NEW THIRD WORLD AGRICULTURAL COMPETITORS: THE GROWING CHALLENGE

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88G01116R000700790003-6
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• Document Creation Date: December 22, 2016
• Document Release Date: July 1, 2011
• Sequence Number: 3
• Publication Date: September 1, 1986
• Content Type: REPORT

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Q IAL
CONFIDENT
The Deputy Director of Ctntral Intelligence
Washington. D. C. 20505
NOTE TO: Director of Central Intelligence
/&4 -
This is an important paper. You should read
at least the key judgments on your trip. It has
significant implications for the US economy.
I am sending a copy to Richard Lyng with a suggestion
from both of us that he read it.
Attachment:
GI 86-10066,Sept86
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Directorate of
Intelligence
New Third World
Agricultural Competitors:
The Growing Challenge (c NF)
n den ial
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Directorate of
Intelligence
The Growing Challenge
New Third World
Agricultural Competitors:
Office of Global Issues. Comments and queries are
welcome and may be directed to the Chief,
Economics Division, OGI, on
This paper was prepared by
Confidential
GI 86-10066
September 1986
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Summary
Information available
as of 4 August 1986
was used in this report.
The Growing Challenge
New Third World
Agricultural Competitors:
years.
The United States faces serious competition from LDC agricultural
exports over the next decade. Structural change in the form of advances in
agrotechnology and shifts to more market-oriented agricultural policies has
transformed a few countries such as Brazil, Malaysia, and Thailand into
major international suppliers of grain and other farm products in recent
years, and we expect their strength to expand through 1990. Several other
LDCs, including Argentina, India, and Indonesia, will probably join the
ranks of serious, diversified agricultural exporters within the next five
objectives in a new GATT round.
This new competition has mixed implications for US interests. On the one
hand, strengthened LDC agricultural sectors will contribute to political
stability in key Third World allies, facilitate LDC debt payments, and open
new markets for US exports of agricultural support products such as farm
machinery and agrochemicals. On the other hand, increased LDC agricul-
tural exports are likely to:
? Result in even larger global surpluses than at present, keeping commod-
ity prices-and US export earnings-depressed.
? Provide particularly strong competition in world grain markets, where
the United States has already become a residual supplier of wheat.
? Intensify competition with the United States in markets for soybeans,
poultry, cotton, rice, and orange juice.
? Strengthen the LDC voice in international negotiations on agricultural
trade, which could complicate, as well as support, the attainment of US
Several factors indicate that expansion o farm exports will probably
continue. Most important, nearly all the new Third World agricultural
competitors are efficient producers, relying little on production or export
subsidies. Only in Brazil has such support played a major role in boosting
export capacity. We believe that increased LDC competitiveness has
stemmed primarily from sounder government policies offering stronger
production incentives and from lower labor costs, more productive invest-
ments, and natural comparative advantage. As a result, governments of the
new LDC competitors will probably be able to sustain an export drive by
relying proportionately less on subsidies than more developed countries.
Confidential
GI 86-10066
September 1986
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Also boosting LDC agricultural export prospects is agrotechnology. While
several of the new LDC competitors have been using high-yielding varieties
of grain and advanced farm inputs, most have improved their productivity
without substantially relying on the products of agricultural research. The
untapped potential for enhanced output through increased funding and
adoption of new technology is thus considerable. Even more effective
application of traditional farming methods will substantially improve
productivity in some LDCs
We believe that additional LDCs could become serious agricultural
competitors in the 1990s. Although overall agricultural prospects in Africa
and Latin America are not good, selected countries-including some in
hard-pressed regions-will make advances in exporting certain commod-
ities. Colombia, Zimbabwe, and Pakistan could achieve strong growth in
exports of several products if they follow relatively market-oriented policies
and exploit new farming techniques. Other potential successes include
cotton in Panama, palm oil in Papua New Guinea, and barley in Tunisia.
Many of these countries, however, will have to minimize domestic instabil-
ity and deal with the politically explosive issue of land reform.
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Opportunities 10
B. Snapshot of LDC Agriculture
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New Third World
Agricultural Competitors:
The Growing Challenge (C NF)
Scope Note This research paper is part of a broader effort by the Directorate of
Intelligence to assess the implications for the United States of structural
change in the Third World. It examines the substantial transformation in
agricultural policies and technologies that has occurred in six LDCs that
have systematically expanded their agricultural exports. The paper then
suggests how continued productivity advances by these and other LDCs not
only could benefit the economic and political fortunes of important Third
World US allies, but also could threaten to intensify worldwide agricultur-
al competition and damage US interests.
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New Third World
Agricultural Competitors:
The Growing Challenge (C NF)
A surge in Third World agricultural production over
the past decade has helped to seriously weaken inter-
national commodity markets. Whereas key developing
countries accounted for about 9 percent of world
agricultural exports in 1975, by 1984 they were
responsible for 15 percent. Some LDCs already have
the potential to add massive amounts to the world
supply of certain commodities, such as soybeans, palm
oil, rubber, and rice. Moreover, despite the continued
glut plaguing agricultural trade, several other coun-
tries show promise of substantially expanding their
export capacity within the next decade.
Six LDCs in particular have emerged as serious
agricultural competitors. In spite of the weak com-
modity prices of the 1980s, they have managed to
enter the top ranks of exporters by skillfully combin-
ing their comparative advantages with sound, market-
oriented policies and, in many cases, the introduction
of new agrotechnologies. Highly efficient producers in
most cases, all have seen their exports grow dramati-
cally-by 1984 approximating 20 percent of total
agricultural exports from the Third World:
? Brazil-currently the world's second-largest agri-
cultural exporter behind the United States-since
1975 has achieved dramatic growth in soybean,
citrus, and livestock production for export.
