reflection of the continuous state of disequilibrium. I am always fascinated by how many stories are written when prices go up 60 percent. But in 2009, when prices went down 50 percent, I didn’t really see a lot of reports in the media. This disequilibrium has occurred in the last two and a half years in both directions and to a degree greater than we have seen at any time in the past.

Today, very small changes in production have an outsized impact on price. Earlier this week the U.S. government announced that the size of the carryover stocks of corn in the United States had gone down by about 1.7 million tons. As a result, the price of corn in the United States, and along with it, the price of wheat and soybeans, went up 3.5 percent. To put that in context, a quantity change of 1.7 million tons in a crop of 300 million tons in this country led to a 3.5 percent increase in the global price of maize. These outsized impacts on price of very small quantity changes are becoming increasingly erratic in the past several years. 

The world stocks-to-use ratio is a number Cargill follows very closely. If you multiply the stocks-to-use ratio by 365 days you can get a sense of how close to the edge we are operating our global food system. Looking back from the ‘80s and through the year 2003, the world operated with fairly robust stocks -- and as a result, we had relatively muted price volatility. But you need to take into account that this was a period where the western world probably did more harm to sub-Saharan Africa and South Asia than any other period in history. Why? Because we refused to allow price to signal farmers in Western Europe and the United States to produce less because we were providing subsidies. The signal of price, which would have been to slow down or stop planting, and to take marginal land out of production, was absent. We continued to produce, and as a result, the world price of grains fell far below the ability of any smallholder to compete. We then shipped those surpluses to developing countries, which then failed to invest in their agriculture for several decades.

About seven or eight years ago, at the real bottom of cotton prices, I had a chance to speak to the Minnesota Corn Growers convention. I always find with audiences it is best to use agricultural examples that don’t apply to them; it really helps the question and answer period.  In this case I used the example of cotton. Here I am in Minnesota talking to corn growers and to my chagrin one of the attendee’s brother-in-laws was a cotton farmer from Plainview, Texas, and he happened to be in the audience. I weighed in on what the American Farm Bill and the subsidization of cotton at 50 percent over the world price had done to our smallholder farmers in Zimbabwe and that it was unconscionable. When the question and answer period started he tackled the person with the microphone and spoke first, saying he refused to take responsibility for the plight of Africa’s poor. I said he was welcome to refuse to take responsibility but it didn’t make it not so.  The question and answer period spiraled out of control after that, but the point is the behavior of governments and farmers in one place  -- through this very interconnected world we live in -- has an enormous impact on the investment decisions and the well-being of people in other places. 

From complacency to crisis

Today, we are lurching from complacency to crisis. In 2009, farmers raised 2 percent more calories than it looked like the world was going to consume and prices plummeted 40 or 50 percent.  In 2010, farmers produced about 2 percent fewer calories than expected when crops were planted and prices are up 80 percent or more depending on the commodity. This may be one case where having a wired and interconnected world has hurt us. The ability of information to be transmitted rapidly and find its way into the purchasing decisions of thousands or millions of consumers is happening today.

If everything you read in the newspaper is that the world is going to have higher priced food -- or it is going to run out of food -- what is the instinct of every household in the world? To purchase more, and we see it in demand. We see it in small restaurants that purchase our vegetable oil in China. Cargill’s truck goes by and instead of buying 5 kilos this week the restaurant buys 10. It is their hedge, and it gets multiplied by millions of restaurants.

I heard this story from the man who was the president of a Chinese food company. He had visited his mother’s apartment and on the floor were four 25 kilo bags of white rice. His mother is 80 years old and lives by herself. He said, “what are you doing with all this rice?” She said that she had read there was going to be a food crisis, the price was going to go up and there was going to be a shortage. He said, “now there is.” 

We can laugh but it is not so much the impact on price that is created by speculation but rather the impact on price that is created by hoarding. Clearly, we have been confronted with hoarding at an individual and household level -- as people who feel at risk double their purchases or in some cases triple their purchases to protect themselves at the expense of the collective good. And we have been confronted with hoarding at a governmental level as exporters close their borders. I think there is a great desire when we see food prices rise to find a single villain, when in fact it is a very complicated problem.

The power of price

Some of the drivers of price are good things, such as the increase in per capita income and the capacity of more people to have a more dense and more nutritious diet. But let me move on to the real issue as it pertains to price. I often say that the rules of agriculture are set by three very stern economists: Friedrich Hayek, David Ricardo and Adam Smith. If you ignore any of the three you will get in trouble. Hayek was the proponent of the behavior changing power of price. I believe the dialog that has gone on in the world of late is that price serves only one role, as a harbinger of inflation. But we get to witness throughout Cargill’s business that it is a signal to producers everywhere to do what we want them to do, which is to grow more. In those countries where actions intervene that price we fail to send that encouragement to farmers.

