Regional Office for Asia and the Pacific

Hiroyuki Konuma

FAO Regional Representative for Asia-Pacific

KEYNOTE SPEECH

by

He Changchui
Assistant Director-General and
Regional Representative for Asia and the Pacific

Delivered at the

AGROCHEM ASIA 2007
“Fuelling Asia’s Growing Food and Energy Needs”

25-26 June, 2007
Sheraton Towers, Singapore




Mr Chairman,
Distinguished Guests,
Ladies and Gentlemen,


Introduction

I would like to thank the organizers of Agrochem 2007, IBC Asia, for inviting FAO to make a keynote presentation at this Conference. It is a privilege for me to attend this timely event that will examine Asia’s growing food and energy needs as both population and purchasing power continue to increase.

All of you may recall that the United Nations’ Millennium Summit in 2000 endorsed Millennium Declaration: Setting out a global agenda for the start of 21st Century to promote human development and reduce inequality. Among the eight Millennium Development Goals, eradicating extreme poverty and hunger is the first and foremost goal to be achieved by 2015. Member countries in Asia and the Pacific region continued to make great strikes at reducing poverty and hungers and improving living standards in the past decades. Despite the most rapidly economic growth in the world and substantial progress in social development, not all countries are in track towards achieving all MDGs; many remain mired in poverty and the region is still home to some 524 million undernourished, accounting for 64% of the total undernourished in the world. Thus, the issues to be discussed during these two days are of utmost importance to both private and public sectors.

As all of you are well aware, prices of agricultural commodities have increased substantially in recent years. After adjusting for inflation, annual world market prices of sugar, rice and palm oil have increased more than 50% since 2001. Annual prices of wheat and soybean oil have increased by more than 30% during the same time. Between September 2006 and March 2007, corn prices surged more than 40%.

Rising oil prices have played an important role in the recent surge in commodities. First, they raise costs of production by increasing the price of fertilizer (especially urea, which uses natural gas as a feedstock) and the price of fuel for machinery. Second, higher oil prices have also spurred demand for alternative energy sources such as ethanol and bio-diesel, which use key agricultural commodities such as sugar, corn and palm oil as feedstocks.

Exchange rates, in particular the weakening of the US dollar, have added to the pressure on agricultural commodity prices. Since most commodities are priced in US$ on international markets, the strength of currencies other than the US dollar make it easier for these countries to afford more imports at the same time that it puts pressure on farmers by reducing the amount of local currency they receive for their output, thus reducing their incentives to increase supplies. This is similar to the second half of the 1980s, when the falling US dollar also contributed to higher commodity prices.

It is not only international commodity prices that have been increasing; domestic markets have experienced similar trends. Bangladesh and Indonesia, for example, have both recently struggled with rising rice prices that have increased hunger and poverty. Higher prices for rice have been shown to lead to poor nutritional outcomes in Central Java, as families were forced to reduce consumption of other foods such as eggs in order to afford the calories that rice provides. Pregnant and nursing mothers suffered from wasting as they reduced their own food intake to protect their children. Despite the mothers’ sacrifice, the children still saw their blood hemoglobin levels decline (as did the mothers), thus increasing the probability of longer term adverse effects on the children’s development.

Long-term population and income dynamics

We are all interested to know whether or not prices will continue to increase. While I do not know the answer to that question, I would like to point out that the recent increases come against a background of prices that are quite low in historical terms. During the past fifty years, growth in food production has outpaced population growth, thus lowering food prices. Coupled with the effects of rising incomes, millions of the poor now have now lifted out of poverty and vastly expanded access to food.

Among the group of 17 major rice producers in Asia, paddy production per person was less than 120 kilograms in 1951. By 1999, it had reached a peak of 167 kilograms per person, despite the fact that population more than doubled during this period. This represents a 40% increase in less than half a century. Because of the rapid growth in food production, rice prices on the world market, after adjusting for inflation, declined by about 80% in US dollar terms between 1980 and 2000. I am sure history will judge this to be a remarkable achievement, made possible by good policies and investments in research, technology, and infrastructure. Certainly the poor people of Asia have appreciated the transformation it has brought to their lives in terms of enhanced food security and improved nutritional status. At the same time, higher yields cushioned farmers against the effects of falling prices.

While this was indeed a welcome development, the challenges ahead are even greater. In 1950, there were only 1.4 billion people in Asia. Today there are about 4 billion, and these people have much higher incomes than before. More people with higher incomes mean substantially more pressure on our natural resource base.

