Rise of the Asian middle class and the competition for animal protein

November 29, 2011

The size of the world population is among the most significant changes for the future. There are many challenges, as the media tell us on a daily basis, but there are opportunities. The first and the main of these opportunities is the population increase itself. In the coming four decades, there will be two billion more people to feed. Never before, has humanity seen such a demand increase. This means that farmers and food suppliers do not have to worry about a lack of market opportunities. Not only the number of people will increase, but the consumption pattern will change, too.

Until recently, most of the consumption took place in industrial countries, mostly the USA, the EU and Japan. For the coming decades, food consumption in these areas will not increase. There are simple reasons for this. One is the demographic stagnation of industrialized regions. Another reason is that people of these regions already eat too much. They have no room for more consumption. At best, they can replace one food by another. Before the economic crisis of 2008, the average daily intake of calories per American was on average of 3,800. This amount is about 50% more calories higher than a normal human being needs on a daily basis. Nobody should be surprised that in such conditions a third of Americans are obese.

In emerging countries, the economic growth results in the rise of a new middle class. A change of diet is the first change that takes place when the standard of living increases. People switch from staple foods such as rice or wheat to higher quantities of animal protein and more fruit and vegetables. The OECD (Organization for Economic Cooperation and Development) looked at the future evolution of the respective shares of consumption by the middle class, between different regions of the world. Their study was for consumption goods at large. The graph is simply amazing.

Click on the picture see the enlarged version

The relative consumption of Western countries will shrink dramatically. While the USA represented about 5% of the world population in 2000 and consumed about 25% of the world resources, they will represent only about 4% of the population and consume about 4% as well. A similar evolution will take place in the EU and in Japan. China and India show the opposite trend. With a share of the total world consumption close to negligible percentages a few years ago, their economic development and the size of their middle classes will transform markets dramatically. Estimates are that the middle class from China and India combined will represent about 45% of the world middle class by 2030! Market demand and therefore world prices will be dictated by the demand from these two countries and not by Western countries anymore.

While the graph covers all consumption items, the situation for food alone might show some differences, but the trend would show a similar pattern. The demand for food in emerging countries will grow strongly. This will not affect only the consumption volumes but also the type of food. The change of the type of food that consumers of the middle class of emerging countries will demand will go beyond switching from a starch-based diet to an animal-protein-rich diet. The type of animal protein that they will eat will change, too. A couple of decades ago, China would import many of the low quality animal products that Western consumers did not want to eat. China used to import products such as chicken feet, chicken wingtips, sow uteri or fish heads. The new middle class is no longer much hungry about those products. They want the prime cuts, too. Instead of being complementary, emerging markets and developed countries will be in competition with each other for the better animal products. This will have profound consequences for the future. It will make the sale of the low-quality products more difficult and affect negatively the profitability of meat producers. At the same time, it will make the demand for prime products literally explode, pushing prices up. Western consumers and Western markets used to set the prices. In the future, Western consumers will have to buy food based on the price set in Asia. Their alternative will be to not have access to these prime products anymore and have a choice between changing their diets or eat less animal products.

This change will make producers and buyers look at business opportunities in a completely different manner than they currently do. All emerging countries show the same trend. Brazil now sees domestic demand for chicken meat increase faster than export markets. Brazilians eat more meat because they become wealthier. Chilean salmon farmers see growing possibilities in the Brazilian market. While their traditional market for Atlantic salmon was the US market, this may change. Since air transport from Chile to the USA is quite expensive, at least more expensive than transport to Brazil, the flow of trade will change from the past. Norwegian salmon might become a better alternative, but the Chinese are now buying increasing quantities. American buyers must prepare themselves to pay much more than in the past to get salmon products.

It becomes clear that the challenge of feeding the world depends for a large part on future consumption of animal protein.

