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Appendix C Commodity Market Outlook and Trade Implications Indicated by the FAPRI Analysis WILLIAM H. MEYERS, S. DEVADOSS, AND BRUNA ANGEL* Center for Agricultural and Rural Development, Iowa State University INTRODUCTION In this evaluation we use a multinational and multi-commodity trade model to project grain production, consumption, trade, and prices for selected countries and regions for the period 1987/88 to 1996/97. The projections are compared to historical data and are used to assess the grain needs of the importing countries. In evaluating the food requirements, factors such as supply and demand conditions in other countries, world market price for agricultural commodities, economic growth and purchasing power of the importing countries are often ignored. It is important to take these factors into account in assessing the food needs of the importing countries. The trade model used in this study incorporates these factors. The trade models are econometric models consisting of behavioral components of supply and demand for wheat, coarse grains, soybeans, soymeal, and soyoiT for major exporters and importers. Before presenting the results, we briefly explain the structure and components of the model and assumptions used in the projection. The projections are first presented in general terms for wheat, coarse grains, and soybeans. Then a regional analysis is conducted for wheat and coarse grains. MODEL DESCRIPTION The CARD/FAPRI agricultural trade models are dynamic, nonspatial, partial equilib- rium econometric models for wheat, coarse grains (corn, barley, and oats), sorghum and the soybean complex. All four trade models are used in the analysis; however the detailed results are presented only for wheat and coarse grains. The models are non-spatial in that they do not identify trade flows between regions the major concern is to identify net ,,. ~ _ O quantities traded by each country or region. *William H. Meyers is Professor of Economics, S. Devadoss is Assistant Professor of Economics, and Bruna Angel is Research Associate. 98

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While the individual commodity components may be run independently, they are integrated into a larger system with other commodity components through price linkages permitting cross-commodity and cross-country interactions to take place. These linkages between countries and commodities are designed to reflect the simultaneity of the price determination process in the agricultural sector. A simultaneous solution can be obtained to arrive at a consistent market clearing equilibrium for the four commodities. In regions where internal prices are not insulated from the world market, domestic prices are linked to their respective U.S. commodity prices- corn, sorghum, barley, wheat, soybean, soymeal and soyoil. A descriptive econometric approach is employed in the structural specification which imposes few constraints on the parameter estimation. While the functional form of the models is generally linear, fundamental identities and other basic variables, such as relative prices, render the models nonlinear. The models include domestic supply and demand functions for major trading and producing countries and regions. Equilibrium prices, quan- tities and net trade are determined by equating excess demands and supplies across regions and explicitly linking prices in each region to a world price. Except where they are set by governments, domestic prices are linked to world prices via price linkage equations including bilateral exchange ranges and transfer service margins. Where some degree of insulation of domestic prices from external market conditions exists. the free adjustment of trade flows is restricted. The price linkage equation defines the degree of price transmission of external market conditions into the internal system. Bade occurs whether price transrn~ssion is allowed or not. If there is no price transmission, the quantity traded merely adjusts to internal conditions. Figure 1 illustrates the linkages between the four commodity trade models and the regional and country details of each model. The coarse grains model includes corn, barley and oats, while sorghum is modeled separately. Within this group of coarse grain crops (corn, barley and oats) supply and demand of the one or two most important crops in each country or region have been modeled. Net import demand (export supply) of the endogenous commodities are added (with a weight equal to one) to the exogenous net trade of the minor commodities to find the net imports (exports) for all coarse grains. The market equilibrium identity is defined in terms of the aggregate commodity, coarse grains. Coarse grains and sorghum are mainly used as feed and therefore this derived demand is of primary importance. While the portion of coarse grains directly consumed for food compared to total usage is small, the proportion of coarse grains utilized for nonfeed uses is large in Africa. and significant en c] rising in t.h~ F,~19 zing in t.h~ TInit."r] ~t.=t.~e In t.hme" ~ ~ t~ ~ O ~ ~ w ~ ~ ~ ~ ~ ~ v ~ ~ _ ~ ~ ~ ~ v _ ~ ~ v w ~ ~ ~ · ~ ~ ~ u ~ ~ ~ ~ ~ . areas, coarse grain used as food is determined endogenously in the model. The coarse grain model includes 20 countries and regions. In all of them, the demand component is endogenous. In countries or regions where production is important, supply has been endogenized, but in countries with very little domestic production, such as Japan, domestic supply is exogenous. The wheat model is composed of 22 countries and regions. In 16 countries and regions both production and demand functions are estimated. In the Soviet Union, Eastern Europe and Japan, production is exogenous and domestic demand is endogenized. Other Western Europe and High Income East Asian regions each consist of a net import function. Wheat demand equations are usually specified either as total demand (feed plus food) or as food demand only. However, in those countries or regions where wheat feed use is a significant proportion of total domestic use, such as in the United States, Canada and the EC-12, wheat feed demand is estimated separately. 99

