Trusting Photosynthesis

By: Jan Mazotti Issue: Global Trade Section: Jewel Of Collaboration

Cargill’s Thoughts on the Future of Global Food Production

Trusting Photosynthesis Cargill has a purpose - nourishing people. The company is family-owned, with the exception of an employee stock ownership where over 25,000 employees own about 7 percent of the company. It is a very diversified organization, with a significant scientific component, primarily in agriculture. There are over 1,100 scientists inside Cargill, working on things as diverse as high intensity, all-natural sweeteners – so you can have a zero-calorie drink that is produced with natural rather than artificial sweeteners. There are people working on uses of plant phytosterols for the treatment of cholesterol problems. There are people working on soluble fibers so that you can get your daily fiber in a beverage. All across the food chain, they have people working in research.

But clearly, Cargill is most involved in fundamental food products – the building blocks of our food system. Whether it’s malt for your beer, flour for your bread, sweeteners for your pastries or chocolate for your confections – those are the things that are at the core of Cargill. They are engaged in globally trading a variety of commodities, something of particular importance in this era of energy. They trade ferrous metals, petroleum and coal, as well as electricity, which is an adjunct to trading natural gas and trading coal. They also trade financial instruments and, increasingly, carbon dioxide credits in nations that participate in the Kyoto Protocol. That linkage to agriculture is key to Cargill’s long-term strategy - the convergence of financial markets, agricultural markets, energy markets and the emerging environmental markets.

In the broadest sense, Cargill is engaged in the commercialization of photosynthesis - the conversion of sunlight and carbon dioxide into the products that we all use to support and sustain ourselves.

“We have to think about food and agriculture in its many, many pieces,” says Cargill CEO Greg Page. “Certainly, it is a world of many conflicting views.”

Page describes the Cargill culture as “the world’s largest debating society.” “Within our ranks we have Europeans, who are opposed to genetically modified organisms. We have voices within our company expressing grave concerns about biofuels. We have active debate about everything, and we each arrive at those discussions with our own set of facts,” he says.

In a wide-ranging speech last summer at the prestigious Chautauqua Institute, Page argued that food production is not a single issue, but an interdependent and interconnected set of issues involving the environment, energy, agriculture and, particularly, food trade. In his opinion, solutions are linked, and those who promote simple solutions imperil the world over the long-term. He says, “We should not oversimplify this.”

H.L. Mencken made a great statement in this regard. He said that there is always a well-known solution to every human problem – neat, plausible and wrong. That has never been more true than in the discussion of something as difficult as nourishing the 6 billion people who are so disparately situated across the world.

In his speech, Page emphasized three key points:

Plowing a FieldFirst, there is a convergence of agriculture, food, energy and the environment that can’t be discussed within just one legislative committee. They are so intertwined that they must be discussed holistically.

Second, the world’s need to double food production between now and 2050 is something that we can do. And we can do it without drawing enormous amounts of additional land into production – provided we take the appropriate signals and make the appropriate investments.

Third, free trade is vital both to manage the cost of food and to limit the environmental impact of doubling its production. That means a food system based on trust, much of which has been damaged by the actions of many governments in response to the global economic downturn.

To demonstrate the interconnectedness of the world food system, Page poses three “quiz” questions - none of which I knew the answer to, but then I’m not alone, especially among America’s city dwellers…

What is the interconnection between the unreliability of the electrical grid in India and the price of palm oil?“For those who drive diesel vehicles, in the many places around the globe, the price of diesel fuel is now 80± cents a gallon over the price of gasoline. As the Indian economy has grown and outstripped their electricity generating capacity, companies, to defend themselves, have installed their own diesel generators. The big database service centers, for example, are all run on diesel. The non-transportation use of diesel fuel in the world has spiked dramatically, much of it driven by India because they can’t trust the electrical grid for power. The relative price of diesel fuel worldwide has shot up. However, since biodiesel is made out of palm oil and soybean oil, the price of palm oil has risen. So, if you track back through the steps, as the Indian electricity grid becomes more reliable, you will pay less for your diesel.”

What is the interconnection between farming practices in the San Joaquin Valley of California and the yields in Zimbabwe?

What is the interconnection between Argentine production of malt and the soybean prices for Chinese consumers? (He answers questions 2 and 3 later).

Is the World Running Out of Food?

Trusting Photosynthesis When asked if the world was running out of food, Page answered with a strong “No.” He said, “I think humanity has never been further from famine than it is today.” He said, that the sheer amount of knowledge and capital deployed against hunger and in understanding how plants work allows us to grow, store, process and preserve the products of photosynthesis. He went on to argue that there certainly are issues of cost, particularly for the world’s poor, and that there are huge issues of uneven and inequitable distribution of food. But, he said, in terms of the total products of photosynthesis available to nourish humanity, we are as far from famine as we have been in human history.

