Hope for Our Planet: How a Resilient Global Food System Can Feed a Growing World
October 11, 2014
Rabobank, Duisenberg Lecture
David W. MacLennan, Cargill President and Chief Executive Officer
Good afternoon everyone. I’m honored to have this opportunity to speak with you today, and to be here at Decatur House, given its history. Benjamin Henry Latrobe – America’s first professional architect – apparently designed the home to be “fit for entertaining” and it’s wonderful that we can still carry on that tradition today.
At Cargill, we recognize the Duisenberg Lecture, and the studies Rabobank publishes each year in connection with the IMF and World Bank meetings, as occasions when important and provocative thinking about improving global food security is advanced. We appreciate being asked to add our perspective.
First, a quick word on our relationship with Rabobank. The bank is an important source of funding, derivatives and settlement lines for us in multiple geographies. But we also look to Rabobank for more than credit and banking services. We value Rabobank’s insights into the global farm and agribusiness sector and have turned to the bank for informed external views of the industry.
We are also a long-time partner with Rabobank in the Latin American Agribusiness Development Corporation, an organization that finances small- and medium-sized agribusiness projects to promote economic and social development in Latin America. This has been a very successful venture in many dimensions and provides a case study in the benefits of treating agriculture in emerging economies as a business rather than as a development project.
The work we do at Cargill provides us with insight into the complexity of producing enough food, feed and fuel for the world’s growing needs. I’m going to talk today about why we at Cargill are optimistic about the global food system’s ability to meet the demands that will be created by a more populous, prosperous world, even in the face of a changing climate. First, though, let me provide some information about Cargill.
At Cargill, we are engaged every day, all over the world, in the workings of the global food system. We move food and crops from times and places of surplus to times and places of deficit. This core grain and oilseeds trading activity makes up about a quarter of our business.
We also work with farmers all over the world – providing farmers at all scales of production with a variety of services and with access to markets for the crops and livestock they produce. We also produce a variety of foods ourselves. Among them are cocoa and chocolate, malt, flour, salad dressings, vegetable oils and poultry, beef and pork. In addition, we trade ocean freight, coal, electricity, natural gas, petroleum, iron ore and basic metals. The prices of these commodities have a dramatic impact on agriculture and are therefore very much a part of the interdependencies of the global food system.
Our company will be 150 years old next year. We are still owned by the family that founded the business with the purchase of a grain warehouse in Conover, Iowa in 1865. Today we employ about 143,000 people across 67 countries.
Cargill’s commitment to Corporate Responsibility
An overarching goal in our business is to operate in a responsible way across the agricultural, food, industrial and financial markets in which we participate. Throughout our history, a strong commitment to ethical conduct has shaped the way we do business. We’re proud of this legacy and grateful to our employees for always remembering that it’s not just what we achieve, but how we achieve it, that matters most.
All of our stakeholders – our own employees, our business partners, our customers, governments in the countries in which we operate and non-governmental organizations with interests in social and environmental issues – all demand greater transparency about where and how the raw materials we source, process and trade are produced. All of our stakeholders want assurances that every participant in the supply chains in which we are involved is acting in a responsible and sustainable manner.
We are embracing the challenge to ensure more responsible supply chains. That’s why I was in New York last month at the U.N. Climate Summit to sign the New York Declaration on Forests, committing Cargill to do more than we are already doing to reduce deforestation associated with agricultural supply chains. And in palm oil we announced a new commitment to move to zero deforestation of valuable forests – High Carbon Stock and High Conservation Value forests – both on our own plantations and in our third party supply chain.
With respect to climate change, I believe there are encouraging signs that the private sector is committed to meaningful action. It is no longer only pressure from customers, governments or activists that is motivating change.
Cargill sits in a unique position in the middle of supply chains, between producers and processors, growers of food and consumers of food. With this unique position comes great responsibility – the responsibility to be actively, productively engaged in figuring out how to feed a world on its way to 9 billion increasingly affluent people, in an environmentally responsible way -- and in the face of a changing climate.
