Industry perspective: Grain-based foods in the post-GATT world
April 01, 1995
by Teresa Acklin
The Uruguay Round agreement of the General Agreement on Tariffs and Trade will affect much more than bulk grain trade in the years to come. In a late 1994 speech to the World Grain/Agra Europe conference on GATT, World Grain Editor-in-Chief Morton I. Sosland, described how liberalized trade will influence other sectors of the grain-based foods industry. This article is based on his comments.
My aim is to set out my views on how the Uruguay Round and its aftermath will affect the structure and the well-being of the industry we call grain-based foods. At World Grain, we consider this industry to be made up of three principal sectors: grain merchants, grain processors and food manufacturers.
I want to explore how changes in trade flows and in support programs may affect the future of the three sectors of grain-based foods. We believe all three sectors, regardless of the degree to which they are involved with exports, will be impacted by how this historic agreement influences worldwide and national grain markets.
Even though the GATT accord is generally discussed for its potential to affect export business in grains, its repercussions extend well beyond. Exports of wheat and coarse grains currently account for only 12.8% of global grain disappearance. Yet, it's on that relatively small share of what may be called the total grain pie that most analysis has been concentrated. I emphasize that the other 87.2% of global grain business will also be affected by the Round.
The real issue is the degree to which the Uruguay Round will affect the already-existing trends that are shaping the businesses of grain-based foods. No one predicts the Round will precipitate a revolution by reversing existing patterns for either trade or industry sector performance. This led me to select the trends that I believe ought be in the forefront of the thinking of executives concerned with the various sectors of grain-based foods. These are inter-related to create a three-dimensional matrix of considerable complication but also of importance to understanding the future of our business.
In the case of grain merchanting, the dominant trends are:
The declining role of exports as a source of global grain supplies accompanied by moderating growth in total, not just import, demand.
Increasing vertical integration along the grain continuum accompanied by growing privatization of the trade in once centrally-controlled economies.
For flour milling, the trends I selected are:
Dramatic variations in consumption patterns.
Determining whether recent ebullience in flour exports is for real or an anomaly.
When it comes to end products, I would suggest we look at the following trends:
Price, quality and income levels drive demand, but other forces, like health and nutrition, loom large.
Structural changes within the retail and processing sectors are having a tremendous impact.
I have purposely omitted from this list two trends frequently considered in examining the long-term future of the grain business. One is the inexorable march of population growth, particularly in the developing nations of Asia, Latin America and Africa. The second is the perception that grain production may not be able to keep pace with the rise in people numbers, leading to accelerated trade at some point in the distant future. While no one is more impressed than I am with the driving force represented by expansion in population, I also believe that crop production will be able to keep pace, much as it has in the past several decades.
It is well to remember that science, especially biotechnology, is advancing at an even faster clip than population, and that while global population growth may be slowing to a degree, the progress from science is accelerating. It is possible that scientific advances will not only increase yields, but may lessen the unpredictability of nature, eliminating grain shortages as a source of even short-term trade vitality. This is why I've come to believe that expansion in demand alone must be seen as the important force in the grain-based foods business of the future.
Statistics describing recent global consumption, or demand, growth are not positive. The question here is whether the Uruguay Round's outcome may help to reverse these trends. Gains in demand have slowed in recent years. Thus far in the 1990s, global consumption of wheat and coarse grains combined has increased at an annual average rate of 12.4 million tonnes. With consumption slightly above 1.4 billion tonnes, global demand is rising at less than 1% (actually 0.8%) a year, which is below the current global population increase rate of 1.1%.
While total demand has been growing at a rate considerably less than population, it's impossible to identify a relationship between population and export trade. This season's global grain exports are projected to be down 11% from the start of the 1980s, whereas world population in that period rose 19%.
One of the best things I could say about the Uruguay Round is that it has the potential of restoring a relationship to growth in population and demand for grain, including export demand. This will only happen if the Round reduces and even eliminates mindless barriers to trade that have so long interrupted this relationship.