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ASSUMPTIONS The macroeconomic, policy, and yield growth assumptions used in the projections are external to the models. Macroeconomic Assumptions The macroeconomic assumptions for the projection were provided by the WEFA Group (1987~. The macroeconomic environment for the next 10-year period (1987/88 to 1996/97) contrasts sharply with that of the early 1980s. Then, low or negative real GDP growth was experienced by many countries. Although still sluggish, the recovery of the world economies from the performance in the early 1980s has a significant impact on the level of demand and trade over the next decade. The growth patterns in the developing market economies are diverse, with some struggling under heavy external debt, and others, like the Asians NICs (Newly Industrialized Countries) experiencing sustained growth. The projection for world economic growth averages 2.8 percent per annum from 1988 to 1992. Significant price declines, Tower interest rates, a cheaper dollar, and Tower oil and commodity prices signify ongoing adjustments in the world economy. The debt crisis and high unemployment in individual developing countries remain as potential problems. The outlook is influenced by assumptions about oil and non-of! commodity prices, international debt, exchange rates, and fiscal and monetary policies. The baseline implicitly assumes that the GATT negotiations result in few changes and that protectionist forces are held in check at their historical level of influence. The projected pattern of economic growth activity in developing market economies is much more fragmented compared to developed economies. Several oil-exporting debtor countries, e.g., Mexico, Venezuela, Nigeria, and Indonesia, continue to stagger under the growing weight of external debt. A reduction in external assets would cushion some of the impact of lower oil prices for the oil exporting countries in the Middle East and Africa, but the bulk of the adjustment is expected to be accomplished through a decline in domestic demand and imports. For the oil importing developing countries, such as the Asian NICs, prospects are good. Lower of} prices, lower global interest rates, and continued expansion of the developed economies combine to boost projected growth above the average for the developing world as a whole. The debt crisis may worsen somewhat in light of a weaker U.S. and world econorn~c outlook. The renewed debt crisis in Brazil could dampen Latin American growth this year. Continuing structural adjustments in most debtor economies and restrained growth are expected. These economies will reduce investment to repay past debts, making new financial transfers to developed countries. Pacific Basin. Countries in the Pacific Basin region are expected to have higher econorn~c growth rates in the projection period compared to those of other regions. Projected real GDP growth rate of the Pacific Basin countries is 5.5 percent in 1988 and increases to 6.0 percent in 1992. The higher economic growth rate of Pacific Basin countries is partly due to their expanding export markets. Since this region is a growth market for U.S. exports, higher economic growth rates in this region should have a positive effect on the U.S. exports. Other Asia and Mididle East. The projected real GDP growth rate for this region is around 4 percent in the projection period. Since countries in this region are net importers of food products, their imports heavily depend on their economic growth. In recent years, some 101