The Complexity of Food Security
The global food system involves multiple and interdependent parts. Having all these parts working together is complicated and affects food security.
We see the challenges to global food security in these six areas:
- Increasing global consumption;
- Changing consumption trends based on income growth;
- Increasing demand for arable land for renewables and, in particular, determining how much the global fuel system will need from the global food system;
- Government policies that inhibit trade or limit productivity;
- The impacts of a changing climate; and
- Low productivity in areas with high-potential natural resources for food production.
Sensible approaches to improving global food security need to recognize the interconnections among these parts and address the challenge holistically. As I said at the outset, we are optimistic about the ability of the world to feed itself. We are by no means complacent about the challenges, including the challenges added by a changing climate. But we think there are many reasons to be hopeful. Let’s start with supply and consumption.
Global production and consumption
The world’s farmers already produce enough calories to provide adequate nutrition for all, even as they have responded to demand for crops for non-food uses. Production of the 16 key crops that are the building blocks for the global food system has more than doubled in the last 37 years – and with only a modest increase in acres or hectares under production. Yield improvements have been the primary driver of this increase. And the advent of biofuels has helped recapitalize agriculture, improving returns to farmers and encouraging more production.
As a result, even with rising consumption – doubling the annual growth rate from 30 to almost 60 million metric tons – production has kept pace. In fact, looking at September’s global grain and oilseed supply and demand tables from USDA, we see world stocks in crop year 2014/2015 strongly restored from painfully tight levels two years ago, even crossing the boundary to modest OVER-supply compared to long-term averages (on a stocks to use ratio basis).
At least in North America right now, a more pressing problem than production is transportation. Congestion in the U.S. rail system is hampering farmers from moving record harvests to market. Spillover demand for those seeking alternatives to rail is also creating record high need for barges down the Mississippi. We often only think of infrastructure as in issue in developing countries, but we need to pay attention to the issue here in the United States as well. Climate change is likely to only increase the demands on moving food and put more pressure on the system. We need to improve the resilience of these assets.
So, at Cargill we believe the world can produce enough food to feed everyone, but we still have 800 million undernourished people in the world, mostly in developing economies. What are the prospects for them?
Growth in low-income countries
The good news is that the percentage of the world’s population living in extreme poverty is declining. The economists in our grain business are always looking at demand pull and where future growth will come from. The stunning growth we see is in low-income parts of the world; all these countries are unified by demand pull and expansion of GDP.
The poorest parts of the world are growing six times faster than the richest part of the world. (We set China’s income level as a benchmark. And 92 countries -- or 70% of world’s population has per capita incomes lower than China’s. Those countries are averaging 7.5 percent growth, compared to 1.9 percent growth for the affluent countries (albeit at a much lower average income.)
And these lower income countries are making the transition from rural to urban. In 1950, 30% of the world's population was urban; today, 54% of the world's population is urban. The urban population is expected to grow, so that by 2050, the world will be one third rural and two-thirds urban. In just the next decade, the world’s cities will gain some 590 million people, with cities in China and India leading the way.
Urbanization of this sort is a very commodity-intensive process. And a key question all these developing economies will face is how they can develop enough off-farm income (jobs in the city) to support a viable agricultural sector and the inevitable consolidation of rural lands and the resulting urban migration.
The rise of the middle class
Commodity consumption has substantially increased in the past when household incomes in developing economies approached “middle class” levels. The size of the middle class (defined as daily expenditures between $10 and $100) in emerging markets has grown massively.
The world has gone through a big shift from the lowest income levels to the $2,000 to $3,000 annual income level over the past ten years. Over the next ten years, we expect to see an ever greater move further up the income chain and particularly important to food demand is the population growth within the $2,000 to $10,000 income group.
Additional income means higher consumption, of both raw and finished products.
