Mattie R. Sharpless
Acting Administrator, Foreign Agricultural Service
U.S. Department of Agriculture
Before the Senate
Agriculture Committee, the Subcommittee on
Production and Price Competitiveness
August 1, 2001
Mr. Chairman, members of the Committee, I am pleased to be here today to discuss the status of the U.S. agricultural export situation, the U.S. Department of Agriculture’s (USDA) strategy for expanding overseas sales, and how coming policy decisions can benefit our food and agricultural sector.
Trade continues to be critically important to the long-term economic health and prosperity of our food and agricultural sector. We have far more capacity than needed to meet domestic food market requirements. To avoid excess capacity throughout the system -- our farmland, transportation, processing, financing, and other ancillary services – we must maintain and grow our sales to customers outside this country. In fact, our system capacity grows faster than the domestic market alone can absorb. Given the maturity of our own food market, aggregate U.S. domestic demand has grown slower than the farm sector’s rate of productivity growth. However, steadily expanding foreign demand – brought on by income gains, trade liberalization, and changes in global market structures – has helped U.S. exports double over the past 15 years to $53.5 billion estimated for the current fiscal year. Clearly, without the offsetting effects of an expanding export market, farm prices and net cash incomes would be significantly lower today.
We are optimistic about the growth prospects for global agricultural trade. During the past 20 years, much of global trade performance was influenced by government policies and actions rather than by economic decisions dictated by the marketplace. These include the collapse of the Soviet Union, the U.S.-European Union (EU) subsidy wars, and China’s shifting agricultural policies. As the world more and more moves away from such state-determined events toward a more open global trading system, U.S. agricultural exports will have a greater growth potential. But, of course, we will need to have both a clear strategy and appropriate tools to achieve this potential.
Export Situation and Outlook
First, let me review the already tremendous importance of trade to our industry, and review performance over the past decade and a half, a time when we established some of the key promotion programs in use today.
Dollar for dollar, we export more meat than steel, more corn than cosmetics, more wheat than coal, more bakery products than motorboats, and more fruits and vegetables than household appliances. Agriculture generally ranks among the top six U.S. industry groups in export sales, accounting for about 5 percent of the Nation’s total exports. Moreover, agriculture is one of the few sectors of our economy that consistently contributes a surplus to our trade balance.
In just the past 15 years, agricultural exports have increased from about 18 percent of producers’ cash receipts to 27 percent today. We conservatively project that by 2010, the proportion will reach 30 percent – a clear measure of the impact that globalization of the food and agricultural systems is having on our producers.
The farm sector’s reliance on exports can be further appreciated by observing the share of production of individual commodities exported each year. This year, we project 53 percent of the wheat crop will be exported, 47 percent of cotton, 42 percent of rice, 35 percent of soybeans, and 21 percent of corn. Moreover, these estimates do not include the quantities of soybeans and corn that increasingly are being exported in the form of livestock products, so their full export percentages are even higher. In 1990, only 1.4 percent of the value of our grain output and 1.8 percent of the value of our soybean output was exported as livestock products. Today, those numbers have grown to 4.3 percent for grains and 5.4 percent for soybeans.
Likewise, many of our high-value products (especially horticultural products) have come to rely on foreign markets for a large share of their production, including almonds (71 percent), cattle hides (62 percent), and walnuts (51 percent).
For both global trade and our exports, the fastest growing sector over the past 20 years has been what we call consumer-oriented high-value products (meats, poultry, fruits and vegetables, and processed grocery products). Our exports of these products are expected to reach a record $22.5 billion in 2001.
Since 1999, these products have been our largest export sector, accounting for over 40 percent of total sales, up from just 15 percent in 1985. Performance has been outstanding for many of these products including meats (beef, pork, and poultry), fresh fruits and vegetables, snack foods, pet foods, tree nuts, breakfast cereals, wine and beer. Of the 20 fastest growing agricultural exports during the past decade, 15 were consumer-oriented high-value products, with pet food leading the list. Pet food sales have grown almost 14 percent a year for a decade and should finish 2001 at a record 1 million tons valued at $1 billion.
Consumer food products not only are fast growing -- but also more resilient to the wide market volatility that affects bulk commodities. During the global financial crisis of the late 1990s, bulk commodity export value fell some 23 percent as both prices and volume declined. In contrast, sales of high-value products, which had 13 consecutive years of new records before the crisis, dropped only 5 percent in 1998 and 1999. Then, in 2000 they quickly resumed growth and soared to new highs in 2001. In fact, sales of many individual products expand every year, and especially to the emerging markets.
This bright outlook for high-value products is also positive for our bulk commodity producers. The sharp expansion in red meats and poultry sales in turn increases overall demand for grain and soybeans needed to produce those products. Since we do not import corn or soybeans, these benefits flow fully to our grain and soybean producers. Likewise, the growing sales of processed food exports require raw farm products that, for the most part, come from our own farmers.
