The Strategic Marketing Institute Working Paper

Transcription

1 The Strategic Marketing Institute Working Paper Spending on Food: Implications for Michigan Agriculture William A. Knudson October 2003

2 Introduction Researchers at the Economic Research Service (ERS) at the U.S. Department of Agriculture (USDA) recently compiled spending figures on food purchases in 114 countries. They also compiled income elasticities for various food categories for the same 114 countries. These figures have profound implications for the agri-food industry in Michigan the United States. The figures provide evidence of potential markets export opportunities for farmers processors. The ERS grouped food items into the following general categories: beverages tobacco, breads cereals, dairy, fish, fruits vegetables, meat, other foods. The ERS also calculated total food expenditure as a percentage of total spending. The figures ran from a low of percent in the U.S. to a high of percent in the former Soviet Republic of Azerbaijan. Spending on food tends to be highest in the former soviet republics, Africa, parts of Asia. It is lowest in the developed world such as the U.S., Canada Western Europe. Generally speaking, countries that have high spending levels on food have the potential to be markets for U.S. exports if they can generate sufficient foreign exchange earnings, while countries that have relatively low spending on food generally have poorer export potential. Income elasticity is a measure of the responsiveness of food dem to changes in income. Mathematically, it is the percentage change in dem divided by the percentage change in income. For most goods as income increases dem increases. The figures generated by the ERS show that this is the case for food. Income elasticities are closely related to food spending. Developed countries that spend relatively little on 2

3 food have low income elasticities. Countries that have high levels of spending on food tend to have higher income elasticities. Spending on food income elasticities provide information to farmers, processors exporters on possible opportunities to market commodities products overseas. Countries with growing economies that have relatively high income elasticities have a high level of food spending are potential targets for U.S. Michigan exports. Mature economies with well fed populations are less likely to be good potential markets for U.S. Michigan products. The U.S. is the best example of a mature market. While there may be individual opportunities for exped markets in the U.S. for the most part, it appears the U.S. food market is a zero sum game, expansion in one food category comes at the expense of a different food category. Spending on Food The U.S. Table 1 outlines spending on food. The column Total Food Expenditure represents the percentage of spending devoted to food purchases. The individual categories represent the percentage share of the total food budget. Using Albania as an example, percent of spending is devoted to food purchases: percent of food purchases are devoted to tobacco beverages, percent to breads cereals, percent dairy, percent fats oils, percent fish, fruits vegetables, percent meat, other foods. The U.S. is an example of a mature market only percent of all spending is on food. This is the lowest of any nation. Of this amount, purchases of tobacco beverages are the largest component, comprising percent of all food related 3

4 purchases. This is also typical for advanced economies, spending on beverages tobacco is generally the highest proportion of the typical food budget. For example, in the United Kingdom, spending on tobacco beverages account for more than 47 percent of all spending on food related items. One reason the budget share or tobacco beverages is so high in these economies is fact that alcohol tobacco are often taxed. This is not only the case in the U.S., but for most European Union (EU) nations as well as Canada. The second largest segment of the food budget in the U.S. is meat products at percent, followed by fruits vegetables at percent. Europe the Former Soviet Bloc Food consumption patterns in Western Northern Europe are similar to those in the U.S. Food purchases are percent of all purchases in Denmark, percent in France, percent in Germany, in the Netherls, in Norway, percent in Spain, percent in the United Kingdom. In every country except France Spain tobacco beverages constituted the largest share of the food budget. For France Spain, meats were the largest share of the food budget. While the citizens of these nations spend more on food than the U.S., it appears that the difference is not great enough for the EU others to reduce their agricultural subsidies, trade barriers or their opposition to Genetically Modified Organisms (GMOs). One group of countries that do show promise as potential markets for U.S. Michigan agricultural exports are countries of the former Soviet Bloc. Especially promising is Central Europe the Baltic Republics. For example, purchases in the Czech Republic account for almost 25 percent of all spending, purchases in Estonia 4