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parts of this region, e.g., India, were profoundly affected by a severe drought. This year, Bangladesh was hit by severe flooding. Latin America. The projected real GDP growth rate in Latin America averages 2.5 percent over the projection period. Economic growth in these countries is plagued by the debt crisis. Other debtors may now follow Brazil's example of interest moratoria, delayed rescheduTings, reduced flows of bank credits, postponed implementation of structural reforms, and more import and capital controls. This continued adjustment to accommodate the foreign debt is likely to restrain economic growth. Africa. The projected real GDP growth rate of 2.5 percent in African countries, is the lowest compared to those of other regions in the world. This Tower growth rate would limit their purchasing power to import agricultural commodities in the world market. Farm Policy Assumptions The Food Security Act of 1985 has reduced world commodity prices and increased trade shares for the United States. The increase in exports were achieved by allowing target prices to decline slowly while lowering loan rates substantially, adopting marketing To an programs for rice and cotton, and conducting aggressive export enhancement programs. It is assumed in this analysis that current programs will prevail and future legislation will continue with the objective of reducing stocks, and remaining competitive in world markets. This implies reductions in support prices and continued use of programs to control production and encourage the utilization of commodities currently in excess supply. Target prices, for most major commodities, were allowed to decline slowly. For example, in the case of wheat, the target price in 1988/89 was set at $4.23 and was reduced to $3.54 by 1996/97. Similarly, the corn target price was allowed to decline from $2.93 in 1988/89 to $2.44 in 1996/97. The baseline assumes a target price reduction of 2 percent per year during the five years following the end of the current farm legislation. For all program commodities, we assume that loan rates will be reduced in 1989/90. In 1990/91, however, cotton, rice, and soybean loan rates will not be reduced, because they will have reached the minimum levels permitted by the FSA85. For feed grains and wheat, however, loan rates are set equal to 75 percent of the average market price for the previous 5 marketing years. excluding the years with the highest and lowest prices. A further qualification is that loan rates may not fall more than 5 percent in a given year. Beginning in 1990/92, the 75 percent rule begins to take effect for wheat, barley, and oats. and loan rates for these commodities increase from 1989/1990 levels. The conservation reserve program is assumed to reach its maximum of 45 million acres by 1990/91. The annual acreage reduction program is gradually reduced over time and the paid diversion is eliminated as CRP expands and market prices begin to increase. A large proportion of U.S. grain exports is under one or more of a variety of government programs, including PL-480, various loan programs, and the Export Enhancement Program (EEP). The EEP is a new program created by the FSA85 that has played a major role in expanding U.S. wheat and barley exports. Under the EEP, exporters receive generic certificates equal in value to the difference between export prices and the accepted bid prices of countries qualified to buy EEP grain. We assume that the EEP and other export programs will be phased out by 1990. As market prices increase and government stocks decline, there is less incentive to utilize export subsidies. It is assumed that the European Community will increase its intervention price only 102

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slightly over the next decade due to a strain on the European Agricultural Guidance and Guarantee fund. The initial prices paid by the Canadian Wheat Board to Canadian farmers are assumed to decline because of the Tower world market prices. Yield Assumptions Production in the forecast period depends on acreage projections and yield assumptions. In most of the countries acreage is endogenously projected; however, yield growth is assumed to be exogenous. More sDecificallv. when yield is not ~ncinF~no',~l~r ~~t.im~t.~H ~ t.r~nA growth rate is assumed. —, 7 ~ o ~ ~ _ _ ~ ^—^ ~ _ _ _ ~ ~ V— _ ~ ~ ~ ~ ^ ~ ~ ~ ~ ~^ COMMODITY MARKET PROJECTIONS The baseline projection (Table 1) was prepared before the onset of the 1988 U.S. drought. The drought will reduce 1988 crop production and increase market prices above baseline levels. Stocks will be reduced more quickly and 1989 planted area will be higher in response to higher prices and reduced U.S. government acreage reduction programs. Most impacts of the drought will have played themselves out by the early 1990s. This study focuses primarily on the 1990-1996 period. That is, most results of this analysis are not substantially affected by the drought (Westhoff et al. 1988~. Real prices of wheat, maize, and soybeans are expected to remain constant or decline over the period 1989/9~1995/96 (Table 1 and Figure 2~. In particular, the real price of maize remains nearly constant, wheat prices decline by 5 percent and soybean prices by more than 8 percent over the period. Thus, the historical pattern of declining real prices for these commodities continues, but at a somewhat slower rate than during the last decade. From 1989 to 1995 world wheat production increases by 12.5 percent, feed grain produc- tion by 13.7 percent, and soybean production by 12.5 percent. Consumption is projected to grow at a slightly lower pace except for soybeans, and ending stocks are projected to remain stable or increase. The increase in carryover stocks from 1989 to 1995 still leaves inventories well below the high levels that existed in 1986/87. In fact, the stock-to-use ratios for wheat, coarse grains, and soybeans are projected to be 0.25,0.24, and 0.15 in 1995/96 compared to 0.34, 0.33, arid 0.20 in 1986/87, respectively (Table ~ and Figure 33. Trade for grains and soybeans increases more rapidly than production and consumption. The patterns of change in net imports and net exports indicate that demand growth continues to outpace supply growth in developing and centrally planned economies and that production growth continues to exceed demand growth in the industrial countries (Table 1 and Figures 4 and 5~. This pattern has been evident for more than a decade and raises concerns about the foreign exchange costs of the projected imports of developing countries. Using U.S. Gulf port prices, the import cost of wheat, coarse grains, and soybeans to developing countries in 1988 dollars is projected to increase from $9 billion in 1986/87 to $15 billion in 1995/96. The trade picture for soymeal is different. Argentina and Brazil are projected to export an increased quantity and value of soybean meal to the industrial and centrally planned economies. The supply, demand and prices in the evaluation period indicate a return to more stable commodity market conditions after the extraordinary market boom that occurred in the mid-1970s and the equally traumatic decline of the first half of the 1980s. Much of the explanation for this boom and bust cycle lies in the macroeconomic factors external to agriculture. However, the explanation also rests with agricultural policies and productivity changes. Johnson, et al. (1988) recently evaluated the sensitivity of these projections to 103