If we look ahead to the income forecast for 2023, we expect a massive spike in the $5,000 to $6,000 bucket. At Cargill, we look at what that income does in terms of diet.
Food consumption vs. income
Today, two-thirds of the world’s people have incomes below $2,000. That means about 4.5 billion of the world’s 7 billion people are relying primarily on grain for their diets.
At incomes above $2,000 a year, dietary expansion starts to happen. People eat less grain and more meat, vegetable oils and sugars.
And in any part of the world, when per capita incomes exceed $5,000 annually, the whole crop production system is transformed. Now most of the grain farmers produce is not used directly for food but rather for animal feed. In short, the whole food system becomes more meat-destined than grain-destined. For all crop materials globally, about 55 percent go to food consumption, 40 percent to animal feed and 5 percent to fuel.
Another factor impacting production and consumption is photosynthesis-based fuel production.
Biofuels have been a net positive for food security as they have led to recapitalization of agriculture after decades of decapitalization. That makes us better able to deal with weather events -- if there are appropriate circuit breakers for our biofuels policies.
Where biofuels mandates exist, we believe government policy should include mechanisms to lift these mandates in times of agricultural market stress, so that the market can direct short crops to those sectors where they are most needed.
Climate change and food security
We also believe that everything that is challenging about feeding the world in a responsible way becomes more complicated in the face of uncertainties posed by climate change. Several recent studies – including reports this year from the Intergovernmental Panel on Climate Change, the National Climate Assessment and the Chicago Council on Global Affairs – all project climate change to impact agricultural production and food security.
Regardless of what one believes about climate change, its causes, and our ability to temper unwanted climate effects through mitigation and adaptation, it would be arrogant to dismiss the projections in these studies lightly. Among the new climate change studies issued in the last several months was one commissioned by a group of business leaders. This group, called Risky Business, focused its study on the economic risks presented by climate change to various sectors of the U.S. economy, including agriculture.
My colleague, Cargill’s executive chairman, Greg Page, participated in this group as a member of a bipartisan Risk Committee. The Risk Committee’s role was to review the analysis of the projected economic impacts and share key findings with business leaders and policymakers.
Their aim was to get business leaders to take note of the risks presented by a changing climate and begin to treat them as risks to be managed and mitigated just as they would manage and mitigate risks in other areas of their business. I applaud Greg’s involvement in this project, which provoked harsh criticism from some quarters, but which I believe has helped start important conversation in the business and ag communities on a highly charged topic.
The Risky Business report concludes that the U.S. economy could face significant and widespread disruptions from climate change unless U.S. businesses and policymakers take action to reduce climate risks. The report also finds that the most severe risks can still be avoided through early investments in resilience and through action to reduce the pollution that causes global warming.
With respect to agriculture, the report outlines the shifting agricultural patterns and crop yields we can expect with a changing climate. These include longer growing seasons and resulting gains for farmers in Northern latitudes, offset by losses related to intensifying heat and drought in the Midwest and South.
In particular, the Risky Business report estimates that – absent adaptation in the agricultural sector – U.S. production of corn, soy, wheat and cotton could decline by 14 percent by mid-century and by as much as 42 percent later in the century as extreme heat spreads across the middle of the country.
The report also projects some nearer term benefits for agricultural productivity and crop yields in the upper Great Plains, which would initially benefit from warmer temperatures and carbon fertilization.
What these projections do not take into account is the proven adaptability and resilience of the world’s farmers. Those of you who work regularly with farmers know that they are the consummate optimizers. With each new growing season, they weigh multiple variables – expected growing conditions, trends in commodity prices, movements in credit markets, the availability of new hybrids and varieties to plant, and new technologies to use on their farms. They then make decisions about what and how much to plant to get the best return on their investment and effort.
But modeling how farmers might adapt to a changing climate, and what those responses might mean for agricultural production, is extraordinarily difficult. That’s particularly true the farther you get from the baseline.