At the same time, there are still more than half a billion people in Asia who are undernourished. Furthermore, population is still growing. Indeed, despite the slowdown in population growth rates in percentage terms, the Asian population is growing more rapidly today (46 million more people per year) than it was in the early 1960s in absolute terms. This annual increase is only slightly less than the peak of 57 million people that were being added every year in the region during the second half of the 1980s. The UN medium variant projection is that the Asian population will continue to increase further until at least 2050, when it will exceed 5.25 billion people.

In addition, China and India, as well as many other countries, continue to grow rapidly. Since most of these countries are still relatively poor, increases in their demand are oriented disproportionately toward products that are relatively commodity-intensive.

Outlook for the future

Does the recent increase in commodity prices indicate that the challenge of feeding the world will be difficult to meet? To some extent, the recent surge in world prices is just part of the normal ups and downs of international commodity markets. Prices sunk to historical lows in 2001/02 for many crops, and we are now witnessing a recovery from those abnormally low levels. Indeed, after adjusting for inflation, the prices of most agricultural commodities are still below the levels witnessed in 1995-96. World sugar prices have declined by 40% from their monthly peak in February 2006 due to increased production, and, after adjusting for inflation, are well below the levels reached in 1995.

Indeed, the OECD-FAO Agricultural Outlook projects that prices will rise only slightly during the next ten years, at a rate that is less than the rate of inflation. The FAO publication World Agriculture Toward 2050 does not project prices, but it is optimistic that the number of undernourished will continue to decline and reach less than 4% of the world population by 2050.

On the other hand, there are many factors that suggest prices could continue to increase further at rates faster than inflation. First, grain yields are still increasing, but the rate of increase has slowed to a trickle. Yield growth is now slower than population growth, despite the fact that population growth is declining, suggesting that technological progress may be slowing down. Growth in adoption of modern rice varieties, for example, has inevitably slowed as adoption rates reach plateaus of 75 to 90 percent in many countries. Unfortunately, continued expansion of area planted is not a solution either, as more land is needed for housing, roads and other crops that are being demanded by consumers. The Asian population is still increasing by more than 100 000 persons every day, and a way must be found to feed them.

The problem of slower yield growth is exacerbated by the changing composition of Asian diets, as increasingly wealthy consumers demand more meat and dairy products. Since it takes several kilograms of grain to produce one kilogram of meat, this will make it even more difficult for farmers to keep pace with food demand.

Besides increasing population, higher incomes, slower yield growth and the changing composition of diets, water scarcity is another source of concern for agricultural commodity markets. Water demand from the industrial and household sectors is increasing rapidly, while groundwater tables are falling in many parts of China and India, putting pressure on farm production costs. Some of the water scarcity is caused by economic growth, but sometimes it is caused by government policies. For example, widespread electricity subsidies in India encourage excessive and wasteful use of water, harming the environment and thus reducing future production prospects. Given increased future water scarcity, the implications for food prices are potentially severe if water management is not improved. For example, under the “Crisis” scenario of Rosegrant et al (2002), rice prices in 2025 are higher by 80 percent compared to a “Business as usual” scenario.

Climate change adds another layer of uncertainty; a recent study on Indonesia from the Proceedings of the National Academy of Sciences found that increased variability of the El Ni?o Southern Oscillation (ENSO) phenomenon in the future will lead to an increased probability of delayed monsoon onset and reduced rainfall that will lead to more variable production with important effects on food security. Furthermore, the region is prone to higher frequency of meteorological disasters such as droughts, floods, cyclones which often have severe impacts on food production.

The Gold Rush of the 21st century

Yet another cause for concern is what I call the “Gold Rush of the 21st century” – biofuels. Seven years ago, there were just 1 million hectares planted for biofuel production. Today, that has increased to 25 million hectares.

If petroleum prices remain high and more ethanol plants are built, demand for sugar and maize will increase, leading to higher prices of these crops unless technology can lower crop production costs per ton. Even if petroleum prices fall, demand for corn from ethanol plants may remain high, as these plants have already incurred the fixed costs of construction and will continue to operate as long as they can cover their marginal costs of production. The problem is exacerbated by large subsidies and tax credits in the United States and other developed countries. If this additional demand for corn and sugar is met by farmers shifting land from other crops, then prices of other foods will also increase.

Even if most of the biofuels are produced outside of Asia, the impact on Asia will be profound due to the globalized and integrated nature of world commodity markets. For example, farmers in northern Bangladesh are now shifting out of wheat into corn as world corn prices soar, making imports more expensive and making corn production more profitable. Thus, factory construction in the American Midwest is affecting the decisions of farmers in one of the world’s poorest countries. Today, we truly live in a global village.