? Malaysian palm oil production could top 4.8 million
metric tons this year, nearly four times the 1975
level. Similarly, subsidized inputs and new varieties
have enabled Malaysia to rise from the world's
tenth-largest cocoa bean producer in 1978 to sixth
in 1985.
? Thailand's success in multiple rice cropping has
enabled it to become the world's largest rice export-
er, with production rising from 10 million tons in
1975 to 13 million last year. Rubber production also
doubled in the past decade, reaching 720,000 tons in
1985.
? Indonesia has moved from being the world's largest
rice importer to self-sufficiency in just 10 years.
According to USDA, 1986 rice production will
probably reach a record 39.4 million tons, creating a
surplus of over 2 million tons.
? India's wheat production has increased from only
24 million tons in 1975 to 45 million tons last year.
Because of large stocks resulting from heavy im-
ports in prior years and this year's record produc-
tion, India hopes to export approximately 2 million
tons in 1986.
? Argentina instituted production incentives that have
dramatically boosted wheat output. Export tonnages
correspondingly jumped from 3 million tons in 1975
to consistently over 8 million tons in the 1980s.
While many LDCs have made attempts at reform, the
six new Third World agricultural competitors have
systematically reduced disincentives and, in many
cases, introduced new technologies to increase produc-
tion. The stunning success of these countries in boost-
ing their agricultural exports has stemmed primarily
from continued productivity gains from agrotechno-
logy and from a shift in government policy toward
favoring market incentives. Of the two, changes in
agricultural policies have been the most critical, since
new agrotechnologies have not been widely adopted
where appropriate producer incentives have been lack-
ing. To a lesser extent, the presence or absence of land
reform, political stability, and advantageous natural
resources have also played a role in forming the new
competition
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Confidential
Figure 1
LDC Agricultural Export Performance
Export Growth Rate, 1975-84a Real Export Earnings, 1984
Percent Billion US $
Argentina
Indonesia
Chile
Malaysia
Malawi
Thailand
Ivory Coast
Kenya
Brazil
Colombia
Venezuela
China
Burma
Ethiopia
Mexico
India
Zambia
Pakistan
Tanzania
Zimbabwe
Philippines
Tunisia
Ghana
Algeria
Brazil
Argentina
China
Malaysia
Thailand
Indonesia
India
Colombia
Ivory Coast
Mexico
Philippines
Kenya
Pakistan
Zimbabwe
Chile
Tanzania
Ethiopia
Malawi
Ghana
Burma
Tunisia
Venezuela
Algeria
Zambia
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Table 1
Keys to Success
Prices and Subsidies and Agrotechnology Natural
Market Structure Taxes Resources
Government-Backed Incentives
Governments in each of the six LDCs have changed
their agricultural policies in the past decade in ways
that have directly and indirectly increased the incen-
tives for farmers to produce for export. The new
policies have included favorable producer prices, sub-
sidies on inputs such as seeds and fertilizer, producer
credit, liberal financing of land purchases, tax incen-
tives, export subsidies, and currency devaluation.
Subsidies and Taxes. In addition to pricing and
marketing policies, some new competitors provide
direct export incentives, including differential tax
rates and rebates, marketing board assistance, and
freight subsidies:
? Brazil, for example, uses differential export taxes to
promote the export of value-added products such as
soybean meal, soybean oil, and orange juice.
? Malaysia uses lower export taxes and subsidized
export financing to encourage exports of palm oil,
rather than palm kernels.
? Indonesia uses subsidies on seed, fertilizer, and
pesticides to promote surplus production for export.
Prices and Marketing Structure. The successful
LDCs have generally pushed market incentives favor-
ing export promotion over domestic food supply,
abandoning their previous practice of taxing agricul-
ture to support industrial development and subsidizing
food consumption by keeping producer prices low.
Driven largely by hard currency needs, several LDCs
have used currency devaluations to successfully en-
courage increased agricultural production and export
development. Agricultural pricing policies-geared to
expand the output of export products by offering
farmers a good profit on their crops-have been
particularly important in Malaysia and Thailand.
Similarly, according to Embassy reports, Indonesian
commodity floor prices have helped to encourage
palm oil and rice production. Most of the six LDCs
also have improved their transportation and storage
facilities and made their marketing mechanisms more
efficient. Ineffective state marketing boards have
been dismantled and replaced with farmer co-ops and
private trading firms.
Despite the proliferation of subsidies generally among
LDCs (see appendix B), we judge that subsidies have
not played a major role in the export success of the
new competitors except for Brazil (see inset). So-called
LDC production aids-price support programs, the
provision of inputs at less-than-market value, and low-
cost production loans-are widespread, and have
clearly affected the level of Third World agricultural
supplies available for export. According to Embassy
reporting, however, among the leading six exporters:
? Rice is the only commodity to be subsidized by the
federal government in Malaysia, which remains a
net rice importer.
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The basic goal of Brazil's trade policy is to maximize
its trade surplus. A combination of import restric-
tions and export promotion-utilizing in many cases
subsidized production credits and differential export
taxes-has enabled Brazil to shift its global trade
balance from a $2.8 billion deficit in 1979 to a $12.4
billion surplus in 1985.
While Brazil's agricultural sector has strongly react-
ed to the international price and market signals for
most export commodities, Brasilia has made exten-
sive use of tax and credit systems to improve its
export competitiveness:
? Central Ban Resolutions 71, 296, 674, and CIC-
CREGE 14-11 offer subsidized interest rates for
reexport loan programs.
? State value-added tax (ICM) provides differential
export taxes for soybeans and orange juice that
favor value-added exports.
? The 11 percent Federal Industrial Products Tax
(IPI) is rebated to exporters.
For soybeans, government incentives include tax ex-
emptions and deductions on exports of meal and oil,
subsidized financing to cover crushers' operating ex-
penses, and restrictions on soybean imports. While
the extent of these subsidies has not been measured,
competitors have complained that these practices
allow Brazil to export soybean meal and oil at a
discount to international prices.