Recently the USDA determined that in 2007/2008 there were 989 million people who did not have access to 2,100 calories a day, which is the World Health Organization’s requirement for adequate nutrition, and that filling that gap in caloric shortfall would require 38 million tons of additional food.

To put that 38 million tons in context, the world produces – of the 16 major food crops – almost 3 billion tons. So the shortfall, if we had appropriate distribution, is about 1.3 percent of current production. To put that 38 million tons in another context, this year the United States will convert 100 million tons of grain into alcohol. And so, Page says, “In the total scheme of things, how far are we from famine? A long way, if we elect to be. I think that is important to understand.”

“In the total scheme of things, how far are we from famine? A long way, if we elect to be. I think that is important to understand.”

Next, Page addressed the increased use of foodstuffs to feed and power our world and how Cargill and other producers are going to get increased production of photosynthesis to the people who need it most. “Let’s start with an historical context for food production – those 16 big crops that are the building blocks of the global food system,” he said. He described that in the 1950s, there were 2.5 billion people in the world and 20 percent more land under cultivation than there is today. So, over the last 50 years, “We have taken the population of the world from 2.5 billion to over 6 billion, and we have improved the quality of diet in terms of its diversity and grams of protein available to people. We have done this with 20 percent less land. We have done this before, and now we have to set out collectively to do it again.”

In fact, Page would argue that one of the most important ways to address this is through the signal of price. “One of the best things to come from ethanol has been restoring agriculture to profitability, which has encouraged more capital investment. Long-term, that capital investment will protect us all from famine as we grow the world’s population,” said Page.

He went on, “Price is always at the intersection of supply and demand. In the area of fuel and crude oil, we need to conserve, and when high prices reduce demand for oil we see that as a good thing. I think discretionary use of hydrocarbons – the ability of price to make us all be better conservationists – is a good message. That doesn’t work for food. How many people are in favor of destroying demand for food? Not a good thing when you think about the impact on individuals, particularly those 989 million hungry people in the world. So, we really do not have the choice of using demand destruction to lower food prices. Our only choice is to increase supplies as a way to moderate the rapid increases we have seen in the price of food.”

Food Production in Developing Countries

When asked how developing countries would cope with food production challenges, Page said there was not a simple answer. He prefaced his remarks regarding the countries that continuously suffer significant food shortfalls with one commonality - an absence of property rights. “Sustainable, dependable agriculture depends on investment, and investment depends on property rights,” he said. “At the level of individual farmers, uncertainty about the possession of their land limits their willingness to invest to improve their productivity,” he commented, and “as a result, year-after-year they make shortsighted decisions, sentencing their countries to a doom loop of shortfalls. I believe that the number one thing our multilateral institutions can do is to help create property rights in those countries. That is the way to create sustainable agriculture.” Sustainable, dependable agriculture depends on investment, and investment depends on property rights Page described a recent trip to Zimbabwe (…here is the answer to question #2 of his quiz) where they drove to a farm and found, covered in weeds, a sub-soiler machine. He explained that a sub-soiler was a device that is designed to go three feet below the ground and break up the hardpan that forms in certain kinds of soils. That is exactly what happens in California’s San Joaquin Valley – today one of the most productive farming areas in the world. But in Zimbabwe, a place where, “property rights have been destroyed, this sub-soiler obviously had sat for years, unused.” Page described that the amount of soil that they were farming was getting thinner and thinner every year as the hardpan rose toward the surface. Rhetorically, he asked, “But who was going to make the investment in the equipment to restore that land to full productivity?” He went on, “To me, it was a vivid illustration that, when you destroy property rights, you slowly erode your ability to feed yourself.

Another example from Page drove his point home. He described that in the former Soviet Union, agriculture was decimated after 1990. It was totally decapitalized. Now, as prices come back, Russia has clarified their property rights and people understand what they own. He said, “Last summer, I drove 2,000 kilometers across Russia. It was a revealing trip. One thing I saw everywhere were truckloads of brand new John Deere tractors, along with new grain storage and drying equipment. The recapitalization of Russian agriculture was taking place right before my eyes. To me, fundamentally, this was because they changed and clarified their property rights. If there is a role for multilateral organizations in something that we can all advocate, it is in helping to create property rights. Almost automatically, you will get capital and infrastructure development.”

Why is the Price of Food Going Up?

when you destroy property rights, you slowly erode your ability to feed yourself In 1975, basic food – the 16 building block crops - as a percentage of GDP was 4 percent globally. Over the years, food expenses as a percentage of the world’s income continued to decline. It eventually fell to less than 8/10ths of 1 percent – an 80 percent reduction since 1975. “We all felt wealthier,” Page said. “Agriculture was delivering, but at the expense of very low profitability and under-investment. As demand began to rise, we paid the price for that under-investment.”

corn grainery pour The second thing, Page described, was how governments around the world, in an effort to support prices for farmers, took land out of production. The U.S. and the European Union both had fairly significant land set-aside programs and the U.S. reduced the supply of food in an effort to restore profitability for the farmers. As a result, it lowered stocks to the point that prices rose.