We believe that in the face of a climate that may become warmer, wetter in some places, drier in others, and more prone to extremes everywhere, farmers will respond as they always have – they will adapt. And we can expect certain responses:
- Changes in the number of crops per year;
- Changes in crop phenotype;
- Changes in crop rotation; and
- Potentially breakthrough advancements in genetics beyond the typical trend growth.
Policies to create a more resilient global food system
Improving global food security in the face of climate change will require us to sustain the productivity gains crop and livestock farmers have been delivering historically and create a more resilient global food system. So what kind of policies will we need to get there? Let me cover four solutions that Cargill believes are vital.
First, we need to honor the economic principle of comparative advantage and enable trust-based free trade. Farmers will produce the most food in the most economically and environmentally sound ways if they can plant the crops best suited for their growing conditions and trade the surpluses.
Today, about 16% of food crosses borders, but that number will increase because populations are growing fastest in the places that are not blessed with the natural resources suited to agricultural production. And if we face climate-related disruptions, trade will become even more important.
Different geographies in the world contribute to either production or consumption based on their comparative advantage. Cargill strongly believes that a global food system based on comparative advantage and trade is not only the most efficient – it is best from an environmental standpoint.
When we are looking at supply, we look at countries with sunshine, good soil, water. Basically where there is a competitive advantage to grow crops and make food. But generally the natural resources conducive to production are not where the people are.
Second, we need to embrace sound science and proven technologies that help increase food production in environmentally sound ways. We cannot turn our backs on science if we are going to feed another two billion people in the coming decades. We must enable the rapid and responsible dissemination and adoption of biotechnology and other agricultural innovations.
There is a vigorous debate underway in the United States about genetically modified organisms (GMOs) and this debate has big implications for food security. More than 30 state legislatures have introduced bills requiring GMOs to be labeled, but only one bill made it to the desk of a Governor this year. On May 8th, Vermont’s Governor signed a bill that will require the labeling of foods entirely or partially produced with genetic engineering sold at retail. This makes Vermont the first state to implement GMO labeling without a "trigger" clause, which would require other states to pass labeling requirements before their own goes into effect.
The Economist had an article several months ago that talked about Vermont as “The little state that could kneecap the biotech industry.” But what caught my eye in the article was a datapoint they featured: that there are 3.1 million global deaths annually from malnutrition (children under five, 2013 estimate) and zero from genetically modified foods.
Public opinion in the U.S. towards genetically modified foods has changed dramatically in the past two years. In a survey in July, fully half of U.S. consumers said that the use of genetic modification to create or enhance food crops was “unacceptable” and one in four said it was very unacceptable, despite the science saying GMOs are safe (including the Center for Science in the Public Interest).
It was interesting to see a couple weeks ago that the shareholders of General Mills resoundingly rejected a proposal to eliminate genetically modified ingredients from its brands. The shareholder proposal originated from the great-granddaughter of the company’s founder.
We at Cargill believe the world has benefitted from the appropriate and well-regulated use of genetic engineering to create foodstuffs that are cheaper to produce and require less water, fertilizer and tillage, resulting in a much smaller carbon footprint and a much smaller impact on the earth's environment. And GMOs will become even more important as we adapt to a changing climate.
Third, we need to make Africa part of the solution. According to McKinsey Global Institute, Africa represents about 60 percent of the potentially available cropland in the world…it is well suited to harvest the fruits of photosynthesis (lots of sun, adequate water and soil). Africa is critical to feeding the planet’s growing population. We have huge opportunity and challenge within our grasp.
But the reality today is that Africa is a net importer of food and agriculture products, despite its vast potential. Domestic food production (from 1961 to 2007) increased only by 2.7% per year, just above the continent’s population growth rate. Many African countries have the lowest agricultural GDP per capita in the world.
To have Africa contribute to food security, appropriate lands need to be brought into production, and existing agricultural land brought to higher levels of production. This has enormous issues associated with it, but we at Cargill feel we have a role in enabling Africa to realize its agricultural potential. And we are increasing our investment on the continent.