Many of these Brazilian export incentives-such as
the IPI and CIC-CREGE-have been very sharply
reduced or phased out altogether. New ones are, in
some cases, replacing them-subsidies paid directly
to exporters to allay freight costs totaled $20 million
in 1985. The largest subsidies, however, are used to
stimulate domestic production of food crops, not
exports. For example, this year's budget allocates
$2.5 billion for planting credits of which the domestic
wheat industry alone receives $1 billion.F_
? In Indonesia, the major producer subsidy to agricul-
ture is for fertilizer, with minor subsidies for insecti-
cides and herbicides. For 1986-87, Jakarta has
budgeted a 20-percent increase in fertilizer
subsidies.
? Argentina's primary incentive for encouraging the
export of high-value goods is the cash export reim-
bursement called a reembolso. This has been used
primarily for exports of vegetable oil, leather goods,
and apple juice. Argentina does not subsidize its
wheat exports but does discount its posted market
prices in order to sell its surpluses.
? In Thailand, subsidies have played virtually no role.
The price of rice in the domestic market has
traditionally been kept below the world price by an
export tax called the rice premium. To promote
greater rice exports, however, this tax has recently
been eliminated.
? India has made great strides in export development
without substantial outlays for agricultural subsi-
dies, according to press and trade report
The case of Brazil is more complex. A World Bank
study found that Brazil, in fact, taxes agricultural
exports and that actual net subsidies-ranging from
9 to 25 percent-are given only to semiprocessed
products such as soybean oil. According to studies by
the Office of the US Trade Representative, however,
Brazilian poultry exports have clearly benefited from
an undetermined level of subsidy, as, to a lesser
extent, have exports of soybean products
In response to US petitions detailing unfair trade
practices in these product areas, Brazil has scaled
back many of its subsidy programs. According to
press reports, the government of President Jose
Sarney has also had to cut its export subsidies in
response to IMF adjustment programs and is attempt-
ing to replace these incentives with government-
guaranteed private bank financing of exports.
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Technology
The dramatic growth in LDC agricultural production
has been underpinned by the coming to fruition of the
Green Revolution of the 1970s. Better agricultural
chemicals, greater use of irrigation, and high-yield
seed varieties have steadily raised crop yields through-
out the past three decades and have provided farmers
in the six leading LDC exporters with the tools to
respond to the changes in agricultural policy climate:
? Brazil, according to USDA, is introducing a less-
daylight-sensitive soybean variety-which might
permit planting to expand northward-and im-
proved pesticide and fertilizer application
techniques.
? Successful tissue culture experiments in Malaysia
have dramatically raised rubber and palm oil yields:
researchers can produce as many as 20,000 identical
seedlings from a single high-yield parent, according
to Embassy reports.
? Thai agricultural reforms under the current five-
year-plan period (1982-86) have included strong
promotion of high-yield seeds and more productive
cropping patterns.
? Chemical partitioning agents-which channel plant
energy between metabolic requirements and storage
needs-have successfully boosted yields in cotton
and soybeans in Asian and South American re-
search centers, according to press reports.
? Indian foodgrain production-especially rice and
wheat-has attained increased stability because of
greater use of inputs, improved cultivation tech-
niques, and better water management practices.
Further sizable production increases from agrotechno-
logy appear likely among a number of LDCs. As new
technologies such as growth hormones and new hybrid
seeds become more affordable and more widespread,
more Third World countries will have an opportunity
to increase their agricultural potential despite limita-
tions of soil and climate. Much of West Africa, for
example, could become self-sufficient in rice by shift-
ing from upland to swampland production, according
to State Department analysis. The shift will require
different rice varieties, fertilizer, and pesticides, and
effective swamp drainage
Genetic engineering offers the possibility of tailoring
plants for greater adaptability to adverse Third World
growing conditions; for example, agricultural poten-
tial can be increased with drought-resistant cereals
and, for coastal marshes, salt-tolerant rice. Recombi-
nant DNA and growth regulators offer the potential
to raise crop yields through improved nitrogen fixa-
tion, disease resistance, and shortened growing time.
Through genetic manipulation of nitrogen-fixing bac-
teria, for example, plants will be able to create their
own fertilizer. According to industry sources and
press reports, research currently under way in these
areas is likely to yield commercially applicable seeds
and technology within the next 10 to 15 years.~25X1
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In the near term, however, opportunities for increased
LDC agricultural production from technology will
come primarily from soil management and cropping
systems, rather than genetic engineering. The more
advanced technological breakthroughs of the Green
Revolution are being absorbed slowly and in relatively
few countries. Although India, Malaysia, and Thai-
land have been particularly active in introducing
agrotechnologies, many other LDCs have not under-
taken major efforts to develop or implement them.
Greater attention to more basic farming methods is
likely to have a stronger impact on productivity in the
next few years.