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TABLE 1 Baseline Projections of Wheat and Coarse Grains and Soybean Supply, Use, Trade, and Prices Actual 1986/87 1989/90 90/91 Projected 91/92 92/93 93/94 94/95 95/96 Nominal Prices ($/mt) Wheat 1 109 134 137 138 138 139 144 150 Maize 2 74 90 91 94 99 98 100 105 Soybeans3 193 211 204 233 215 232 224 228 Real Prices (1988$/mt) Wheat 1 117 131 129 128 124 122 123 124 Maize 2 79 87 87 87 89 86 85 87 Soybeans3 207 205 194 215 194 204 191 188 Wheat (milt mt.) World Production 529 535 548 560 572 583 591 602 World Consumption 521 536 549 561 572 582 592 602 World Ending Stocke 176 150 149 149 149 149 149 149 Net Exports Industrial 72 79 81 83 85 86 87 89 Developing -53 -61 -62 -64 -66 -68 -70 -71 CPE (excl. China) -18 -18 -19 -19 -19 -18 -17 -17 Coarse Grains (milt mt.)4 World Production 752 748 767 792 805 825 838 851 World Consumption 724 764 776 791 802 817 831 845 World Ending Stocks 236 182 173 174 177 186 193 199 Net Exports Industrial 41 46 48 51 53 56 59 62 Developing -27 -31 -32 -34 -37 -38 -42 -43 CPE (excl. China) -14 -15 -16 -17 -17 -18 -18 -19 Soybeans (milt mt.) World Production 98 112 113 114 119 120 124 126 World Consumption 101 110 112 115 118 120 123 126 World Ending Stocks 20 18 19 18 19 19 19 19 Net Exports Industrial 1.6 2.6 2.9 3.4 3.6 4.1 4.5 5.0 Developing 0.3 0.3 0.1 -0.4 -0.6 - 1.1 - 1.4 - 1.9 CPE (excl. China) -1.9 -2.9 -3.0 -3.0 -3.0 -3.1 -3.1 -3.1 SoYmea1 Net Exports (milt mt.) Industrial -2.1 -3.4 -3.6 -3.7 -3.7 -3.8 -3.9 -3.9 Developing 8.6 10.6 11.1 11.4 11.7 12.2 12.5 12.8 CPE (excl. China) -6.5 -7.2 -7.5 -7.7 -8.0 -8.4 -8.6 -8.9 2 Wheat - FOB Gulf #2 H.W. 13% 3 Corn - FOB Gulf #3 Yellow 4 Soybeans - FOB Gulf #2 Yellow Maize, Sorghum, Barley and Oats alternatives for the macroeconomy, productivity growth, and potential policy changes that could occur over the next decade. DETAILED REGIONAL IMPI,ICATIONS In this section, we discuss the results of projecting grain production, consumption, and import requirements of four major regions from 1987/88 to 1996/97. These regions include Africa and Middle East, Latin America, Asia, and Centrally Planned Economies. 104

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500 450 400 O 350 ~ 300 Lit 250 to Go - 10Q 50 FIGURE 2 Real U.S. Gulf Port Prices - ~ \ _ ~ \ I \ I \ / \ Soybean I \ I \ \ \ \ , Wheat ~ / \ / \ \ 71/72 76/77 81/82 86/87 91/92 96/97 YEAR 0.29 _ 0.28 _ /~\ ~ ~ ~ j ~ {4 ~ {/ / my\ 0.16 _ I I I \ 0.15 _\ / I I Feed Grains \ 0.14 ~ \ / \~ / 1 J a___ __ oooo1~3o _/ 11/ 71/72 76/77 81/82 86/87 91/92 96/97 YEAR FIGURE 3 World Stocks to Use Ratio 105

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110 100 90 80 70 LU 60 50 40 30 20 10 76/77 81 /82 FIGURE 4 Net Importers: Coarse Grain Imports 110 100 90 z o By o 3 - 80 70 60 50 40 30 20 10 o FIGURE 5 Net Importers: Wheat Imports YEAR _ [//1 Developed Market CPE If// Developing ~ . . I : - ~ . 71/72 76/77 81/82 86/87 91/92 96/97 YEAR 106