It is not only Fidel Castro who thinks that demand for biofuels will lead to higher world commodity prices. The IMPACT model from the International Food Policy Research Institute (IFPRI) also projects substantially higher prices of agricultural commodities due to growth in biofuels. An analysis from the OECD estimates that if oil prices are sustained at $60 per barrel, prices for sugar in 2014 will increase by about 80 percent relative to a scenario of constant biofuels production, with maize prices increasing by 20 percent. These increases are substantial, especially since the increased biofuels production that would result will raise the share of biofuels in total EU-15 transport fuel consumption to just 6 percent, and less than 3 percent in the USA and Canada. Thus, there would appear to substantial upside potential if biofuels were to become even more important as a source of transport fuel. Indeed, if biofuels were to account for 10 percent of total transport fuel, it would require nearly one-third of all land currently harvested for cereals, oilseeds and sugar in the USA and Canada, and more than 70 percent in the EU-15.

Higher prices will of course help farmers, but there are other effects to consider as well. One study by Senauer and Sur (2001) estimated that a 20 percent increase in food prices would increase the number of undernourished in Asia by 158 million people; thus, the impact of biofuels demand is worrisome indeed. And this does not even take account of the environmental destruction that will occur if more forests are cleared for oilseed production in Brazil and Asia.

Challenges for the future: more research and increased private-public collaboration

Clearly we face enormous challenges in achieving a sound environment and ensuring that affordable food reaches the poor. More money is needed for investment in agriculture, especially agricultural research, which has been shown to be one of the most cost-efficient ways for governments to reduce poverty. And governments must focus the scarce resources that they do have on increasing productivity, as opposed to handing out subsidies that are often biased against the poor and encourage wasteful use of natural resources. But the challenges are so large that the public sector will be unable to do it alone; active participation by the private sector will be essential. The world desperately needs the research capacities and extension skills that are available in the private sector.

Biotechnology is one particularly promising way to improve agricultural productivity, and the private sector has played a major role in this area. Genetically modified organisms, or GMO crops, have received quite a large amount of publicity, and farmer adoption of GMO crops has grown extremely rapidly over the past decade. Most of this growth has occurred outside Asia, but Bt cotton has proved to be a favorite with farmers in China and India, and adoption has been exceedingly rapid. Insecticide use on cotton has traditionally been very high, so this innovation has reduced insecticide levels substantially, contributed to improved human health and a cleaner environment, and raised farmers’ profits. This is truly a major achievement, although it will be a challenge to manage the development of insect resistance.

But we need more success stories like this in the future. Some promising possibilities include golden rice, which could reduce vitamin A deficiency among the poor, and C4 rice, which holds out the promise of higher yields, lower production costs per ton, increased water use efficiency, and reduced nitrogen loads into the environment. But these innovations are still not ready to be tried by farmers. Bt maize will hopefully make a big impact in the Philippines and elsewhere. Bt rice has also made progress, but it has still not been approved for commercial release in China. This points to the need for a comprehensive biosecurity framework that supports the introduction of safe new varieties with the potential for increasing the productivity of farmers and the well being of consumers.

In addition, there are also many possibilities for using the tools of biotechnology that do not involve GMOs. For example, the development of submergence tolerant rice will help many poor farmers who are forced to make a living in harsh environments. This has been developed with modern technology but without introducing genes from foreign organisms.

We desperately need innovations by the private sector that can reach the poor and make them marketable. A professor at the University of Michigan has estimated that the world’s four billion poor have 5 trillion US dollars of annual purchasing power, which constitutes a sizable market. For example, many large multi-national banks are now exploring micro-credit, as they believe that profits can be made. We need the private sector to figure out ways that they can make profits by engaging with small farmers, while at the same time ensuring that these farmers also gain through increased productivity or decreased use of harmful chemicals. Hybrid rice is one potential innovation that will make the agricultural sector more dynamic, and the private sector will have a major role to play in encouraging widespread adoption by farmers. It would be very encouraging if such products could be extended to a wide range of crops grown in different environments. New technologies to manufacture biofuels from cellulosic sources such as switchgrass would be a major contribution to food security. Improved pesticides that are less toxic to humans and the environment should also be high on the list of priorities.

Concluding remark

In conclusion, Asia needs new technologies to improve the productivity of farmers so that they can provide affordable, safe food to the poor. Asia also needs a cleaner environment. There are often tradeoffs between these goals, although this is not always the case. We need new technologies and better products so that farmers and governments have more options to choose from and can assess the tradeoffs within their own political and cultural context. The challenge is for us all to work together to provide these options.

I thank you for your kind attention.