To understand the effect of the increase of consumption of meat in China, a few numbers are helpful. When 1.5 billion people eat on average 1 kg more of chicken meat, world production needs to increase by about 750 million chickens. That represents about 2% of the world production. Similarly, when the Chinese consume on average 1 kg of pork more, the world must produce 15 million pigs more. That number represents 1.5% of the world pig production. The meat consumption in China has already passed the milestone of 50 kg per capita per year, and projections indicate that it would reach 8o kg per capita per year in 2030. Clearly, consumption increase will be much more than just 1 kg. An increase of 10 kg of chicken meat per capita per year in China means that chicken production would have to increase by 20% to meet the new demand! This represents almost the US chicken production volume, and more than Brazilian production. In the case of pork, an increase of consumption of 10 kg per capita means that world pig production would have to increase by 15%. That is 5 times the current pig production of Iowa. That is 60% of the EU production. For beef, the world production would have to increase by 24% to meet an increase of 10 kg per capita per year! This number also represents about 25% more than the current total beef US production.

The Indian population, although still largely vegetarian, is also changing its eating habits. Meat production is increasing there, but not in such dramatic proportions as in China. Nonetheless, with a population of 1.2 billion people, any incremental meat consumption will have consequences.

Different animal productions have different levels of feed efficiency. It takes about 1.8 kg of feed to produce 1 kg of chicken meat. It takes about 3 kg of feed to produce 1 kg of pig meat. For beef, depending on how much grass the animals are fed, the amount of grain used to produce 1 kg of beef varies. With a population of 1.5 billion, an increase of meat consumption of 30 kg would result in the need to produce 3 times 30 times 1.5 billion. The need for feed, excluding grass, would be between 100 and 150 million tons of grains.

Human consumption of grains increase rather limited. Considering that in 2011, animal feed uses about a third of all grains produced, more production of animal protein will put much more pressure on the markets of agricultural commodity. Producing enough to meet the desires of a more affluent world population is actually about allowing the luxury of more meat than people really need. There is no doubt that the “meat question” will become more and more vivid in the future.

My next book, We Will Reap What We Sow, will get in depth about this topic and many others, and discuss the pros and cons of different future scenarios. Stay tuned!

Copyright 2011 – The Happy Future Group Consulting Ltd

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Posted by Christophe Pelletier

The fertilizer of the future

March 12, 2011

Among the many challenges that the agriculture of the future faces, soil fertility ranks high on the list of priorities.

Originally, most farms were mixed. They had land to grow crops and they had animals for milk, eggs and meat. Markets were mostly local, and food was consumed in the villages and towns near the farms. Food waste was fed to farm animals; the manure produced was mixed with straw and returned to the fields where the crops had been grown. Over time, farming has evolved. Agriculture has become much larger scale, global and specialized. This evolution has been driven by the use of oil, mechanization, and by the development of mineral fertilizers.

That model, which has been greatly based on cheap energy and resources, needs to be looked at critically as the economic environment changes. Energy is no longer cheap and, like oil, the resources used for the production of fertilizers have been depleted. New solutions are required to be able to produce optimally.

The production of nitrogen fertilizers requires a lot of energy. According to estimates, it uses 5% of the world’s natural gas production, and half the fossil fuels used in agriculture. Because nitrogen is quite mobile when dissolved, as this happens when it rains, a large amount of these high-energy-consumption compounds are lost. An estimated 50% of the nitrogen spread on crops leaches through the soil. It ends up in the water system. The reserves of phosphates, another important mineral fertilizer, are facing depletion. This might happen in 20 years from now. With the development of precision agriculture, the waste of minerals can be reduced. With the development of satellite imaging indicating the mineral status of a field, and the local variations within the field, it has become possible for farmers to bring just the right amount of the right mineral at the right time and at the right place. This follows somehow a similar thinking as fertilizing plants in hydroponics operations where crops are produced without soil and fed a mineral solution drop by drop.

A consequence of the specialization between crop farms and intensive animal farms is the rupture of the organic matter cycle. Large monoculture farms have suffered soil erosion because of a lack of organic matter, among other reasons. In soils, the presence of organic matter increases moisture retention, increases minerals retention and enhances the multiplication of microorganisms. All these characteristics disappear when the quantity of organic matter decreases. A solution to alleviate this problem is the practice of no-tillage together with leaving vegetal debris turn into organic matter to enrich the soil. This has helped restore the content of organic matter in the soil, although one can wonder if this practice has only positive effects. Tillage helps eliminating weeds. It also helps break the superficial structure of the soil, which can develop a hard crust, depending on the precipitations and the clay content of the soil. Possibly, in the future the use of superficial tillage could become the norm. Deep tillage, as it has been carried out when agriculture became mechanized, has the disadvantage of diluting the thin layer of organic matter in a much deepen layer of soil. This dilution seriously reduces the moisture and mineral retention capacity of soils, thus contributing to erosion as well, even in organic matter-rich soils.

