Consumer preferences and concerns shape global food trade

Food Review, Sept-Dec, 2001 by Anita Regmi, Mark Gehlhar

Twenty years ago, bulk commodities that consisted primarily of grains and oilseeds accounted for most agricultural trade; however, in recent years processed and semi-processed products have jointly accounted for two-thirds of total agricultural trade. A number of forces in both developing and developed countries are driving these changes, particularly income growth. As inflation-adjusted per capita incomes increased during the past two decades, more than doubling in many countries, food purchasing power among most consumers also increased. Due to increased caloric intake and population growth, imports of grains and oilseeds by developing countries have increased, while developed country imports of these commodities have remained stagnant.

As incomes rise, wealthier consumers, especially in developed countries, seek out the variety of high-value food imports. High-value food products are nonbulk commodities that either require special handling, such as fresh produce, or are processed, which adds substantial value beyond the farm level. Processed foods are edible foodstuffs that have been transformed from their original post-harvest states to either semi-processed products (flour and meal) or final products (bread and breakfast cereal).

According to United Nations (UN) trade data, high-value food imports increased in the 1990s not only in developed countries but also in developing countries. For example, from 1994 to 1999 the value of Egypt's processed food imports increased 51 percent to $689 million. However, despite trade growth in developing countries, the much larger volume of processed food trade among developed countries has primarily accounted for the shift in world agricultural trade from grains to high-value food products.

While the trade in bulk commodities has decreased in share since 1980 to less than 30 percent of current world agricultural trade, the share of pro-cessed and semi-processed products has increased (fig. 1). Processed high-value products, such as meat, beverages, bakery products, and snack foods, account for about 34 percent of global food trade, up from 18 percent in 1980. Trade in intermediate processed products, which consists of semi-processed commodities, such as vegetable oils, oilseed meals, and flours, has kept pace with world agricultural trade and maintained its share of world trade. The fresh horticultural products group represents the smallest of these aggregate categories and its 12-percent share of world agricultural trade has remained almost unchanged during the past 20 years. The perishable nature of fresh horticultural products constrains trade, although technological advances to extend shelf-life have enhanced the potential for increased produce trade.

The shift in U.S. agricultural exports has been even more pronounced than changes in world trade composition. Bulk exports accounted for nearly 70 percent ($28 billion) of the value of total U.S. agricultural exports in 1980 but declined to less than 40 percent ($19 billion) in 1998 (fig. 2). Lower grain prices and slower volume growth triggered this change. Rising U.S. meat exports in response to growth in world meat demand also represent a key element in the changing composition of U.S. exports. For example, between 1980 and1998, the United States expanded its meat exports fivefold to countries where meat consumption rose, such as Japan and Hong Kong.

Growth in two-way trade of high-value food products--that is, the same country exports and imports products within the same industry--has also helped increase global food trade. In this scenario, trade can expand without growth in consumption as the foreign share of consumption increases. For example, the United States exports higher valued beef to Japan while at the same time it imports a greater volume of lower valued beef from New Zealand. In dairy trade, however, the United States imports higher valued products, mainly cheeses from Europe, but exports lower valued products, such as powder milk and whey products to Mexico.

Growth in intra-industry trade is significant, especially among high-income countries, and is partly attributed to foreign direct investment (FDI). FDI is investment in a foreign entity or affiliate in which a parent company holds a substantial, but not necessarily a majority, ownership interest. FDI and trade are often complementary and fuel bilateral trade growth between countries (see "U.S. Food Companies Access Foreign Markets Through Direct Investment" elsewhere in this issue). For example, the United States and Canada have greatly expanded FDI sales and trade in processed fruit and vegetables. Demand for foreign brands also drives increased trade in packaged or bottled products, such as bakery products, beer, and wine.

Lower transportation costs have a similar effect on trade as tariff cuts: they reduce transaction costs, or the wedge between the product price in the exporting and importing countries, thus stimulating trade. However, although new developments in ocean shipping have reduced shipping costs and made it possible to preserve the quality of perishable products, trans-ocean transportation costs are still higher for many perishable products than for raw agricultural products, such as cotton, or nonperishable products, such as nuts and raisins.