Market ShareAlthough trade has become increasingly important and our total sales to foreign customers have grown, we have not kept pace with our competitors and, as a result, our market share has steadily been eroded. We view with considerable concern this erosion in our share of world agricultural trade. Twenty years ago, we clearly were the world’s export leader, accounting for 24 percent of global agricultural trade. Today, that share has fallen to 18 percent. America’s once overwhelming leadership as an exporter has slipped to the point where our nearest rival, the European Union (EU), is on the verge of overtaking us. In 1999, the EU share stood at over 17 percent, less than one point less than our share. This is in sharp contrast to 20 years ago when the EU was a distant second with 13.5 percent of world exports.
Losing six points over 20 years may not sound like much, but every percentage point loss of market share amounts to $3 billion in lost export sales and a reduction of $750 million in agricultural income. But, the good news is that every percentage point we can recover will add $3 billion in export sales and $750 million to agricultural income each year.
Our examination of the reasons for our erosion in market share suggests several factors have contributed. Most important among these are:
the strong dollar;
aggressive competition; and
over-reliance on mature markets;
Strong dollar. Quite simply, the strengthening of the dollar over recent years has raised the prices of our products relative to our competitors. Moreover, some of our competitors’ currencies have been falling in value at the same time, further widening the price gap. The result is that our products have become less price competitive with similar products of both our in-country and third-country competitors. While a strong dollar does have significant net benefits to the American economy as a whole, it does have a negative effect on export-dependent sectors like agriculture.
The export performance of specific U.S. goods during the 1990s varied depending on the relative exchange rate movements of competitors and importers and on specific foreign market competition. For example, our wheat lost 10.5 percentage points in market share between 1992 and 1998, while our corn lost only 3 points. In contrast, our fresh and frozen poultry exports gained 8 percentage points, while cotton gained 1.6 points during the same period.Aggressive competition. Our competition comes from both "disciplined" and "undisciplined" activities, within a World Trade Organization context. Among disciplined activities, generous domestic supports and export subsidies, especially by the EU, have been especially problematic for our exports. The Organization for Economic Cooperation and Development estimates total EU production supports to be $114.5 billion in 1999, compared to $54 billion for the United States. At the same time, high tariffs in many importing countries have a dampening competitive effect as well. They keep out less expensive products, forcing consumers to pay higher prices. These higher prices not only reduce domestic demand but also stimulate local production, depriving our lower cost producers of export opportunities. With agricultural tariffs averaging 62 percent globally (ours average only 12 percent, for comparison), any significant reduction in tariffs would mean a significant alteration in trade flows, clearly to the benefit of our producers.
We also have experienced increased competition in the form of market development activities. Since the Uruguay Round agreement, our competitors, notably the EU and the Cairns Group, have increased their market development investments by 50 percent to $1 billion annually. In sharp contrast, our market development spending has been virtually flat at about $250 million, and this is a sharp reduction from the early 1990s when MAP funding fell from $200 million to the current $90 million. Moreover, many of the market development activities funded through our programs have remained essentially the same for many years despite changes in world markets and competition. Market development activities are even more critical in today’s consumer-driven marketplace than they were when this was less true 10 years ago.
Over-reliance on mature markets. U.S. exports continue to be concentrated in the developed countries. These are large, slower growing country and commodity markets whose overall import demand growth rate lags that of the rest of the world, the so-called "mature markets." Consider that two-thirds of our exports go to our six largest country markets (Japan, EU, Canada, Mexico, South Korea, and Taiwan). Yet, since the early 1990s, import demand growth for four of these has fallen below the world average, a sharp contrast to the strong import growth posted by the emerging markets in Asia and Latin America. On a commodity basis, our exports typically have been heavily concentrated in slower growing, price-sensitive bulk commodities far more so than our competitors, especially the EU. Their exports increasingly are focused on high-value products for which the global import market both is substantially greater and growing faster.
Taken together, this analysis clearly suggests that the markets we have relied on in the past are fading in relative importance in global agricultural trade. If we are to expand our share of global trade, we must focus more intently on those markets that will increasingly dominate trade over the next decade. That is, we must be forward looking, both in terms of our targets and in obtaining the required tools and resources.
Global Marketing Strategy
We suggest that our role in the Department in restoring our export share involves three areas: substantive progress in trade reform; review and adjustment of our export programs through the current farm bill debate; and, pursuit of an ambitious, newly focused global marketing strategy to gain a 22 percent market share over the decade.
First, we must aggressively seek trade reform to remove market distortions that will allow faster overall growth in trade. The potential benefits of this to us are simply enormous. The President has placed trade at the top of his agenda and set forth critical trade policy initiatives to move us in this direction.
Foremost among these is enactment of enabling Trade Promotion Authority (TPA). It is essential to enable us to pursue trade reform effectively and to level the playing field for our producers and exporters.