An assessment like this makes no allowance for the large differences between actual consumption and potential demand. Perhaps one of the greatest contributions of the Uruguay Round, as with previous trade liberalizing agreements, may be to strengthen the economies of developing nations. In turn, this could create the financial resources required to pay for food that is wanted. Here is where the Uruguay Round, with its pioneering attack against food trade barriers, may play a key role. With the Round, economic advances may not, as was so often the case in the past, prompt an immediate drive for self-sufficiency in food production. In a world of liberalized trade, self-sufficiency ought to make less sense economically, or politically.
I hardly need remind this audience that when it comes to the current export trade in grain, the picture is not bright. To what extent the Round has the power to lift trade out of the doldrums is difficult to forecast. There's no question but that a modest increase is not enough, considering the degree of underutilized exporting capacity.
Export trade in grain has quite literally been static since the late 1970s. Combined global wheat and coarse grain exports first exceeded 200 million tonnes in 1980-81, a decade and a half ago. In only five of the 15 years since 200 million tonnes was first reached has the trade aggregate even repeated that figure.
THE ADDED-VALUE OUTLOOK.
In looking across the entire grain spectrum and hoping that the Uruguay Round might restore luster to exporting, it's also important to say that the Round will not deter, and in all likelihood will encourage, the forces accounting for the growing importance of added-value agricultural exports. For the current fiscal year, processed commodities will for the first time account for about half of all U.S. agricultural exports. Most of this booming trade in processed commodities is the handiwork of a group of merchants different from those associated with trade in bulk commodities.
It's fascinating to speculate about how the Uruguay Round may affect this changing pattern of what is exported as well as who is doing the exporting. Ending excessively high supports on grain does not necessarily mean a country will increase its imports of bulk grain; it might, instead, perceive greater sense or advantage in purchasing added-value commodities. This is one of the primary outcomes of privatization. Private importers have quickly grasped the advantages of focusing their business on added-value imports, where margins are wider, customer loyalty is stronger and opportunities to build business seem brighter.
Consolidation and vertical integration have become the hallmarks of the grain business in many areas of the world, particularly in the United States and in Europe, but also in other lands. Vertically-integrated merchants have a built-in bias to encourage trade in processed commodities over bulk grain. While many of these companies fought the good fight for the Uruguay Round largely in the name of liberalizing trade in grain, it is likely that their ongoing focus will be to look to ways to cultivate business in processed commodities, even consumer-oriented foods.
Vertical integration has had a significant impact on the makeup of the grain industry itself. The shrinking number of independent grain merchants have found the number of potential customers reduced. Independent processors also have had to look to grain merchants unaffiliated with competitive processors.
While vertical integration for the most part has occurred within national borders, one senses that the openness encouraged by the GATT agreement may stimulate extension of the integration process across national boundaries. Within the European Union, that already is being stimulated by the “single market” concept as well as the economics of the grain industry.
TRENDS IN FLOUR TRADE.
While processed commodities embrace many different products, I'd like to limit my discussion of the effect of GATT on this sector of the industry to flour milling. This not only reflects my personal bias, but a belief that flour milling provides an excellent paradigm for what the whole broad range of processing will experience in the post-GATT world.
Consumption trends in flour are made extraordinary primarily by what has occurred in the United States. The issue is whether the American experience a sharply rising total and per capita consumption has any chance of repeating in other lands.
It is difficult to say the Uruguay Round will have a significant effect on flour consumption levels. There is one important exception here, and that is in the developing world where the availability of wheat and flour with less restriction and at prices possibly lower than in the past if this is the result of the trade accord may actually stimulate consumption.
Millers of many nations have studied the U.S. experience. Many have heard me speak about it. The point I consistently make is that what has happened in America can be repeated in other countries, if the same combination of influences is cultivated. This is particularly so when it comes to the stimulus that American milling has enjoyed from a government and nutrition and medical authorities dedicated to increasing consumption of complex carbohydrates.
Export flour business means different things to different nations. It is important to the millers of two major trading blocs the United States and the European Union. Even though exports account for hardly 6% of U.S. flour production and the domestic market has been growing at an amazing rate, American millers jealously guard access to export opportunities.