The removal of farm animals from specialized crop farms requires the systematic use of mineral fertilizers because farmers do not have access to manure and the minerals it contains, even though most of these minerals originate from the crops farms.

At the other end of this interrupted cycle of manure, intensive animal farms do not suffer a lack of organic matter and minerals. They have the opposite problem. They have too much of it, and not enough acreage, if any, where to spread it. This leads to accumulation of manure and other related problems, such as stench, high concentrations of minerals in the soil and eventually in the waterways and drinking water reserves.

Since nothing is lost, what has happened to the minerals from fields and from fertilizers? They have been transferred to other places via the global trade of agricultural commodities. Many of these commodities are used to produce animal feed. Phosphate in European pig manure may come from Asian manioc farms. Therefore, the best way to find out where the minerals are is to look at where intensive animal husbandry farms are. As mentioned earlier, nitrogen is washed away into the water system because of its mobility. Unlike nitrogen, phosphates are not mobile in the soil. They will accumulate, which also leads to a loss of soil fertility, eventually. The other area of concentrations of these minerals is in city sewers, and in the soil of slums. Since the purpose of agriculture is to produce food, and since consumers are increasingly concentrated in urban centers, the exportation of minerals is actually gathering momentum out of rural areas.

In the future, we are going to see a new look at fertilization. The economics of agriculture will change. This is inevitable, because the cost of inputs will increase. This will be a direct consequence of the increase of the price of oil, and of the depletion of phosphates reserves. This change of economics will drive renewed interest for manure, and for sewage. These sources will become attractive and competitive, as they contain large amounts of minerals directly available. Because of their nature, they have a high content of organic matter. One of the most efficient ways to remove nitrates from water is to grow plants with it. One of the main sources of phosphates will be manure.

There is little indication that the human population will return to the land, but animal farms can be moved rather easily. After all, they already are segregated from vegetal production. The increased need for manure will call for a relocation of animal productions. In an expensive-energy economy, having the “fertilizer factory” on site, or at least much closer than today makes a lot of sense. This is especially true because manure contains a lot of water, although there are substantial differences between productions. Transporting water is expensive. Mixing crops and animal productions again on farms will also allow the inclusion of vegetal debris together again with the feces and urine, producing a higher dry matter content, with limited transport costs between the field and the “fertilizer factory”. Regardless of the size of the farms, I expect to see a relocation of animal production units on agricultural land. They will be spread more evenly in the landscape than today. This will decrease the density of farm animals in currently high-density areas to levels that will allow a better control of environmental issues, as well as reduce partly the risks of transmission of animal diseases. Animal production units will reappear in areas where they had disappeared because of the fertilizer that they will provide.

This evolution will also come together with a new approach of manure storage and treatment. Open-air lagoons like those that we know today will simply cease to exist. The changed economics of energy will make the capture of gases financially attractive. Manure storage units will be covered; the biogas will be collected to be used for energy purpose, for the farm and the local communities. The solid and the liquid fractions of the manure will be processed and transformed to provide organic matter and the fertilizing minerals necessary for crop production. The location of the “manure units” will be influenced by the type of animal production, and therefore by the physical quality of the manure. There will be a logistic optimization of manure collection to the crop farms. It will be based on efficiency and optimization of resources. Therefore, the new farm structure will be efficient, as much financially as environmentally. Similarly, open-ocean fish farms that currently do not collect the feces will see the financial value in recuperating the fish waste and sell it. In cities, there will be an increasing interest to recycle the sewage. The purpose will be to recuperate the organic matter and the minerals it contains. A similar approach for human waste will apply as for animal production units as I described above. This will also be integrated in the future approach of urban farming, as it will provide the necessary nutrients for an efficient urban food production. It will be a source of revenue to the cities.