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75 70 65 by o at o _ 45 60 55 50 40 35 30 FIGURE 6 Africa and Middle East Wheat Africa and Middle East .— _ Domestic Use '' - / _ _! , I ~ I ~ ~ / / Production ._ - . - . - _. 76/77 78/79 80/81 82/83 84/85 86/87 88/89 90/91 92/93 94/95 96/97 YEAR African and Middle Eastern countries' imports of wheat are projected to increase from 27.7 million metric tons in 1987/88 to 34.5 million metric tons in 1996/97. This increasing trend is due to the widening gap between domestic use and production levels over the projection period (Figure 6~. Production grows only at an average annual rate of 1.5 percent, whereas the domestic use grows at a much faster rate of 1.9 percent, resulting in increased import needs in the next decade by the countries in this region. A similar projection for coarse grains shows that imports increase from 11.5 million metric tons in 1987/88 to 17.1 million metric tons in 1996/97 (Figure 7~. As in the case of wheat, the domestic use growth rate is projected to increase at a faster pace than that of production. The increase in domestic use of wheat and coarse grains can be attributed to the projected rise in population throughout the region and income growth rates in certain countries. The projected real GDP growth rate of 3.0 percent over the next decade is sianificantIv hither than the-0.06 percent over the previous decade. To_ _ _ ` _~ ~ ~ ~ ~1 · _ · ~ ~ ., A, ~~ Argosy of one countries In ants region, Domestic production does not meet the grow- ing demand. For example, countries in the Middle East do not have suitable agronorn~c conditions to produce enough food to meet the increased demand generated by population and income growth. In many Middle Eastern countries the contribution of the agricultural sector to GNP is very small. In most of the African countries, however, agriculture contributes at least 50 percent of the GNP. Governments in many of these countries tend to subsidize consumption but tax the agriculture sector and food production. Moreover, projected population growth rates in this region exceed food production growth rates. Also, the economies in many of these countries are plagued by foreign debt problems. Agriculture is generally characterized by declining per capita income, slow or no increase in per capita food production, recurrent 107

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65 60 50 45 40 z55 _ o 50 _ ~ 45 _ o ~ 40 _ J 35 _ .' 30 - / 25 FIGURE 7 Africa and Middle East Coarse Grains a' Domestic Use ~ \ . I I I I I I I I I I I I i I I I I I I I ~ Production ~ - - - ' . - - - - - - 76/77 78/79 80/81 82/83 84/85 86/87 88/89 90/91 92/93 94/95 96/97 YEAR droughts, and unmanageable debt. Therefore, most of the African countries are likely to rely on foreign food aid and development assistance in the near future. One of the countries studied more closely in this region is Egypt. because of its growing import demand. For two decades, Egypt has not been self-sufficient in food production and currently imports about half of the food requirement to meet the growing demand of its rapidly rising population of more than 50 million people. As shown in Figures 8 and 9, wheat and corn production is virtually stagnant, whereas the combined domestic use of these commodities increases from 14.0 million metric tons to 15.4 million metric tons from 1987/88 to 1996/98, resulting in an increase of 2.1 million metric tons of imports over the same period. Countries like Algeria and Morocco are expected to make little progress in their grain production, but face significant demand growth, which would make them more dependent on the world market for their imports. As indicated in Figure 10, four North African countries (Egypt, Algeria, Tunisia, and Morocco) are expected to expand their wheat imports by an additional 2 million metric tons by 1996/97. Expansion of the livestock industry coupled with import subsidies have made Saudi Arabia one of the worId's largest importers of barley. Saudi Arabia increased its barley imports from less than 0.1 million metric tons in 1976/77 to 8.6 million metric tons in 1986/87 (Figure 11~. Future imports are expected to remain high with relatively little growth. Latin America Production and domestic use of wheat and coarse grains of Latin American countries, excluding Argentina, are shown in Figures 12 and 13. Since Argentina is a net exporter of wheat and coarse grains, inclusion of Argentina would mislead one to conclude that countries in this region do not rely heavily on imports of these commodities. It is evident 108

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8 7 7 FIGURE 11 Saudi Arabia Barley 25 23 21 by o lo in o YEAR FIGURE 12 Latin America Excluding Argentina Wheat 111 9 6 5 4 3 2 1 _ \r Domestic Use Production 76/77 78/79 80/81 82/83 84/85 86/87 88/89 90/91 92/93 YEAR 19 17 15 13 11 9 - 94/95 96/97 - / —~ _ 6 `_~ 1 1 1 1 1 1 1 1 1 76/77 78/79 80/81 82/83 84/85 86/87 88/89 90/91 Domestic Use ~ - - Production _ _ _ , _ _ _ - 92/93 94/95 96/97