Natural Resources
A combination of fertile soil, good climate, and long
growing season have provided some-but not all--
new Third World agricultural competitors with enor-
mous production potential. The successful exporters,
nonetheless, have all concentrated on the production
and export of products in which they have a compara-
tive advantage. For example, Argentina has taken
advantage of its rich farmland and conducive climate 25X1
to become the fifth-largest wheat exporter. While
domestic and foreign debt-estimated at over $40
billion-will limit opportunities for agricultural devel-
opment in the next few years, Argentina's wheat
production potential is enormous. Wheat yields, for
example, stand at only 1.6 tons per hectare, about 40
percent below current US levels. Similarly, ideal
growing conditions and long crop seasons have helped
Malaysia and Thailand to triple their exports of tree
crops, such as palm oil and rubber, since 1975. 25X1
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Figure 2
Export Market Share in Selected Commodities
EC 7.9
Other 1.8
China .6
Singapore 7.2
United States
62.9
Malaysia
59.7
United States
21.5
Other 38.5 Thailand 11.6
Burma 8.1 China 10.9
Pakistan 9.5
Thailand 11.7 Malaysia
Indonesia 27.0 48.8
Ghana 24.3
Other 41.8
AV Brazil 17.3
Ivory Coast
Malaysia.9 15.7
Other 5.0
China 3.0
EC 11.1
United States
51.4
Other 5.7
Ivory Coast 1.0
Indonesia 10.6
Singapore 16.5 Malaysia
66.3
Other 27.6 Thailand 34.1
Burma 4.9
China 7.3 United States
Pakistan 8.1 17.9
Ivory Coast
Other 35.3 27.1
Malaysia 6.0 Brazil 21.4
Ghana 10.3
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Land Reform
Although land tenure reform policies pursued by
several LDC governments have played a major role in
raising agricultural productivity, they have not been
employed by most of the six leading exporters. In
general, movement toward individual ownership of
land-such as China's new "responsibility system"-
has proved to be an effective production incentive.
Land reform, however, is usually an explosive social
and political issue. In Brazil, President Sarney's
promises to enact land reform have made squatters
bold, and rural violence is rising in several states as
landowners react. Sarney's four-year plan targets 1.4
million agricultural families for land redistribution
and titling, ensuring further unres
Security
The absence of prolonged political unrest or pervasive
guerrilla activities has helped some, but not all, of the
new competitors. Where farmers have been faced with
life-threatening situations and the seizure of their
crops, they have been unable or unwilling to produce
much more than required to meet their immediate
needs. Besides disrupting the agricultural production
cycle from planting to harvest, sustained disturbances
in many LDCs have interrupted normal marketing
channels and affected seasonal planting decisions.
Brazil and India have had relatively few security
problems. On the other hand, some Third World
agricultural competitors continue to face political
obstacles. For example, despite Argentina's vast po-
tential, farmers have reacted to political instability
and high inflation by adopting low-risk crop and
cattle rotations and low-cost technology, hindering
further export gains. In the Indonesian province of
East Timor, farmers face a continuous security threat
from guerrillas and consequently are not allowed to
farm more than 2 to 5 kilometers from their villages,
which restricts the already limited amount of land
available for production.
The experience of the six leading LDC agricultural
exporters is likely to be repeated to some extent by
several other Third World countries over the next
decade. Should those other LDCs follow some of the
same steps taken by the current major LDC competi-
tors with respect to introducing new agrotechnologies
and implementing policies favoring market incentives,
they could capture portions of the world market for
certain commodities. While most of these countries
are not likely to become major exporters in the near
term, the cumulative impact of their exports on
existing surplus world supplies could be significant.
We believe continued growth in LDC agricultural
exports is assured by several factors. Many LDCs,
despite intentions to diversify their export base into
manufactures, have discovered that investment in
agriculture requires less capital and time to generate
export revenue than in higher-value-added industries.
The successes of market-oriented agricultural export
programs, moreover, are becoming well-documented
and are likely to become models for LDCs that have
fared poorly under state-run systems. On the technol-
ogy side, opportunities for great increases in yields are
still plentiful through the application of modern but
conventional farming techniques, while genetic engi-
neering has the longer term potential to revolutionize
LDC farming.
As the push for hard currency earnings forces LDCs
to diversify their agricultural export base, several are
already moving into new commodity markets. The
production is generally localized, highly subsidized,
and targeted for a specific export market. Examples
include cotton in Panama, Zimbabwe, Sudan, and
Pakistan, and palm oil in Papua New Guinea,
Colombia, and Ivory Coast. Other commodities and
countries to watch include corn in Colombia, barley in
Tunisia, rice in India, and grain in some African
LDCs. In Africa, for example:
? Kenya's export success has been due to policies that
have ensured strong price incentives and good exten-
sion services to farmers.
? Malawi price incentives and marketing board re-
forms have boosted maize and cotton production.
? Zimbabwe has succeeded with surplus crops export-
ed from large (400 hectare minimum) commercial
farms with access to capital and new technology.
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While the successful export development of Brazil,
Malaysia, and Thailand may be replicated in at least
some of the emerging exporters, prospects in much of
Africa and Latin America are not good. Governments
in most African nations, which rely heavily on cash
crops to earn foreign exchange, have not provided
adequate infrastructure and producer incentives and
have pursued inconsistent export policies. In Ghana
and Nigeria, for example, misguided agricultural
policies have reversed formerly strong export posi-
tions in a number of commodities. Moreover, an
adverse climate and poor cropping techniques have
greatly hindered agricultural development in many
African countries-especially in the Sahel.
Although a few countries such as Kenya, Malawi,
and Zimbabwe have expanded some agricultural
exports by stressing market orientation, service, and
technology, such success will be difficult to repeat
elsewhere in Africa because of the long history of
tribal, subsistence farming. In West African coun-
tries, an upturn in long-term agricultural prospects
will hinge on a reversal of climatic trends; more
widespread adoption of small-scale, low-cost agro-
technologies; and more rational producer incentives.
In South and Central America, the implementation of
more consistent agricultural policies and technologies
will continue to be constrained by political instabil-
ity, tight government budgets, and overvalued ex-
change rates. Terrorist activities, widespread corrup-
tion, smuggling, and frequent investment and export
policy changes will continue to inhibit the efficient
marketing, processing, and export of agricultural
commodities. These problems are particularly acute
in Colombia, Peru, Bolivia, and El SalvadorF__1
Most LDCs, however, will probably remain marginal
agricultural exporters at best (see inset). Although
increasing numbers of LDCs will become more self-
sufficient in food production, few are likely to come
up with the combination of natural resources, market
incentives, greatly improved technology, and other
factors that have produced such world competitors as
Brazil and Argentina.
