Cargill CEO: Nation should help feed world instead of shaking up prices

Q&A with Cargill chief executive Greg Page on the gifts that nature gave to Ukraine.

Ukraine and Russia could substantially boost crop and food output if they lift export restrictions and open up more to investment, the head of U.S. agribusiness giant Cargill said during a Kyiv Post interview.

Visiting Kyiv on June 23 to take part in an investment advisory council chaired by President Viktor Yanukovych, Cargill chief executive Greg Page urged Ukraine and other grain-producing countries in the Black Sea region to lift export restrictions.

His visit comes nearly one year after Russia fully banned grain exports due to poor weather. Ukraine followed in Russia’s footsteps last autumn, imposing controversial grain export quotas despite reaping a reasonably large harvest of some 40 million metric tons.

Facing mounting international pressure to drop the restrictions seen by many as unnecessary, Ukraine replaced the quotas this summer with duties. Russia has also recently dropped its grain export ban, but warns that it could reintroduce restrictions if needed.

Experts say that while such protectionist policies could help keep food prices low in the short term, they come at big long-term cost by hurting cash-strapped farmers and curtailing investment that is needed to boost production.

Ukraine has in recent years reaped harvests of 30-50 million tons. But yields are about a third of the European Union average.

In talks with Yanukovych, Page said he “highlighted the opportunity for Ukraine to double food output in the next decade.” Page said Cargill could in coming years sharply add to the $150 million investment it has already pumped into production of sunflower seed oil and commodity trading.

But he warned that protectionist government policies could lead to the opposite, a rollback on investment plans.

Kyiv Post: How do you see agriculture commodity prices going into 2012, in light of weather and other concerns? In light of the recent price spikes, are we looking at sustained high agriculture prices?

Greg Page: Everybody mentions the spike in 2007 and the spike in 2010. They leave out the spike downwards in 2008-2009.

To put it in a broader context, it is important to look at volatility of production first and then price afterward. If you go back 40 years, we have in that time doubled the amount of calories that the world produces basically with the same amount of land. Clearly, the world’s farmers have shown that they can respond to a growing population and to an improved diet.

If you take that trend and measure each year the trend up or down from that, most years production in the world is plus or minus 2 percent. Last year was not an [exception] from that.

We had the dryness of the Black Sea area, flooding in Pakistan. The global calorie production was probably off 2 percent. But it led to a 60 percent change in price.
What has changed in recent times is the amount of price response to relatively modest changes in production. Clearly with 24-hour per day news media, wherever there is a drought, you get to watch it 2-3 times per day for a month.

But if you measure the constancy of the world’s food production over the last decades, these are fairly normal year to year deviations. Production has been keeping pace if you look at it over three or four year average periods.

KP: But some world leaders are warning that this century could become the “Century of Hunger” if the right policies are not adopted. You seem to not see this risk.

GP: No, and I think one of the reasons is price, what we were talking about. The world this year is likely to have a double-digit increase in fertilizer use. I was recently in Sumatra in Indonesia.

I have been off and on around the Tapioca (a starch extracted from a root) production business. And in all those years I have not seen someone fertilizing Tapioca. But at today’s prices, we see people doing it.

We talked with the farmer and he said he saw an increase in his production of as much as 40 percent.

I think that the response of producers around the world, if they get any reasonable weather, is going to be just what economics would predict ... more production as a result of more attention.

KP: But could some government policies put this at risk?

GP: Sure. They did last year. The intervention of governments in trade, particularly in countries that supply food, in effect further shortened the supply and raised the anxiety of countries that needed to import as a result of climate.

KP: There seems to be a split in G20 talks, with some countries leaning on one side calling for more government regulation of commodity markets, while others are calling for more open markets. Which policy is right?

GP: I think that a study of nature and demographics would tell you that the right policy is a realization that there will be weather disruptions. Currently in the U.S. we are experiencing a terrible one in Texas, Oklahoma and Kansas.

If the United States were multiple countries and there was no free trade among states, there would be enormous food shortfalls in those areas. A plus for the Black Sea nations [is that they are nearby where the world’s populations are] growing fastest, in the Middle East and North Africa. That’s a market that is most readily available to Ukrainian, Russian, Romanian farmers.

I think it is almost impossible to predict global food security without global free trade on food. Weather will always cause more disruption on a local level than it will cause on a global area. In a given region, you could see 30-40 percent drops in production.

Globally we seldom see drops of more than single-digit percents in a given year. If the world is to have affordable food, food security, it has to be a trust-based system, where those that have positive weather trends help those that have had weather disruption.

If we go to a highly protectionist system, it has the effect of turning the whole world into rigid silos that are solely dependent on their own weather. That is going to be a lot more volatile than trust-based free trade.

KP: Do you see a risk of protectionism or resource nationalism unfolding?

GP: Yes. I think in times of fear there is a certain element of the human psyche that turns inward. I think it is something that has to be talked about. It is not surprising.

KP: Did you discuss this issue with Ukraine’s president today (during the investment advisory council on June 23)?

GP: Yes. We highlighted the opportunity for Ukraine to double in the next decade their food output. We think that is an entirely reasonable aspiration. But to do it, what is needed is private capital, cooperation of banks. It is not that a single company or institution can do this. The technology is out there.

Given the natural resources of the Ukrainian agriculture sector, to set the goal of doubling production in the next decade is entirely reasonable. And when you look at the growth of the world’s population, it is entirely necessary.

KP: What message did you hear from him? Did he understand this?

GP: I think he has a very good understanding. Is the government here going to take the actions on land ownership, equal treatment of government or semi-state organizations? Time will tell.

KP: If Ukraine and other countries in the Black Sea region which could play a big role in filling the world food gap don’t pursue such policies, do you think there could be a rollback on investment plans?

GP: Certainly. This is a great place for the world to grow more food. But all the gifts that nature provides can be undone with bad policies.

KP: How much do you think big investors in Ukraine such as your company have incurred in losses as a result of grain export restrictions imposed last year?

GP: The reputation of the nation was harmed most.

KP: How much investment do you think Ukraine and Russia could receive if they don’t return to export restrictions?

GP: Cargill would hope that our business in Ukraine would be bigger than simply participating in the grain export business, and vegetable oil processing. We have to talk about how many more export elevators would be required if Ukraine’s production doubles.

A grain export elevator could cost $150 million. Our goals in Ukraine now are... we are building a feed plant here. We want to get involved with livestock producers.
A lot of Cargill’s worldwide clients, whether it’s Nestle or McDonalds, are here. We would look for opportunities to serve them in this market as they grow.

For Cargill, the opportunity is to not just invest in the grain or oil seed business. The opportunities in the broader food chain are enormous.

Kyiv Post