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56 54 he 50 o G 46 ~ 44 ~7 o 3 - 52 48 42 40 38 36 34 32 Domestic Use ~ _ / ~ / \ /` 'N _ , , \ , J / , ~ __— / a\\\/, \ // \ / Production _ - - - . _ - . _ 30 76/77 78/79 80/81 82/83 84/85 86/87 88/89 YEAR FIGURE 13 Latin America Excluding Argentina Coarse Grains 10 9 8 z o cr: At o 3 4 5 6 5 3 2 76/77 78/79 80/81 82/83 - W - - l Domestic Use ~ - l - - Production - 90/91 92/93 94/95 96/97 - FIGURE 14 Brazil Wheat 84/85 86/87 YEAR 112 88/89 90/9] 92/93 94/95 96/97

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30 28 by o 24 ~ 22 Ad O 20 26 18 16 it' -\ / \ / \ / 14 _ \/ 1 1 I' 13 76/77 78/79 80/81 82/83 FIGURE 15 Brazil Coarse Grains Domestic ~: - / ~ ~ / / i\\// / ~ - 84/85 86/87 88/89 90/91 YEAR Production _ 92/93 94/95 96/97 distribution. Furthermore, its economic growth is closely tied to of! prices, since Mexico is a of} exporter. Mexico's imports are likely to vary because its foreign exchange earnings depend heavily on the oil price and its repayment of the foreign debt. Asia The production and domestic use of coarse grains and wheat of all Asian countries are shown in Figures 18 and 19. The coarse grain imports of this region in the last decade averaged 5 million metric tons per year, but are projected to increase to an average of 12.2 million metric tons per year over the next decade. The average wheat imports corresponding to these two periods are 21.5 and 27.5 million metric tons, respectively. Clearly, the projected increase in imports by the countries in this region is due to faster growth in consumption than in production. The faster consumption growth is attributed to the projected increases in population in countries such as India, Pakistan, and Bangladesh, and rising per capita income in East Asian countries such as South Korea, Taiwan, and Hong Kong. For both wheat and coarse grains, countries in High Income East Asia (South Korea, Taiwan, Hong Kong, and Singapore) show strong import demand (Figures 20 and 21~. Countries in this region made a significant advancement in the manufacturing sector and experienced high economic growth over the last decade. They are able to earn foreign exchange by exporting industrial goods. It is assumed that these countries will continue their economic progress in the next decade. Recently, these countries have also expanded their livestock sectors, which made them more dependent on imports of coarse grains. Thus, countries in this region are increasingly becoming high growth markets for these grains. China and Thailand are both expected to continue to export corn. Therefore, the production and domestic use projection for this region, excluding China and Thailand, is 113

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6 5.5 5 by 0 4.5 ~ 4 0 3.5 v 2.5 FIGURE 16 Mexico Wheat \ \ - Domestic Use / / l \ l ~ / \ i / l _ ~ Production _ _, 2 1 1 1 1 1 1 1 76/77 78/79 80/81 82/83 84/85 86/87 88/89 90/91 92/93 YEAR 94/95 96/97 a better indicator of the growing need for coarse grains imports (Figure 22~. Furthermore. the High Income East Asian (HIEA) countries would not have significant foreign exchange constraints, so they are excluded. The average annual imports of coarse grains by the remaining Asian countries over the last three years were nearly 2.0 million metric tons, and are projected to more than double over the next ten years. In the case of wheat, India is expected to remain approximately self-sufficient and the HIEA countries will not have difficulty paying for imports. As shown in Figure 23, wheat imports by other countries in this region, excluding India and HIEA are projected to increase slowly. Centrally Planned Economies This region includes the Soviet tries over the last ten years show a Union and Eastern Europe. Imports by these coun- high degree of fluctuation because they are primarily determined by centralized political decisions and production variability. Countries in this region are expected to continue to be major importers of wheat and coarse grains (Figures 24 and 25~. Unfavorable climatic conditions, inefficient input use, and little technological innovation in the past have made these countries more dependent on the world market. Moreover, these countries' economic policies have favored development in the industrial sector over the agricultural sector. However, both production and domestic use of wheat and coarse grains are projected to increase over the next ten years with annual imports averaging 20.2 million metric tons of wheat and 18.7 million metric tons of coarse grains. 114