If even a small number of LDCs substantially expand
their agricultural export capacity, the additional com-
petition in world markets could have mixed implica-
tions for US interests. Continued export expansion by
these countries and declining imports by greater
numbers of self-sufficient LDCs will mean greater
surpluses in world markets-especially for tree crops,
wheat, soybeans, rice, cotton, and vegetable oils.
Indeed, the steady growth of exports from the six new
LDC competitors alone will burden already oversup-
plied world markets, leading to a continuation of low
prices and more intense competition for shrinking
market shares. As a result:
? Competition in US overseas markets for poultry and
orange juice will intensify; the Brazilian Broiler
Exporters Association, for example, recently an-
nounced a $1 million package to diversify foreign
markets by promoting Brazilian poultry in Japan,
the European Community (EC), and West Africa.
? Export competition against the United States will
also be stiff in soybeans, wheat, rice, and vegetable
oil.
? Other US export markets may come under assault
as emerging exporters in Africa, Latin America,
and Asia achieve successes on a more limited scale.
Competition among LDCs themselves will probably
intensify. With sustained pressures to generate hard
currency earnings, LDCs will be forced to undercut
competitors' prices and to adopt even more aggressive
market promotion policies. As buyers lacking ade-
quate foreign exchange, they will be pressured to
arrange barter deals, often based on political ties
rather than market forces)
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Figure 3
Share of Labor Force in Agriculture, 1980
Agriculture
Industry
Other
Such intense competition could create serious trade
tensions among important US allies in the Third
World. For example, Malaysia and Indonesia both
export rubber, palm oil, and timber. Indonesia has
cheaper labor and more suitable undeveloped land, as
compared with Malaysia's superior infrastructure and
processing facilities. Although Malaysia has bested
Indonesia in the export market, its competitive edge is
eroding, and Embassy reporting indicates that in the
1990s Indonesia may overtake Malaysia in the pro-
duction and export of palm oil and rubber. Recent
bilateral talks aimed at easing disagreements over
commodity exports accomplished little, and trade
tensions are likely to intensify
This competitive environment is likely to hinder as
well as help US efforts in the new round of GATT
negotiations. Should agricultural trade restrictions be
considered in depth by GATT for the first time, some
LDCs seeking market access, such as Thailand, are
likely to join the United States in pressing for lower
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EC and Japanese tariffs and nontariff barriers. Coun-
tries in Africa, the Caribbean, and the Pacific, howev-
er, have special trading agreements with the EC and
will be reluctant to alter the status quo, as will some
leading LDC competitors such as Brazil and Malay-
sia. Given these counteracting positions, we do not
expect the LDCs to be major contributors to resolving
the issue of nontariff trade barriers, which have
hindered US gains in foreign markets
Opportunities
On the positive side, stronger commodity export posi-
tions by key Third World countries such as Brazil and
Thailand are likely to pay economic and political
dividends to the United States over the long run.
Continued export gains will be needed in these coun-
tries to cushion the impact of IMF-mandated compli-
ance programs and to compensate for private lending
cutbacks in the industrial sector. Moreover, with up to
two-thirds of some LDC populations engaged in farm-
ing, strong and expanding agricultural sectors will
also be needed to help preserve political stability and
to maintain the viability of newly installed democrat-
ic, civilian governments. This will probably be the
case, for example, in Argentina, Brazil, and Uruguay.
Stronger agricultural growth in the Third World
should also provide considerable benefits to US agri-
business firms. Opportunities for US exports of seeds,
fertilizers, pesticides, farm equipment, and even com-
plete processing plants are likely to present themselves
in the face of expanding LDC agricultural produc-
tion-offsetting to some degree US losses in primary
commodity trade. For example, Zimbabwe and Brazil
are strong potential markets for US seeds and farm
machinery, while Colombia and Pakistan will proba-
bly purchase US fertilizer as part of their efforts to
boost grain yields.
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Appendix A
The Top Three LDC Competitors
The benefits from changes in agricultural policy and
new agrotechnology have had a particularly striking
impact on Brazil, Malaysia, and Thailand. The three
countries have led the surge in agricultural exports,
with export volume for several key Third World
commodities more, than doubling over the past 10
years (see table 2).
Brazil: Already an Agricultural Superpower
Brazil, the world's second-largest agricultural export-
er behind the United States, has boosted export
earnings in the past decade through implementing tax
breaks, subsidized credits, and input subsidies. It has
also taken advantage of changing market trends and
rapidly diversified into processed agricultural prod-
ucts. After a decadelong development drive, lucrative
Brazilian export crops now include soybeans, soy
products, poultry, and orange juice.
Soy products. Brazil's push in the soy sector has met
with particular success: Brazil surpassed Argentina in
1984 to become the second-largest exporter of soy-
beans after the United States. While its drought-
reduced soybean production in 1985 is estimated by
trade sources at only about 13 million tons, reducing
earnings by $700 million, Brazil's aggressive export
pricing is expected to continue to boost its sales over
those of the United States and other Western export-
ers. lthough Brazilian
production costs are similar to those in the United
States, Brazil stands ready to undercut US soybean
prices by $18 to $20 per ton to assure a significant
export market in 1986. According to Embassy offi-
cials, Brazilian soybean production may reach 21
million tons by 1990, making Brazil the world's
second-largest producer. At current prices, this could
add $180 million to export earnings
Citrus. Prospects for future Brazilian export gains are
especially good in citrus. Citrus-primarily orange
juice-exports have grown even more rapidly than
soybeans and have become Brazil's seventh-largest
source of foreign exchange. The USDA estimates
Table 2
New Third World Agricultural
Competitors: Production and
Exports of Selected Commodities
Exports
4,078 7,450
Soybean oil
Exports
430 600
211 771
181 730
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Confidential
1985 earnings at $753 million, up from $339 million
in 1980. Brazil's citrus expansion has been especially
well timed, since the US industry in Florida has been
damaged by consecutive poor crops. Despite lower
world prices, substantial Brazilian exports, expected
as a result of Florida's frost-induced production prob-
lems, mean Brazil's 1986 export earnings will once
again top $730 million.