The negotiation of a Free Trade Area of the Americas (FTAA) is being reemphasized. It will provide us with much greater access to 450 million consumers (outside the NAFTA countries) whose income will surpass $2 trillion by 2005. Conservative estimates suggest this could boost sales of our products by as much as $1.5 billion annually when fully in force.
World Trade Organization (WTO) negotiations now underway must be given new impetus and brought to a successful conclusion. If successful, total long-term benefits to the United States from eliminating world agricultural policy distortions are $13.3 billion annually. Our producers and the industries they support could see an increase in the value of U.S. agricultural exports of 19 percent each year.
Second, we must ensure our exporters have the necessary tools to capture a greater share of the benefits that will flow from trade reform and the resulting global market expansion. The programs we now operate -- our export credit guarantee, market development and food aid programs -- have served our food and agriculture sector well. But the upcoming farm bill presents an opportunity to review all of our programs with an eye to improving them to meet tomorrow’s challenges and opportunities.
For example, given our WTO commitments and negotiating proposals, are there new, effective approaches to export market development that clearly would not be subject to disciplines under the Uruguay Round Agreement on Agriculture?
Should the new trade title allow the Secretary of Agriculture more flexibility to shift priorities and funds in response to the dynamic world trade situation?
What program levels are appropriate to meet today’s increasingly sophisticated global competition?
Are our aid and development programs still appropriate for today’s conditions, or could they be better designed and targeted?
Are there better ways to use our programs to help speed countries along the development time line to grow their incomes and thus make them better customers?
We look forward to working with the Committee throughout the farm bill process to examine these and other ways in which improvements might be made.
Finally, of course, our international trade and domestic farm programs must be complementary. Programs that may work against one another must be reassessed. It makes no sense to have trade policies and programs promoting farm exports while our domestic support programs inadvertently reduce our competitiveness. It also goes without saying that our domestic and export policy must be consistent with our existing international obligations and, at the same time, give us ample latitude in pursuing our ambitious goals in the ongoing negotiations.
Third, we must sharpen our strategic focus to more effectively capitalize on the trade opportunities offered by fast-growing, emerging markets. But, we must also evaluate the potentials carefully because not all emerging markets offer equal rewards. Our analysis suggests that the most promising long-term opportunities lie in the developing countries in Asia (particularly China and Southeast Asia), Latin America, Russia, and some selected opportunities in Africa and the Middle East. Over the next decade, food consumption in these markets will surge, driven by favorable demographics -- some 600 million new "middle class" consumers with rapidly rising disposable incomes eager to spend on more and better food.
However, these markets are not without risk and surely will not all exhibit uninterrupted trade growth patterns. Even today, we are clearly concerned about the economic situation in Argentina and Brazil. Even though the long-term economic and food demand fundamentals in these countries are strong, and further trade liberalization and market development will make them excellent export prospects, these markets are vulnerable to short-term serious downturns.
In the long run, we argue that gaining access and share in these fast-growing markets, without sacrificing hard won gains in our large mature markets, will prove to be the most effective approach for increasing our overall share of world trade. We must make use of all the tools at our disposal -- our market development, our export credit guarantee, and our development activities -- with each tool appropriately focused on the specific markets that support our exporters as they access these markets, .
Our efforts to develop the Mexican market provide an example of a comprehensive approach. NAFTA provided our exporters with significant opportunities as Mexico lowered (and will ultimately eliminate) many tariffs and other trade barriers. USDA continued aggressive use of export credit guarantees to support sales and, at the same time, encouraged our partners to use their market development funds to educate Mexican buyers about the quality of U.S. products. As a result, Mexico now has overtaken the EU as our third largest market, and is expected to buy $7.4 billion worth of our food and agricultural products this year.
ConclusionMr. Chairman, U.S. agriculture’s strong reliance on world markets for its economic future means there is no question that we must strengthen our efforts to expand export sales. Our strategy focuses on realizing an ambitious trade liberalization agenda and using new and retooled export promotion programs to capitalize on the opportunities offered by significant growth in future world food demand. This approach will be employed worldwide, but with special emphasis placed on the most promising growth markets in the developing world, especially in Asia and Latin America.
First, we know that trade liberalization works. It helps create new sales opportunities as growing numbers of foreign consumers with purchasing power, gain increased access to goods produced in many countries. However, to be fully effective, it also must curb the ability of some countries to distort markets at the expense of others.
Second, strategically targeted export programs work. This is true, to varying degrees, whether it be market development, export credit guarantees, trade shows and missions, technical assistance, or marketing intelligence. With adequate funding, proper execution, and a modicum of patience, export programs and exporter assistance carried out in targeted "high return" markets will enable our producers to capture more of the new opportunities than our competitors.
That concludes my statement Mr. Chairman. I would be pleased to respond to questions you or the members may have.