In rural areas and in urban areas, organic matter and fertilizing minerals will become strategic activities. They will serve the purpose of feeding sustainably the world population.

Copyright 2011 – The Happy Future Group Consulting Ltd.

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Posted by Christophe Pelletier

Why we will change our eating habits, one way or the other

February 8, 2011

In the discussion about producing enough food for the 9 billion people the world will have by 2050, one of the sensitive issues, especially in the overfed world, is about what to eat and how much of it. There always is resistance to change, and changing eating habits may be even among the most difficult challenges we have. Eating habits are developed unconsciously since early childhood, and switching to conscious choices is not easy to achieve. It requires will power and self-discipline.

Most of the gloomy scenarios about the challenge of feeding the world are based on the assumption that the diet model would have to be the Western diet, and in particular the American diet. This is far from certain. Actually, do not expect this to be the case.

Changing eating habits will happen in two ways. One will be voluntary and the other will be a consequence of food prices.

There is a growing awareness of the health consequences due to overconsumption of food. All the stakeholders seem to blame each over for obesity, diabetes and other heart conditions, and try to convince the public that they are not the cause of the problem. Whose fault is it? Is it meat? Is it corn syrup? Is it fast food? Is it salt? Is it lifestyle? Is it the parents’ fault? Is it the schools with their vending machines offering snacks and soft drinks? We all have read such statements. Here is a scoop: overweight is caused by consuming more calories than are burnt through physical activity. Ailments are the results of rich and unbalanced diets. Eating (and drinking) too much, and too much of the wrong things is bad for you. There is a reason why gluttony is one of the seven deadly sins! Actually, our societies should have a close look at that list, because we might be in trouble.

In Western countries, we eat too much, and that should not be a surprise to anyone. Obesity and diabetes are becoming society problems in the USA, but other countries are following the same path. Europe and China have a rising percentage of obese people, especially young people. Even in Africa, there seems to be an increase of the number of overweight people. A recent study confirmed this (click here for the interactive chart). Awareness about health problems has already generated action. There are government campaigns. Food producers are reviewing their formulas and are working toward healthier products, in particular by lowering the content of salt and sugar of their foods. More and more consumers are also adjusting their eating habits, mostly by changing what they buy and where they buy it. The trend towards healthier and more natural food is growing and it will not stop. Only biotech companies seem to ignore this fact. This food trend is not just in Western countries but in China, too, the demand for natural and organic foods is increasing. After all, nobody really feels happy with being fat or unhealthy. If some people are taking action to improve their diets and its impact on the environment, this voluntary choice is still about a minority of the population, today. One of the reasons for this is that healthy diets seem more expensive than the junk fattening eating habits. I say seem, because those who can cook know that it is quite simple to make delicious balanced meal for less than the supersize combo deep fried so-called menu.

Money matters. That is a fact. This is why money is probably the best incentive for change. And the future will bring us plenty of incentive to change our diets. The current concerns about food prices, and the food riots of 2008, have created awareness about food supply. Although the price hike is more the result of investors, not necessarily speculators, looking for a safe haven for their US dollars through transactions in futures contract, the reality is that the commodity markets, even on paper, becomes the “official” market price. This enters the real economy and affects the price of food for households all over the world. The poorer countries are more sensitive to food price inflation, and this has the potential to cause very serious unrest.

Regardless of the current causes of food price increase, simple economics show that when demand increase, while supply has difficulties to keep up, prices increase. And this is exactly what will happen. In a previous article, I showed that the potential for meeting food demand, or I should say the demand for nutritional needs, of 9 billion was there. Quite easily. However, in this calculation, I indicated the road to success includes reducing food waste and a reduction of the quantity of meat in the diet. This means that we need to change our behaviour towards food.

If there is a sensitive topic about diet, this has to be meat. Opinions vary from one extreme to another. Some advocate a total rejection of meat and meat production, which would be the cause for most of hunger and environmental damage, even climate change. Others shout something that sounds like “don’t touch my meat!”, calling on some right that they might have to do as they please, or so they like to think. The truth, like most things in life, is in the middle. Meat is fine when consumed with moderation. Eating more than 100 kg per year will not make you healthier than if you eat only 30 kg. It might provide more pleasure for some, though. I should know. My father was a butcher and I grew up with lots of meat available. During the growth years as a teenager, I could gulp a pound of ground meat just like that. I eat a lot less nowadays. I choose quality before quantity.