For E.U. millers, export flour business is much more important than to their American counterparts. A rough estimate is that flour exports account for nearly 20% of total flour output in the Union, and, of course, that percentage varies considerably by country. There are large mills in Europe operating totally on export business. Decision-makers in Brussels are concerned with keeping these plants operating.
For reasons having to do with these relationships, the final Uruguay Round largely excludes flour from its impact, except for the limits placed on subsidy expenditures. The required quantity reductions on subsidized shipments do not apply to flour, meaning the E.U. could elect to continue its support of milling by devoting more and more of the shrinking restitution total to flour.
The global flour market over which the U.S. and E.U. millers have fought for decades is amazingly dynamic. Export flour business has held up better than trade in wheat as grain, a reflection of the shift from trade in bulk grain to intermediate and consumer-oriented products. Currently, the E.U. accounts for more than 60% of global flour exports, and the United States is a distant second with a 17% share.
In discussing the forces behind flour consumption, I touched on the main forces that will affect end products. Here is where the Round, if it accomplishes much of what is promised in the way of encouraging economic and income growth, cannot help but have a salutary effect on consumer demand.
Let me close with a discussion of the structural changes that have occurred in the three industry segments I've been discussing and how they may be affected by the Uruguay Round. Commentators on the GATT ought to look to the North American Free Trade Agreement between the U.S., Canada and Mexico as a forerunner of what may happen. Such examination leads me to suggest that structural repercussions of the Uruguay Round may be greater than now expected.
NAFTA went into effect only at the start of 1994. Yet, as a result of this agreement and the implications it had for trade flows, great changes have occurred in the structure of the grain industry in the three countries. These range from the Canadian flour milling industry becoming almost totally owned by U.S. companies to heavy cross-border investments by Mexican companies in the United States. We are also witnessing rapid consolidation of milling in Mexico, in part to assure favorable access to imported wheat.
Trade in bulk grains between the three countries has taken surprising twists and turns. Grain flows have been almost totally opposite of what was predicted before NAFTA went into effect.
Not very often at grain market conferences do we talk much about what's happening in retail food. Yet, this is a matter of importance for the future of the grain business as well as for any analysis of what effect the Uruguay Round may have on the business we call grain-based foods.
A revolution is under way in American food retailing in two ways the emergence of new companies in grocery retailing that utilize totally new merchandising and marketing concepts and the continued rapid growth of away-from-home eating to the point where it currently accounts for 50% of the food market. Even though these forces may be primarily American, there is every indication that these same trends will become powerful, first, throughout the rest of the developed world and then will transfer very fast to developing nations. Even as this retailing revolution appears on the horizon, one senses that the food business in places like central and eastern Europe already is being driven by changes in grocery retailing.
If the driving force in the future is going to be the need to satisfy the marketing, pricing, quality and product requirements of these fast-moving food chains, businesses like grain merchandising and grain processing are going to experience a direct effect from the retail side of the industry. It is also in this arena that the Uruguay Round, offering increased access to world markets and reduced governmental interference with trade, may encourage the expansionist frame of mind of grocery retailers. The promise is of a global food market totally different, mainly larger, faster growing and faster changing, from the national and regional food markets of the quite recent past.
A global marketplace characterized by the economic sense inherent in the Uruguay Round, even with all of its defects, is one that encourages bold moves across borders in products and also by companies and industries. Even if export trade does not greatly change in the wake of the GATT agreement or even declines in importance, it's probable that many businesses will migrate across borders, encouraged by the endless search for investment opportunities and by the promise of liberalized trade. Vertical integration in food and grain may very well become an international phenomenon. Of course, vertical integration will extend across borders. But it's more likely that the companies successful in one nation will experiment with similar structures in many different countries, taking advantage of skills and knowledge of national differences.
The end result in all likelihood will be a structure for grain-based foods early in the next century dramatically different from anything experienced in the 20th century. I hope you agree that this is not just a very exciting prospect; it is a good one, too, holding out much promise for the future of our industry and for the companies that are able to align themselves with this fast-changing structure and market.