And the final solution we believe is central to our ability to create a food-secure world is enabling the world’s smallholder farmers. Let me share Cargill’s view of what smallholder farmers in developing countries really need to succeed.
First on the list is more technology and inputs. Bringing existing technology to parts of the world that are behind is a huge opportunity that can improve agricultural yields and productivity. And by technologies we mean a broad definition that encompasses inputs such as fertilizer, improved genetics and crop protection, as well as storage infrastructure and training in best agronomic practices.
Focusing just on fertilizer for a moment, fertilizer use in Africa is only about 8kg/hectare, the world’s lowest. (The world average is 93kg/ha). Even modest fertilizer would help replenish the soils and increase crop yields dramatically. We have field schools in a number of countries and provide agronomists that aren’t there to tell these farmers how we do it in Iowa….but to help them with their own situation and farm size. And fertilizer is always on the agenda.
A big barrier to the use of fertilizer is infrastructure. Most farmers can’t access or afford fertilizer. Clearly, unlocking the agricultural potential in places like Africa will require the right mix of logistics, infrastructure, input industries, seed companies and fertilizer companies all collaborating.
It’s important to note, too, that bringing the right technologies to developing countries not only increases productivity, but also takes pressure off bringing marginal lands into production in other parts of the world, which usually has negative environmental consequences associated with it like over-use of water and fertilizer.
In addition to technology, smallholders need a clear price signal and functioning markets. 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.
At Cargill we feel strongly about being an advocate for the importance of price and the signal it sends. At a policy level, we need to avoid practices that distort markets through selective protection of either producers or consumers. And we need to support investments that enable farmers to access markets – literally, as in roads, railways and ports – but also investments in processing facilities that create demand for farmers’ output and in systems that enable the power of prices to be broadly and transparently transmitted to all.
Finally, smallholder farmers need property rights and the ability to pledge their property as collateral.
Although Africa has land that can be developed at fairly low cost for agriculture, ownership of these lands lies with the states. Land distribution poses a big challenge (creating conflicts with smallholders who are farming the land but don’t own it.) Many governments have been unable to resolve their land issues, which has limited their ability to improve production and attract private sector investment.
This is an important point because it is essential for farmers – in Africa or any part of the world –to have clarity around property rights. They must be able to own their land and pledge it as collateral if they are expected to reinvest and raise their productivity over time. Establishing the requisite governance and legal systems here may be beyond the reach of the private sector. But the private sector can play a role in helping farmers access credit and capital via their landholdings, which is essential to moving smallholders into commercial businesses.
Collaboration is Critical
There are many challenges that stand in our way as we envision a world that is well nourished. We believe creating a more food-secure world – in a responsible way – is best done by working together.
Clearly multilateral institutions and development banks can take risks that companies cannot and probably should not. But we will still face situations where our roles overlap (At what point is the grain elevator in a port an appropriate common good or a private sector endeavor?) So we each need to play our roles….one which is highly commercial and the other more developmental and infrastructure focused.
Cargill believes that if we have a global food system that:
- Puts food before fuel;
- Prepares for the impact of a changing climate;
- Respects the tenets of free trade;
- Welcomes science and innovation;
- Enables Africa to be part of the solution; and
- Supports smallholders in their crucial role in feeding the world…..a food-secure world will be within reach.
And we are encouraged with the increasing collaboration we are seeing among the public and private sectors to tackle these complex issues. Acting on all these imperatives is best done by working together: government, private sector and NGOs.
An African proverb says it well. “If you want to go fast, go alone. But if you want to go far, go together.”
These challenges are complex and interconnected; not fully addressable by any one entity. But there are many reasons to be optimistic about the ability to feed the world and doing it in a socially and environmentally responsible manner.
Thank you for this opportunity to share Cargill’s views on this critically important topic.