The future evolution of the price of food is going to have several effects. The first one is the most direct. As food becomes more expensive, consumers look for the more affordable alternative first. If their budget is tight, they buy slightly smaller portions. People will slightly reduce their food intake. Those who were over consuming might actually benefit from a positive impact on their health. For those who already were struggling, this will be more difficult to deal with. From all the food sorts, animal protein will be the most affected by an increase of the price of food commodities. Already today, there are clear signs from the meat and poultry companies that the price of feed is seriously squeezing their margins. As usual, passing the price increase to consumers will take time, as retailers will resist. If the price of agricultural commodities is to stay high, consumers will inevitably have to accept price increases for food in general, and for meat and other animal products in particular. The price of meat is going to be affected by other factors than just feed prices. The need for more control on food safety issues, the stricter environmental regulations that will come for animal husbandry, on the land and in the sea, a change in animal husbandry practices, especially a lower use of antibiotics and farms with lower densities of animal will all contribute to an increase in costs. Energy will become more expensive, too. A whole system based on cheap commodities is about to change, simply because there will not be any cheap commodity anymore. These are all adjustments to rebalance our consumption behaviour from the unbridled overconsumption of the past decades, when consumers were not thinking about the consequences of their actions. The industry will figure out how to increase efficiency to contain some of the cost increases, but the change of farming practices will make meat significantly more expensive than it is today. The price of ad-lib cheap meat is ending. The future dynamics of food prices as presented here will be ongoing. A long as we will not have adjusted our diets to a new equilibrium, meat will keep increasing faster than other basic food staples, until meat consumption, and therefore meat production, will reset to different levels. Do not expect this to happen overnight. It will be a gradual process. There will not be any meat or fish riots. If food riots happen, they will be about the basic food staples, simply because the first ones to riot will be the poorer among us, and their diet is composed mostly from rice, wheat, corn, cassava or potatoes. Should the situation become dire, governments will intervene to ensure food for the poorest. Such price systems are already in place in many developing countries, and they are likely to be maintained, and even strengthened.

The same critical factors to keep food prices in check are very much the same as the ones that I presented in the previous article that I mentioned earlier: food waste reduction, moderate meat consumption per capita; and economic development, especially in Africa.

Copyright 2011 – The Happy Future Group Consulting Ltd.

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Posted by Christophe Pelletier

The locavore’s dilemma

December 1, 2010

There is a growing trend, or at least a growing noise in favour of eating locally produced food. The “locavores” as they are called, claim that 100-mile food is the way to a more sustainable agriculture and consumption. Is this approach realistic and could it be the model for the future?

This movement is rather popular here in Vancouver, British Columbia. The laid-back residents who support the local food paradigm certainly love their cup of coffee and their beer. Wait a minute! There is no coffee plantation anywhere around here. There is not much barley produced around Vancouver, either. Life should be possible without these two beverages, should not it? The disappearance of coffee –and tea- from our households will make the lack of sugar beets less painful. This is good because sugar beets are not produced in the region. At least, there is no shortage of water.