5 account for more than on third of all spending, food spending in the Ukraine account for more than 45 percent of all purchases. Russia itself shows potential; more than 34 percent of all purchases are food products. However, the window of opportunity in these countries may be limited. Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Pol, Romania, Slovakia, Slovenia have applied for membership in the EU. The best potential markets, the Czech Republic, Hungary, Estonia, are also most likely to obtain entry into the EU first. Establishing market presence in these countries before they are accepted into the EU will be important. The development of the Russian Asian republics will be dependent on their economic growth much of which is dependent on exploiting oil other resource based industries. If these economies grow, the potential for increased U.S. Michigan exports will increase. Asia Latin America Asian markets are a mixed bag. Food consumption patterns in Japan Hong Kong are similar to Europe. In the case of Japan, this means that the high levels of protection for Japanese farmers will likely continue. More than 31 percent of all spending in South Korea is on food. As the South Korean economy grows, its potential as a possible market for U.S. goods will improve. Unfortunately, the ERS did not calculate figures for either India or China, the two most populous countries in the world. Both countries appear to offer potential as export markets in some commodities. However, they also present the potential as competitors to U.S. Michigan farmers in other commodities. 5

6 Latin America is an area that shows promise. In Mexico, more than 25 percent of all purchases are on food. The figure is percent in Brazil, in Chile, in Argentina. Nafta has been successful in increasing market access to U.S. producers in Mexico. Furthermore, given the different growing season, exports to the Southern Hemisphere would not directly compete against locally grown produce. This fact has improves the competitive position of U.S. agriculture generally, Michigan producers of fruits vegetables in particular. Exping free trade zones beyond Canada the U.S. could exp U.S. Michigan export opportunities. Income Elasticities The U.S. As previously mentioned, income elasticities figures are similar to the spending figures. Low income elasticities are found in those countries that have a low level of spending on food. Figure 2 gives the income elasticities for various food groups for 114 countries. For example, in Albania, a one percent increase in income will increase the dem for beverages tobacco by percent, breads cereals by percent, dairy by percent, fats oils by percent, etc. The figures show that while the income elasticity of dem is positive it is in virtually every case less than one. In short Engle s Law holds. As incomes rise less less income is devoted to food purchases. Furthermore, as incomes increase the income elasticity of dem declines. In a few cases the income elasticity for beverages tobacco is greater than one meaning that the dem for these goods increases at a greater rate than income. However, this is true only in some African nations some former Soviet Republics. 6

7 No nation has lower income elasticities than the U.S. The highest income elasticity is for beverages tobacco at percent. The lowest is breads cereals at 0.05 percent. This means that the dem for food is almost completely unresponsive to changes in income. Rising incomes in the U.S. will be spent on items other than food. Europe the Former Soviet Bloc The income elasticity of dem for food items in Western Northern Europe are higher than the U.S. but still well below those of most other nations. As is the case with the U.S., the income elasticities for beverages tobacco tend to be higher than for other food categories. As is also the case with the U.S., the income elasticities for breads cereals are the lowest although the income elasticity for fats oils are also very low. The figures for Western Northern Europe reflect nations that are well developed well fed. The potential for exports is greater for former Soviet Republics satellite nations. For example the income elasticity of dem for meat in the Czech Republic is The income elasticity of dem for meat in Estonia is The income elasticity of dem in Russia for dairy, fish, meat is above These markets show potential if access can be obtained if incomes in these countries rise. In order to fully take advantage of these developing markets, these countries will need access to foreign exchange earnings. Asia Latin America Income elasticities in Japan tend to be similar to those of Western Northern Europe. Income elasticities for South Korea are somewhat higher, especially for dairy 7

8 meat products. This reinforces the implication that South Korea is a potential market for U.S. goods. Latin America also shows promise in certain types of products. For example the income elasticity of dem for dairy products in Mexico is 0.679, for meat products Income elasticities for these types of products are also high in Chile. Income elasticities for all types of products are relatively high for Brazil as well. Implications The data generated by the ERS has several implications. The U.S. is a mature market. In many respects the U.S. market appears to be a zero sum game. While it may be possible for a product or commodity to capture a larger share the U.S. market, it will be at the cost of another product or commodity. Furthermore, the income elasticity figures show that an economic rebound in the U.S. will have little impact on the domestic agri-food industry. As a result, if the U.S. agri-food sector is to grow prosper access to foreign markets will be important. Western Northern Europe are also mature markets; increasing market access in these markets will be extremely difficult. Former Soviet Bloc countries have more potential. However, the window of access is limited. Many of the best potential markets such as the Czech Republic, Estonia, Hungary have applied for membership in the EU. Russia also has potential for U.S. exports, especially if the Russian oil industry increases production foreign exchange earnings in that country increase. Since China India were not included in the ERS figures determining their potential as a market for U.S. products is difficult. This is unfortunate given that these 8