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15 14 Oh Ad 13 o by o 12 11 10 9 8 7 FIGURE 17 Mexico Coarse Grains CONCLUSIONS AND IMPLICATIONS ~ I _ ~ \ / \/ ,~ J 111 \ / l / I Domestic Use Production /\ '' / \\ l / l ~ \ - 1 1 1 1 1 - _~ 76/77 78/79 80/81 82/83 84/85 86/87 88/89 90/91 92/93 94/95 96/97 YEAR The implications of these projections are summarized by looking at per capita income, production, consumption, and net imports of the major developing regions of the world. Per capita income growth rates for the Latin American and Asian regions are slightly lower than those experienced in the last decade. In Africa and the Middle East per capita income is still projected to decline but at a much slower rate than occurred during the last decade. Overall, the general economic picture for the world is projected to be significantly more favorable than the past five years but not as robust as in the 1970s. Thus, the ten year historical averages mask the sharp economic downturn that occurred in the early 1980s and the more recent improvement in economic performance that occurred in the mid-1980s. While the improved economic conditions are encouraging, the fact remains that in many developing countries production growth cannot keep pace with the growth in demand resulting from both population and income increases. This leads to increased import demand for both wheat and coarse grains in most developing regions. Some of the strong growth markets, such as High Income East Asia, can cover the increasing cost of grain imports with increasing revenues from export sales. However, many other countries and regions in the developing world have heavy debt service problems and foreign exchange constraints that inhibit their ability to substantially increase the imports of grains. Thus, the rate of production and import growth in these projections is not sufficient to maintain current per capita consumption levels. While grain prices are stable or declining in real U.S. dollars, the cost to the importers will also depend heavily on whether local currencies appreciate or depreciate relative to the U.S. dollar. The same countries which have a shortage of foreign exchange and heavy 115

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240 220 oh o ~ 180 LL z 160 o 140 120 100 / / ~ 80 1 1 1 1 76/77 78/79 80/81 82/83 Domestic Use ~ - - Production _ - - 84/85 86/87 88/89 90/91 92/93 94/95 96/97 YEAR FIGURE 18 Asia Wheat 160 150 140 z ~ 130 cr ~ 120 z o c FIGURE 19 Asia Coarse Grains - Domestic Use ~ / 110 100 90 80 70 1 1 1 1 1 1 1 . 76/77 78/79 80/81 82/83 84/85 86/87 88/89 90/91 art' , ~ Production 92/93 94/95 96/97 YEAR 116

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18 20 16 Oh o 14 to 12 ~ 10 of o 8 6 4 2 o Domestic Use ~ L ~ / / Production . 76/77 78/79 80/81 82/83 84/85 86/87 88/89 90/91 92/93 YEAR FIGURE 20 High Income East Asia Coarse Grains 7 6.5 6 an O 5.5 111 ~ 4.5 o ·' 4 c 5 3~5 3 2.5 94/95 96/97 - / / I / \ .' , . _,/ 1 Imports ~ - I J 76/77 78/79 80/81 82/83 84/85 86/87 88/89 YEAR FIGURE 21 High Income East Asia Wheat 90/91 92/93 94/95 96/97 117

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Oh O 28 27 26 25 32r 31 30 29 24 23 22 21 20 3~ it/ 3 _~1 \ `~, x/ - - _ Domestic Use / Production , _ - _ , _ - 19 1 1 1 1 1 1 1 1 1 1 76/77 78/79 80/81 82/83 84/85 86/87 88/89 90/91 92/93 94/95 96/97 YEAR FIGURE 22 Asia less China, Thailand, and HIEA Coarse Grains debt service obligations are the ones whose currencies are likely to depreciate relative to the dollar, causing the import costs of these commodities to increase. Our analysis suggests that the region under the greatest pressure in terms of potential reductions in per capita consumption is Africa and the Middle East. Second to this region is the Latin American region excluding Argentina. The Asian region is expected to perform better, because production growth is expected to keep pace with or be slightly ahead of the population growth rate. A major reason for the declining per capita consumption in the other regions is that per capita production is declining. Although imports are increasing in all developing regions, these increases are not sufficient to offset the slower rates of growth in production. Measures to improve productivity growth in these regions would be the most desirable solution to these problems. A recent analysis by Johnson, et al. (1988) indicated that improved rates of yield growth globally would benefit the developing regions by reducing world market prices, increasing developing country production and reducing their net imports. Another important measure is the resolution of the Third World debt problem. The debt service burden is one of the constraints to import demand in developing countries. A resolution of the debt problem or other measures that would increase the rate of economic growth in developing countries would be expected to stimulate more import demand for grains and lead to higher levels of trade. Food assistance programs are recognized as being a short term or stop gap measure rather than a solution to stagnant or declining per capita consumption levels. Targeted export subsidies can have a similar effect, provided that the targeting is based on human need rather than on geopolitical or policy strategy considerations. 118