The third factor in rising food prices, argued Page, was a good one: rising incomes. “The world’s poor and near poor have had the best 10 years in the history of mankind, and we at Cargill can see that in their diets. People in developing countries are consuming more meat, milk and eggs – transitioning from a pure carbohydrate diet to one that is much broader and more diverse. We see it in the statistics of country after country. That demand is putting pressure on our agricultural supplies, but people improving their diets is a good thing!”

Another factor Page mentioned was one that “didn’t need to occur.” He said, “Many governments reacted poorly as they saw prices rise. Last year, 29 countries enacted trade barriers for food. As a result, people panicked, and in panic they made irrational decisions. If you are Hosni Mubarak and you have 80 million people to feed, and you get a phone call announcing that your largest food-trading partner has decided to no longer ship you anything – zero – what is your reaction? To feed their people and avoid civil strife, countries like Egypt went out and paid whatever price necessary to gain the food stocks they needed. This wasn’t because the food wasn’t there. It was a reaction to governments halting trade to try to protect their own domestic food price inflation. As a result of government intervention in markets, you had a lot of emotional buying that drove food prices even higher.”

He listed additional factors for price increases include the rising price of energy, which increased the cost of producing and transporting food. Biofuels, of course, also contributed to the demand for crops and severe weather was also a factor.

Is Globalization of the Food System the Culprit of Current Issues?

“There is a lot of talk about globalization in agriculture. Here are a couple of facts that I’d like you to think about,” Page said.

“First, Cargill arguably is the largest trader of grain in the world. Yet, last year we traded less than 1 percent of the global supply of the 16 major crops. In fact, way less than 1 percent. So, yes, we are an important player, but at a very small level.”

He went on, “Depending on the year,only 14 or 15 percent of the calories in the global diet trade across borders. So, 85 percent of the caloric intake of the world is produced where it is consumed – crops grown in the same political entity where they are consumed. Clearly, for agriculture-deficient countries like Egypt, global trade in food is critical to their survival. But, overall, the global food system already is a highly localized business. We have shortages caused by weather that need to be accommodated by global free trade, and we need to exploit comparative advantage in producing different crops.”

Jumping back to question #3 of the quiz, Page said, “Brazilians are enormous consumers of beer. They could grow their own barley and make their own malt, but they don’t. Their climate and soil is better suited to growing soybeans. The Argentines have the other situation. They have a wonderful climate and great soil in the southern Pampas to grow barley. So, in a world of free trade and free trust, the Argentines grow barley, make malt and send it to the Brazilians. The Brazilians use their land to grow soybeans, the very best crop for their soil and their weather pattern. As a result, Brazil is far more competitive. The Chinese, who need to import 35 million tons a year of soybeans, benefit because the Argentines and the Brazilian allow each other to exploit their own comparative advantages. Grow the right crop on the right soil with the right climate; then trade with each other to the betterment of all parties. This is the message that is getting lost in the debate. Everyone can win when we grow the right crops in the right places, but it does require an enormous amount of trust.”

Page went on to describe how Saudi Arabia had exercised “political bravery” in relation to food production. In fact, Saudi Arabia announced that it would discontinue the production of grain over the next nine or 10 years. Page said, “They looked at the drawdown in their aquifers that has been required to sustain their grain industry and decided it was irresponsible to continue to use a precious, non-renewable resource like water to grow crops they could buy far more cheaply from the Canadians. That is an act of faith in the global food system. The Saudis, for the long-term security of their country, have taken the step of not growing their own food. I think we will see more of that, despite the cost of transporting products.”

“The environmental impact of failing to trade can be dramatic.” Page went on. In terms of transportation costs, the single largest use of hydrocarbons in transporting food is bringing your food home from the grocery store. He said, “It takes only a single gallon of fuel for Cargill, or any other grain company, to transport a ton of food 2,500 miles in an ocean-going vessel. If you brought home 100 pounds of food on every trip to a grocery store four miles from your house, you would burn 10 gallons of gasoline per ton of food. With that amount of fuel, we could send a ton of grain all the way around the world. My point is that focusing solely on food miles can lead us to the wrong decisions. And further, by not planting the right crops in the right soil with the right climate, we end up using more land – therefore, less land for wildlife, less land for recreation.”

Page concluded with a quote from Libanius, a 4th century philosopher… “God did not bestow all products upon all parts of the earth, but distributed gifts over different regions to the end that we might cultivate a social relationship, because one would need the help of another. And so God called commerce into being, that all might have common enjoyment of the fruits of the earth, no matter where produced.”

Greg Page is Chairman and Chief Executive Officer of Cargill Corporation.