Poultry. Brazilian production grew quickly in the
1970s as large integrated poultry systems replaced
outdated, labor-intensive barnyard operations. Ac-
cording to trade and press reports, low-interest agri-
cultural loans to farmers, subsidized poultry feed, and
bulk rate freight savings have all contributed to
expansion of Brazilian poultry exports since 1979.
Earnings peaked at over $350 million in 1981 and
have consistently topped $250 million since then.
Brazilian poultry producers are currently among the
most efficient in the world, according to industry
reports, with a price advantage of between 40 and 45
percent over other exporters. Seizing on new market
opportunities, Brazil now dominates the lucrative
Middle East poultry market, and it is encroaching on
US markets for chicken parts in Japan, Singapore,
and Hong Kong.
Malaysia: Building on Advantages in Tree Crops
Malaysia's agricultural success is largely due, in our
view, to a rich endowment of natural resources and
government policies to encourage investment, techno-
logical innovation, and specialization. Malaysia has
built on its strong comparative advantage in produc-
ing tropical tree crops-especially rubber, palm oil,
and cocoa-on large, efficiently managed estates for
export markets. Output of these crops is rising and
Malaysia's share of world trade is increasing. Like
Brazil, Malaysia has reacted quickly to changing
international economic conditions and is likely to
continue to emphasize improved productivity to main-
tain international competitiveness in agricultural ex-
ports.
Palm Oil. The palm oil sector has led the surge in
exports. Compared with only 1.3 million tons in 1975,
Malaysian palm oil production could top 4.8 million
in 1986, according to industry reports, while export
earnings could reach about $1 billion. Malaysian
price and investment incentives have been a particular
boon to the production and export of palm oil and
cocoa. To encourage value-added palm exports, pro-
cessed palm oil exports are exempt from the 15- to 30-
percent export duty on palm kernels, amounting to an
average subsidy of $180 million per year to the
Malaysian processed palm oil industry. As an addi-
tional incentive, refined palm products are eligible for
the new National Bank Export Finance Scheme,
which provides exporters funds for seeds, fertilizer,
and pesticides to improve crop yields.
Seizing on palm oil's price advantage over soybean oil,
Malaysia has vigorously promoted palm oil exports. In
addition to official trade missions and market promo-
tion tours by the state-owned Palm Oil Research
Institute of Malaysia (PORIM), high-level delegations
from Kuala Lumpur have traveled to Iran, India, and
Egypt. According to USDA, these trips have success-
fully set up joint ventures to sell palm oil in China and
Egypt, and stimulated direct purchases from Paki-
stan.
The future for Malaysian palm oil exports is bright.
According to industry sources and USDA, production
estimates for Malaysian palm oil range between 5.4
and 6.7 million tons by 1990, assuring that Malaysia
will remain the largest US competitor in world vege-
table oil markets. Generous tax incentives for produc-
ers and processors and a new National Export Council
are likely to spur expansion of palm oil exports into
major markets in India, Pakistan, Japan, Africa, and
the USSR
Cocoa. Malaysian cocoa production and exports also
have responded well to research advances and produc-
er incentives. The Malaysian Agricultural Research
and Development Institute (MARDI) continues to
make progress in cocoa research, specifically the
development of five new high-yielding cocoa clones.
Kuala Lumpur provides incentives to small farmers in
the form of fertilizers, pesticides, and planting materi-
als. These subsidized inputs and new varieties have
enabled Malaysia to rise from the world's tenth-
largest producer of cocoa beans in 1978 to sixth in
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1985. Extensive areas planted in the mid-1970s have
now reached peak productive age, and, with another
40,000 hectares coming into maturity, USDA predicts
exports of cocoa beans will probably reach a record
125,000 tons in 1986/87.
Thailand: Gains in Rice and Rubber
Thailand's comparative advantage in agriculture
comes from its favorable climate and abundance of
fertile land. Dependent mainly on rice twenty years
ago, Thai farmers have responded to price signals and
diversified into a variety of other crops. As a result,
Thailand now exports large quantities of corn, tapi-
oca, and rubber, as well as rice.
Rice. Thai rice farmers have been particularly respon-
sive to market signals, making long-term switches in
cropping patterns in reaction to the relative attractive-
ness of commodity prices. For example, in several
areas two and sometimes three rice crops are now
harvested per year to produce surplus for export. To
encourage even greater productivity, Bangkok is pro-
viding low-cost inputs such as fertilizer to farmersF_
As a result of these initiatives, Thailand has become
the world's number-one rice exporter, and production
has risen from 10 million tons in 1975 to 13 million in
1985. To further boost its export competitiveness,
Bangkok in January 1986 abolished the longstanding
export tax on rice. Price discounting and recent
improvements in Thai rice processing have facilitated
Thai penetration of traditional US markets in Europe,
the Middle East, and Africa. However, recent US
legislation designed to enable US rice exporters to
compete in world markets will cut into Thai sales this
year by about 500,000 tons, according to USDA
estimates
We believe Thailand will remain a major competitor
in rice by moving away from traditional cultivation
techniques into yield-improving technologies. Accord-
ing to USDA, Thailand could boost yields by as much
as 150 percent with regular fertilizer use. In addition,
the use of appropriate equipment for row-seeding and
inter-row cultivation has the potential to greatly
increase productivity and export potential.
Rubber. Thailand has become the third-largest ex-
porter of rubber behind Malaysia and Indonesia.
Production has jumped from 355,000 tons in 1975 to
720,000 tons in 1985, according to State Department
reporting. This was achieved by expanded plantings,
replacing aged stands with new high-yielding clones,
and using more sophisticated tapping and processing
techniques. Lower production costs and improved
quality are making Thai rubber even more competi-
tive. As a result, export revenues topped $670 million
for 1985, up from $511 million in 1983.
