The Agricultural Forum 2002: Prices, Policy, and the WTO

1
The Agricultural Forum 2002Prices, Policy, and
the WTO

• Persistence of Protectionism Effects for
  Competitive Nations
• Decio Zylbersztajn
• Marcos Sawaia Jank
• André Meloni Nassar
• University of São Paulo, Brazil
• School of Business, Economics and Accountancy
• PENSA - Agri-Food Business Program

2
Objectives

• Impacts of agricultural protectionism
• traditional and non-traditional impacts in
  developing nations
• Dimensions persistence and change
• - Strategies of private players
• - Enforcement of WTO agreements

3
Structure

• Objectives
• Competitiveness of Brazilian farm sector
• Traditional impacts of protectionism
• Second-order impacts of protectionism
• Incentives (persistence)
• Conclusions

4
Evolution of Brazilian Farm Sector

• Competitive costs of production
• Significant agricultural frontier (low cost)
• Production efficiency
• Rapidly increasing yield
• Decline in infrastructure costs
• Exports potential
• Traditional commodities soybean, coffee, sugar
  cane, and orange juice
• Diversification meat (beef, poultry, and pork),
  alcohol, dairy, and corn

5
Evolution of Brazilian Farm Sector

• Are there real changes in LA agriculture?
• Traditional variables investments in RD, new
  role of government, deregulation, infrastructure.
• Also new profile of farmers, new financial tools,
  world networks

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US/Brazil Soybean Average Costs (USDA data)
Fixed Costs
Operating Costs
Total Costs
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NEW BRAZILIAN AGRICULTURAL FRONTIERS
Brazilian Cerrados ? diversification from
beef/soy model to corn, cotton, poultry, pork,
dairy, and coffee
46 of the Cerrados (230 million acres) are
suitable for large-crop production
Source FAO / SIFFERT
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Brazil offers worlds greatest geographic
potential for agricultural expansion, with
favorable climate, soil, and topography.
AGRICULTURAL FRONTIERS IN BRAZIL
Belém
Source FAO (1) Forested (2) Unforested
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Productive Efficiency
Since the seventies, the yield has doubled in
grain production
Source IBGE, CONAB
10
Declining infrastructure costs (USDA data)
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Dynamics of Agribusiness Exports

• Agribusiness exports ? US 22 billion per year
• 40 of all Brazilian exports
• 4th largest world exporter (3.5 of world total)
• Export focus ? processed commodities

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Impacts of Protectionism

• Developing countries macroeconomic reforms
• Promote capital inflow (Govt. reputation)
• Incentives to exports
• Result from fiscal and monetary responsibility,
  debt management, tariff reduction (50 to 14)

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Impacts of Protectionism

• Protectionism over supply the agricultural
  commodities market
• International prices
• Exports value
• Farmers income

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Second Order of Negative Impacts of Protectionism

• 1) Distorts the FDI flow in agribusiness sector
• Firms in protected markets have no incentives to
  invest in emerging and competitive markets
• Emerging markets became a basis for origination
• Instead of a basis for origination and processing
  
• International firms in emerging markets focus
  only on domestic purposes
• MNC investments in emerging markets dilemma
  (enjoy protectionism at home)

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Second Order Negative Impacts of Protectionism

• 2) Developing countries to export only bulk
  products
• Green coffee x roasted coffee
• Tarifary escalation
• Brazilian food processing increases productive
  capacity abroad
• Brazilian orange juice firms in American market

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Forces Inducing the Change

• WTO Redefinition of property rights of access to
  markets.
• Changes in domestic subsidy policies
• Capacity to enforce rules
• Dispute resolution system

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Forces Inducing the Change

• MNF Interest groups. Importance of private
  strategies.
• Enjoy benefits from protectionism.
• At the same time, show clear signals of new
  strategic position.

18
Forces Inducing the Change

• Evidences
• Doux bought Frangosul in Brazil
• French beet sugar companies bought 6 sugar mills
  in Brazil in four years.
• Top 4 crushers own 45 of crushing capacity in
  Brazil (Bunge, Dreifus, ADM, Cargill)

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Forces Inducing the Change

• Uruguay Round Agreement on Agriculture and the
  Cairns Group.
• Agricultural policy inconsistencies in the
  developed world.
• Concentration of subsidies in the hands of a
  small group of beneficiaries.
• Benefits do not reach the target. Capture
  problem.

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Forces Inducing the Change

• Growing international pressures
• Bilateral and multilateral negotiations
• Ethics, fair trade, political turmoil
• Visible adjustments in some developing countries

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Forces Inducing the Change

• New domestic pressures
• Budgetary and political forces
• Macroeconomic adjustments in EU, JPN, and US
• Enormous source of instability for US partners
  (political and economic)

22
Forces Inducing the Change

• Internationalization of agribusiness
• Poultry industry
• International migration of farmers (global
  farmers)
• New paradigm (Dutch, US farmers in Brazil)
• Land and labor costs
• Environmental restrictions

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Forces Inducing the Change

• Macroeconomic adjustments
• Decline in land prices
• Redefinition of credit system
• Increase in domestic demand
• Logistics enhancement
• Global input industry
• Managerial improvement
• Marketing capabilities
• Farm credit improvement
• Positive image with urban population
• (Pessoa and Jank, 2002)

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Forces Inducing the Change

• Competitiveness in Brazil is not only
• Low labor costs
• Effect of devaluation
• Lack of environmental restrictions
• This is no longer true!

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Inefficient by Design

• Reasons to keep sub-efficient goals?
• Distortions are well known.
• Political market (role of constituents).
• Institutions are not designed to be efficient
  (Williamson)
• Explains the persistent suboptimal institutional
  architecture.

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Persistence (Inefficient by Design)

• Agricultural interest groups (US and EU lobby)
• The argument for food security
• Quality standards and food safety
• Characteristics of agriculture in developed
  countries
• Agricultural non-trade concerns (NTC)

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Persistence (Inefficient by Design)

• Characteristics of agriculture in underdeveloped
  countries
• Food dependence
• Trade preferences
• Technicians engaged in protectionist programs
  management (Krueger)

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New Paradigm

• Protectionism is difficult to maintain as it is.
• Agriculture is still based in the Taylorist
  model.
• Look ahead to check how agribusiness is changing
  how groups of interest are affected by
  protectionist measures.

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Conclusions

• Signals show changes in areas of origination
• US farmers face a difficult decision
• Learn how to operate in opened markets
• Build new paradigms in their agriculture sector
• Watch changes in countries of the world (USDA
  persistent mistaken forecasts)

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Conclusions

• New paradigms in agriculture
• build international networks
• invest in knowledge
• completely unexpected new markets
• co-specialization
• capacity to coordinate agribusiness chains