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170 160 150 he o CC IL o 100 _ 90 80 140 130 120 110 70 60 50 _ 76/77 78/79 80/81 82/83 84/85 86/87 88/89 90/91 92/93 94/95 96/97 / , ~,``,/' , . ~ '_ _, _ ., - - YEAR FIGURE 23 Asia less HIEA and India Wheat 160 155 150 an o O 140 E LL A o 145 135 130 125 120 115 _ I/ \` 110 1 ~ 1 ~, ~ ~ ~ ~ ~ ~ 76/77 78/79 80/81 82/83 84/85 86/87 88/89 90/91 92/93 94/95 96/97 YEAR _ ~ /\ _/ I I / I I i"1 i,', I / \ I, ~ /\/ Production, W. I \ _ I \ _ I \ I \, l - / / \ I' - - - . — . — FIGURE 24 Centrally Planned Economies Wheat 119

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200 190 180 170 ~ 160 LL 150 140 130 120 _ 110 1 76/77 78/79 L\', \ a/\ \/ \ \ Domestic Use / - \ ~ / ~ / /' ~ ~ - - - - Production - - 80/81 82/83 84/85 86/87 88/89 YEAR FIGURE 25 Centrally Planned Economies Coarse Grains 90/91 92/93 94/95 96/97 A conclusion of the recent 1988 World Food Conference (Helmuth and Johnson) is that there needs to be a shift in priorities. Third World countries must have assistance in de- veloping their entire infrastructures education, health care, highways, harbors, marketing and distribution systems—as well as their agricultural and industrial sectors. Only through long-term, sustainable growth can the problem of food security be solved. When Third World nations are able to efficiently produce and sell the products for which they have a comparative advantage, they will have command of the resources necessary to feed their populations. When economic development reaches this point, the investment of developed nations in economic assistance returns benefits to the donors as well as to the recipients. DOCUMENTATION AND REFERENCES Bahrenian, A., S. Devadoss, and W.H. Meyers. 1986. "FAPRI Trade Model for Feed Grains: Specification, Estimation, and Validation." Center for Agricultural and Rural Development, Iowa State University, Ames, Iowa. Staff Report 86-SR1. (Revised) Devadoss, S., M.D. Helmar, and W.H. Meyers. 1986. "FAPRI Trade Model for the Wheat Sector: Specification, Estimation and Validation." Center for Agricultural and Rural Development, Iowa State University, Ames, Iowa. Staff Report 86-SR3. (Revised) "FAPRI Ten-Year International Agricultural Outlook." 1988. Food and Agricultural Policy Research Institute, University of Missouri-Columbia and Iowa State University. FAPRI Staff Report #1-88. Helmuth, J.W., and S.R. Johnson, editors. 1988 World Food Cor~ferer~cc Proceeding Volume II: Policy Addresses and Recommendations (Iowa State University Press, Ames, Iowa) forthcoming. Johnson, S.R., W. H. Meyers, P. Westhoff, and A. Womack. 1988. "Agricultural Market Outlook and Sensitivity to Macroeconomic, Productivity, and Policy Changes, pape" prepared for the Twentieth International Conference of Agricultural Economists, Buenos Aires, Argentina, August 23-31, 1988. Meyers, W.H., S. Devadoss, and M.D. Helmar. 1987. "Agricultural Trade Liberalization: Cross-Commodity and Cross-Country Impact Products." Journal of Policy Modeling 9~3~:455-482 (1987~. 120

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Meyers, W.H., M.D. Helmar and S. Devadoss. 1986. "FAPRI Trade Model for the Soybean Sector: Specification, Estimation and Validation.n Center for Agricultural and Rural Development, Iowa State University, Ames, Iowa. Working paper No. 86-SR2. (Revised) Westhoff, P., W.H. Meyers, S.R. Johnson, J. Brandt, and A. Womack. 1988. `'The Drought of 1988: Possible Market Impacts and Policy Implications." Food and Agricultural Policy Research Institute, University of Missouri-Columbia and Iowa State University. FAPRI Staff Report #2-88. "World Economic Outlook." 1987. The WEFA Group, Bala Cyawyd, Pennsylvania. 121