Recent efforts to make Thai rubber more competitive
include government-sponsored consolidation of small 25X1
holdings into "miniestates" to increase yields and
thereby offset the advantages of lower wages and
higher productivity in neighboring Malaysia. This
effort, combined with a dynamic natural rubber re-
planting program and new high-yield planting materi-
als, could boost exports in the next few years to
between 700,000 and 800,000 tons, according to
USDA. For export earnings, this would mean an
increase of nearly $100 million, even at current low
prices.
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Appendix B
Snapshot of LDC Agriculture
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Agricultur-
al Export
Crops
Transportation/
Storage
Algeria
Dates, pota-
toes, citrus
Inadequate
Ethiopia
Coffee, oil-
seeds
Inadequate; two all-
weather roads, two
ports, one railway
Ghana
Cocoa, tim-
ber
Inadequate
Ivory Coast Coffee, co- Inadequate
coa, timber
Kenya Coffee, tea, Task force set up to
sisal, cotton, solve logistic prob-
livestock lems, but severe
transportation prob-
lems remain; new
building program un-
der way in deficient
storage areas
Various ministries and
marketing boards
Government attempts to
control grain and coffee
trade are strictly enforced
but inefficient
Ineffective and costly; by
law, all cocoa, coffee, and
nuts must be sold to state
marketing boards, but low
returns to farmers have led
to widespread smuggling
Tax exemptions to encour- Attempting to build Current five-year plan encour-
age investment in agricul- national capability for agri- ages agricultural development;
ture; liberalization of mar- cultural research land to be redistributed to small
keting and pricing farmers
Proposals to improve grain Insufficient; need to focus Ambitious 10-year development
marketing; strong disincen- on modern farming methods program begun in 1984 has lit-
tives to foreign investment as well as improved varieties tle chance of success; agricul-
persist ture crippled by drought and
poor pricing policies
Bleak outlook despite im- Insufficient New Economic Recovery Pro-
proved producer price incen- gram under study to improve
tives incentives and decrease govern-
ment involvement
Various marketing boards Export subsidies may be ex-
inefficient because of lack of tended to agriculture with
centralized authority emphasis on palm oil and
rubber
Government still heavily in-
volved in grain marketing
through costly, inefficient
parastatals
Tanzania Coffee, cot- Rudimentary; major Extensive co-ops reintro-
ton, sisal bottlenecks persist duced; parallel market for
despite some reha- foodcrops due to inefficien-
bilitation of railroads cy of system
Funding ample by African Guaranteed producer prices are
standards, but still inade- far below market prices; subsi-
quate dized inputs offer little
incentive
Excessive redtape thwarts Research efforts hampered Favorable producer prices for
the expansion of liberalized by limited natural resource coffee and tea provide up to 80
trade base and fragile environ- percent of market prices; re-
ment maining disincentives include
poor access to farm credit and
no land reform
Increased producer prices, Very little; limited to out- Two economic reform packages
but not enough to spur pro- side sources announced; little success
duction; no cohesive foreign expected
investment policy
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Snapshot of LDC Agriculture (continued)
Agricultur- Transportation/
al Export Storage
Crops
Tunisia Olive oil, Inadequate, but
citrus, dates slowly expanding
grain storage
Zambia Tobacco,
cotton, hor-
ticultural
crops
Numerous marketing Very limited; trade and in- 25 large agriculture projects Promotion of countertrade, irri-
boards are still poorly man- vestor agreements with Lib- focus on soil analysis and gation projects, limited land
aged ya, Algeria, China high-yield varieties reform
Inadequate and lo- 103 boards and co-ops are Income tax exemptions, fa- Focus on agronomy and new Considering land reform and
cated far from buy- inefficient and heavily sub- vorable export tariff rates crop varieties; shortage of marketing board reform
ing centers sidized money and qualified staff
Zimbabwe Tobacco, Recent construction
maize, cot- of 24 marketing and
ton distribution depots
will ease bottlenecks
Argentina Wheat, Outdated infrastruc-
meat, oil- ture in need of re-
seeds, corn pair; reconstruction
of damaged Bahia
Blanca port will ease
problems
Farmers sell maize, cotton, Five-year focus on improv- Research plan reoriented to- 15-year land reform package
and sugar to state market- ing crop prices combined ward needs of the small- under discussion; more input
ing boards at fixed national with access to extension, scale producer loans now available
prices credit, and research facili-
ties
Marketing boards sell all Aggressive export pricing; Lacks funding Overvalued peso; reform of ex-
major agricultural exports modest reductions in export port incentives needed
taxes
Brazil Coffee, Infrastructure is out- Large parastatal marketing Production loans offer low Agricultural research has Well-designed export policy has
soya, sugar, dated, but plans are boards purchase and market interest rates; budget con- low priority in funding moved from highly subsidized
citrus, poul- under way to im- agricultural commodities straints have forced export to more market-oriented sys-
try, tobacco prove port and rail subsidies to be halved tem; expanded financing
facilities in Matto
Grosso and Bahia
Chile Vegetables, Inadequate
fruit
(grapes)
Deficient domestic market- Agricultural support prices Low investment in agricul- Need more production and
ing structure for agricultur- encourage expanded plant- ture; trying to expand trans- investment incentives
al commodities; plans to ings fer of technology
strengthen private market-
ing channels
Colombia Coffee, ba- Undependable and Deficient marketing chan- High interest rates and cus- Slackening agricultural re- Marketing and price stabiliza-
nanas, sug- insecure road and nels; widespread black mar- toms duties keep search, but regional com- tion funds under consideration
ar, cotton, rail systems due to ket agricultural profit margin mittees may spark renewed
tobacco guerrilla activities low efforts