9 are the two most populous nations in the world. Japan is similar to Western Europe. However, the figures indicate that South Korea has potential for being a market for U.S. food exports. Of all the areas of the world analyzed, Latin America has the most promise. Nafta has increased market access to Mexico. Furthermore, the growing seasons in North America is opposite those in the Southern Hemisphere. Therefore, there is not direct competition in the fresh fruit vegetable markets in many countries. Exping Nafta to include other countries would likely have the benefit of improving exports to this part of the world. Another implication of these figures is the need to develop alternative uses for agricultural products. As noted the U.S. market is not a growth market. While there is a potential to increase exports, that potential may not be realized. It is increasingly difficult to reduce trade barriers promote freer trade. As an alternative to food uses non food uses for agricultural output could be developed. Examples include energy (e.g. ethanol, biodiesel), industrial uses (e.g. packaging, industrial parts, etc.) pharmaceuticals, sometimes referred to a nutraceuticals. Michigan, with its ties to both manufacturing pharmaceuticals may be well positioned to take advantage of these nontraditional emerging markets. 9

10 Table 1: Food Budget Shares for 114 Countries Beverages Tobacco Breads Cereals Fats Oils Fruits Other Total Food Country Dairy Fish Vegetables Meat Foods Expenditure Albania Antigua Barbuda Argentina Armenia Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bolivia Botswana Brazil Bulgaria Cameroon Canada Chile Congo Cote d'ivoire (Ivory Coast) Czech Republic Denmark Dominica Ecuador Egypt Estonia Fiji Finl France Gabon Georgia Germany Greece Grenada Guinea Hong Kong

11 Table 1 (continued): Food Budget Shares for 114 Countries Beverages Tobacco Breads Cereals Fats Oils Fruits Other Total Food Country Dairy Fish Vegetables Meat Foods Expenditure Hungary Icel Indonesia Iran Irel Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Korea Kyrgyzstan Latvia Lebanon Lithuania Luxembourg Macedonia Madagascar Malawi Mali Mauritius Mexico Moldova Mongolia Morocco Nepal Netherls New Zeal Nigeria Norway Oman Pakistan Paraguay Peru Philippines Pol Portugal Qatar Romania Russia Senegal Sierra Leone Singapore Slovakia

12 Table 1 (continued): Food Budget Shares for 114 Countries Beverages Tobacco Breads Cereals Fats Oils Fruits Other Total Food Country Dairy Fish Vegetables Meat Foods Expenditure Slovenia Spain Sri Lanka St. Kitts Nevis St. Lucia Swazil Sweden Switzerl Syria Tajikistan Tanzania Thail Trinidad Tobago Tunisia Turkey Turkmenistan Ukraine United Kingdom United States Uruguay Uzbekistan Venezuela Vietnam Yemen Zambia Zimbabwe Source: USDA Economic Research Service Note: Total Food Expenditures represent the percentage of spending devoted to food purchases. The individual components represent the percentage of total food budget. 12

13 Table 2: Income Elasticities for Food Subgroups for 114 Countries Beverages Tobacco Breads Cereals Fats Oils Fruits Other Country Dairy Fish Vegetables Meat Foods Albania Antigua Barbuda Argentina Armenia Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bolivia Botswana Brazil Bulgaria Cameroon Canada Chile Congo Cote d'ivoire (Ivory Coast) Czech Republic Denmark Dominica Ecuador Egypt Estonia Fiji Finl France Gabon Georgia Germany Greece Grenada Guinea Hong Kong

14 Table 2 (continued): Income Elasticities for Food Subgroups for 114 Countries Beverages Tobacco Breads Cereals Fats Oils Fruits Other Country Dairy Fish Vegetables Meat Foods Hungary Icel Indonesia Iran Irel Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Korea Kyrgyzstan Latvia Lebanon Lithuania Luxembourg Macedonia Madagascar Malawi Mali Mauritius Mexico Moldova Mongolia Morocco Nepal Netherls New Zeal Nigeria Norway Oman Pakistan Paraguay Peru Philippines Pol Portugal Qatar Romania Russia Senegal Sierra Leone Singapore Slovakia

15 Table 2 (continued): Income Elasticities for Food Subgroups for 114 Countries Beverages Tobacco Breads Cereals Fats Oils Fruits Other Country Dairy Fish Vegetables Meat Foods Slovenia Spain Sri Lanka St. Kitts Nevis St. Lucia Swazil Sweden Switzerl Syria Tajikistan Tanzania Thail Trinidad Tobago Tunisia Turkey Turkmenistan Ukraine United Kingdom United States Uruguay Uzbekistan Venezuela Vietnam Yemen Zambia Zimbabwe Source: USDA Economic Research Service 15