Four years ago, when the price of food started to go up in Argentina, the government imposed price and export controls on beef. Four years later, the size of the beef herd in Argentina is down 25 percent as the power of price to encourage production – or in this case, discourage production -- took over. We need to be mindful that there is a burden on the world’s poor as price rises but that there is a positive outcome of that price increase and it is signaling the world’s producers to plant more crops. It is interesting to note that it appears the world’s farmers will apply about 12 percent more fertilizer in 2011 than they did in 2009.  If we get any kind of reasonable weather that is going to have an outsized impact on the world’s capacity to grow the calories that we need. 

Honoring comparative advantage

In times of volatility, it is important to remember the law of comparative advantage. Cargill has the opportunity to speak with governments whose response to the events like those we have seen in the last three years is to pursue self sufficiency. If every country on earth tried to pursue self sufficiency there would be less food in the world because we are not equally endowed by climate or by weather to be self sufficient. As a result, the role of trust-based free trade becomes increasingly important if we are going to exploit Ricardo’s comparative advantage. My most obnoxious example is that we have the technology to raise all the orange juice we need for Minnesota, in Minnesota -- we just shouldn’t. It is an exaggeration, but we see this kind of thinking at work.

I was in Saudi Arabia the second week of January. They have finally made the decision to back away from irrigated wheat agriculture. They were using 18 billion cubic meters of water a year: 16 for agriculture and only 2 for all of their industrial and urban use.  By simply making that decision the capacity of the Saudis to extend the life cycle of their aquifer goes up nine fold. By trading with others, and by bringing capital into the Sudan to improve its agriculture, the world is going to be better off. The Sudan will use more rain fed water for crops and Saudi Arabia will preserve its water resources. I think the concept of comparative advantage is obvious but often ignored. 

Another critical factor in food security is rural property rights. If you want a farmer to reinvest in his farm he needs to know he owns it. It seems like a simple principal but it is most often ignored.  A recent article in the Wall Street Journal that said one of the root causes of the protests in Egypt today is the lack of property rights. No better example is needed.

Increased revenue certainty

We have talked about the price required to sustain rural sociology. I think it is important to point out that the three countries that benefited most from Norman Borlaug’s Green Revolution 30-some years ago were India, Mexico and China. In each case they had the governmental and institutional capacity to give some degree of revenue certainty to their farmers. As a result, increased productivity did not lead to precipitous drops in farmer income. I think the policy prescription of that is quite clear for Africa and parts of South Asia. 

I refer to the price needed for smallholder farmers to increase their productivity as a Solomonic price. Governments, particularly in places like Ghana that have the capacity to feed themselves -- as do many of the countries in Central Africa -- are going to have to make the decision about what is the price they want to get to their farmers in order to motivate the behavior needed to raise productivity and yields. That decision is not an easy one as they balance the needs of urban consumers and farmers. But it is a discussion that needs to take place and hopefully multilateral groups, nongovernmental organizations, and others, such as the World Bank, can help in the discussion. 

Open markets

Finally, open markets play a key role in ensuring food security. The ability to harvest the benefits of comparative advantage – literally -- depends on the capacity to have open, trust-based free trade. The role of governments in doing that is significant. And we have seen the other side of it as Russia, the Ukraine and Argentina have turned to embargos as a way to protect domestic inflation and thereby frightened the rest of the world and jeopardized an open market, free-trade based food system. 

Key elements in increasing food security

So in summary, here are the elements Cargill believes are critically important to increase food security. First is the ability to understand the tradeoffs between a fast path to caloric sufficiency and the needs of rural sociology. Second, is that crops be grown in the right soil, with the right technology and relying on free trade so we can harvest comparative advantage to its fullest. Third, is the critical importance of property rights if we are going to get the working capital necessary to encourage further investment in farming. Fourth, smallholders in developing countries need some degree of revenue certainty if we expect them to do what their countries really need them to do, which is raise productivity. Fifth, increased food security requires trust-based free trade that is open and facilitated by all. The private sector has a role in being a strong partner in marketing these crops but we also need to work with organizations like the Gates Foundation. I love the expression “catalytic philanthropy” because it implies that at some point it ceases to be philanthropy at all, it just becomes the success of nations. Public, private, and philanthropic partnerships to address food security can be a powerful force. And finally, we believe there are very important roles for the world’s governments in the creation of infrastructure that is vital to provide access to markets.

I appreciate the chance to share these thoughts with you. I want to end with the one final thought:  I believe fully and completely in the world’s capacity to harvest photosynthesis to feed every single person and to do it at a price that can be borne by all. Thank you.

Note: This transcript is an edited version of the speaker’s delivered remarks. Minor edits were made to improve readability.