Venezuela Cocoa, cof- Road and rail system The inefficient and corrupt Farmers exempt from land Need to improve seed tech- Attempts at agricultural revi-
fee, vegeta- in need of expansion Agricultural Marketing and income tax; export sub- nology talization including expanded
bles and upgrading Corporation may be re- sidies of 30 percent on non- credit, subsidized fertilizer, and
placed by a series of region- traditional products (coffee increased producer prices
al marketing boards and cocoa excluded)
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Snapshot of LDC Agriculture (continued)
Agricultur- Transportation/ Marketing Boards
al Export Storage
Crops
Burma Rice, pulses Lack of storage; ru- State marketing boards
dimentary transpor- purchase and sell all rice
tation; poor port fa-
cilities
China Grain, soya, Mostly inadequate
cotton, to- and outdated, but
bacco limited road upgrad-
ing and more wide-
spread port expan-
sion are under way
India Tea, coffee, Inadequate
tobacco,
cotton, rice,
wheat
Indonesia Rice, rub- Limited warehouse
ber, sugar- capacity and trans-
cane, palm portation systems
oil
Malaysia Palm oil, Fairly well devel-
rubber, oped; increased fund-
timber, ing for infrastructure
cocoa in 1986
Pakistan Rice, cotton Well developed but
deteriorating
State procurement is a Largely ineffectual despite Need to reform procurement
strong disincentive to pro- large sums targeted for re- and export policies; no increases
duction search in producer prices since 1976
State buying agencies Moving from state procure- Widespread research under Higher procurement prices
efficiently act as export ment to direct commercial way on plant and animal have promoted quality over
firms; rural marketing and sales breeding, fertilizer, and pes- quantity; responsibility system
distribution system now be- ticides has increased efficiency and
ing developed produced surplus for export
Producer cooperatives, vari- Cash subsidies to promote Research on high-yield vari- Adequate producer prices for
ous marketing boards, and value-added products; tax eties and pest control; vigor- major crops; fertilizer subsidies;
state buying agencies han- rebates and grants for mar- ous promotion of technology farmers provided with basic
dle export trade for various ket promotion activities transfer inputs
commodities
National Food Agency A few direct subsidy pro- Research focuses on disease Fertilizer subsidies and floor
(BULOG) acts as a mini- grams; new reforms will at- control and hybrid seed; prices offer limited production
mum price guarantor tempt to clear up corruption new efforts have resulted in incentives; land reform may in-
and inefficiencies at ports higher yields crease palm oil and coconut
production
State marketing agencies National Export Council
control agricultural market- will promote trade and pub-
ing licize export incentives;
market promotion trips
form an integral part of the
aggressive export marketing
policy
Sophisticated research facil- Export development has
ities keep palm oil produc- steadily increased despite ab-
tion and processing technol- sence of support prices and ex-
ogy in the forefront port subsidies; differential ex-
port taxes encourage value-
added palm oil production
State control of cotton mar- Fruitful manipulation of Fundamental research in
keting and forced rice pro- support prices has provided rice and cotton is required
curement are strong disin- incentives for export-quality to improve yields
centives for farmers rice and cotton
Subsidized credit and inputs;
more appropriate incentives
now focus on higher quality do-
mestic production for export
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Agricultur-
Transportation/
al Export
Storage
Crops
Philippines
Coconut oil,
Limited
sugar,
bananas
Thailand Rice, rub- Limited
ber, sugar,
corn
Marketing Boards Export Incentives Agricultural Research
State marketing agencies Credit packages and price More is needed-especially
control purchase and mar- supports are in place; how- cultivation technology, hy-
keting of commodities ever, high risk and political brid seeds, and weed control
and economic uncertainty
hinder exports
Commodity trade handled Trade promotion tours en- Relatively advanced; oil
by a few large private trad- courage government-to- palm plantations have intro-
ing firms government deals; emphasis duced high-yielding Malay-
on free market trade sian technology including
tissue culture and insect
propagation
Until recently, poorly designed
government intervention in the
pricing and marketing of agri-
cultural commodities was a dis-
incentive to production; price
controls now lifted on all basic
commodities except rice
Continued market-oriented ap-
proach since 1981; producer
price increases have successful-
ly motivated Thai farmers;
sharp currency devaluation has
increased export
competitiveness
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Confidential
Confidential
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STAT
gury
""' c t
EXECUTIVE SECRETARIAT
ROUTING SLIP
ACTION
INFO
DATE
INITIAL
1
DCI
2
DDCI
X
3
EXDIR
4
D/ICS
5
DDI
X
6
DDA
7
DDO
8
DDS&T
9
Chm/NIC
10
GC
11
IG
12
Compt
13
D/OLL
14
D/PAO
15
D/PERS
16
VC/NIC
17
D/0GI
X
18
19
20
21
22
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the Deputy Director of Central Intelligence
NOTE TO: Leo Cherne
Vice Chairman
President's Foreign Intelligence
Advisory Board
Another interesting paper on structural change
with potentially significant implications for the
US economy. Worthy of your reading list.
Regards,
Attachment:
GI 86-10066,Sept86
CONFIDENTIAL Cl By Signer
DECL OADR
Nog Registry
~~. 4668/1
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the )crruty I)11c001 of Central Intclllgcn(c
Wa Jim on 1) c 20SOS
$s- 4668
The Honorable Richard E. Lyng
The Secretary of Agriculture
Washington, D.C. 20250
Dear Secretary Lvng:
Bill Casey and I think you would find the
enclosed report of particular interest. It
has significant potential implications for
US agriculture and our economy in general.
Sincerely,
Enclosure:
CI 86-10066,Sept86
CONFIDENTIAL C1 By Signer
DECL OADR
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Directorate of
Intelligence
The Growing Challenge
New Third World
Agricultural Competitors:
Confidential
GI 86-10066
September 1986
Copy 4 41
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