But this is not all. There is no cocoa plantation around here, and believe me, there are many people who are addicted to chocolate. British Columbia does not produce citrus or other warm climate fruit. If we are to become locavores, we must say goodbye to orange juice, to lemons, to bananas. Even the so popular sushi must disappear because of the lack of rice. There are no rice fields in this area, and neither are there wheat fields. The Asian population certainly would have a hard time eliminating rice from their diet. The lack of wheat means no flour; and no flour means no bread, no pastries, and no cookies. The carbohydrate supply is going to be tough. If we must consume local, our lifestyle is going to change dramatically. Potatoes and cabbage is the way of the future. But before going all local food, the local locavores must realize that British Columbia produces only 48% of all the food its inhabitants consume. One out of two locavores would have to starve. Going exclusively local would also affect deeply the source of animal protein. Most of the animal feed is made of ingredients that come for much farther than 100 miles. The chickens and eggs would become less available. Farmed salmon, BC’s largest agricultural export could not use the type of feed they currently use, as fishmeal and fish oil come from Peru and vegetal oil comes from farms located far away. There would go many jobs with very little alternatives. If we look beyond food, other agricultural products such as cotton and wool would not be an option anymore. Cars would disappear, because the main component of tires, rubber, is not produced under this climate. The 100-mile rule will solve traffic problems. If local consumption is the rule for food, should not it be the rule for everything as well? China would probably have different views about this. Not only would their manufacturing collapse, but also if they have to produce food within 100 miles of the consumer, they would have to give up importing agricultural commodities. For them, a true locavore system would mean famine. The same would be true here in British Columbia. When people are hungry, they are not so picky about the distance from the producing farm.

The problem with concepts such as local consumption is that the basic idea has some value, but the idea quickly evolves into an ideology, and ideologies tend to make their followers stop thinking pragmatically. Today, the idea of eating locally in a place like Vancouver is possible because supply easily meets demand, thanks to the 3,000-mile foods. This is ironical. If the distance to market has to be within 100 miles, farmers in low population density areas, such as many regions of North America, South America and Central Europe, would have a different type of problem. They would produce an abundance of food, but because there are not enough people to consume it locally, the law of supply and demand tells us that the price of agricultural commodities would plummet, food would stay in storage and farmers would go out of business, while people in China, and in British Columbia, would suffer hunger. Clearly, the 100-mile diet needs some amendments.

Intuitively, it sounds logical that locally produced food has a lower carbon footprint than food that comes from 2,000 to 10,000 miles away. However, this is only partly true. The mean of transportation affects the carbon footprint. The environmental impact of transport is much higher for road transport than it is for rail transport, which is also higher than water transport. The type of transport also depends on the type of commodity brought to market. Perishables need to reach consumers as quickly as possible for shelf life reasons, while dry goods, such as for instance grains and oilseeds do not face the same kind of deadline. The quality of the logistics is also crucial to reduce the carbon footprint. A fully loaded truck is much more efficient than a local truck dropping small quantities in many places, thus driving around most of the time with empty space in the trailer.

The emphasis should not be so much on local as it should be about the search for efficient and low environmental impact. More than the distance from the farm to the consumer, it would be more useful to provide consumers with information about the actual carbon footprint of the products they buy. They would have the possibility to make the right choices. Retailers, too, would be able to make decisions about their sourcing strategies. Clean products and clean producers need to be rewarded for doing a good job. Here in Vancouver, local food products are more expensive than similar offerings from California, Mexico, Ecuador or Chile. How do you convince families with a tight budget to spend more for local products that look pretty much the same? This problem needs to be addressed. Currently, farmers markets are much about marketing. They sell the experience as much as their production methods. Only a wealthy minority can afford to buy on these markets. The prices are not based on production costs plus farmers income. They are as high as possible, because the farmers can ask these prices. The wealthy city dwellers are willing to pay a substantial premium above what they can buy from the local supermarket. In this relation farmer-consumer, the price bargaining does not take place. If these farmers were to try to sell to a grocery retail chain, they would never get the prices they get from the consumers who will not haggle about the price. This is why more farmers try to sell directly to consumers: they make more money that way. However, this might change in the future. A number of retailers are working towards offering “farmers market” products into their store. This already makes market farmers nervous.

Is local production for local markets the way of the future? My answer is that it partly will be and it partly will not. I do expect a shift of the location of production for perishables. Consumer habits will change, too. In the West, consumers have been spoiled. They can eat anything from anywhere at any time of the year. This luxury probably will not be affordable for long anymore. The superfluous will naturally be eliminated.

As the economics of energy, and therefore of food, will change, producers will increasingly locate their operations closer to cities; and even inside cities. Urban farming is a growing activity. Although it started mostly in poor neighbourhoods as a way of having a small patch of land for personal consumption, more sophisticated and efficient systems are being developed. My expectation is that production, and consumption, of vegetables and fragile fruit (for instance strawberries) will gradually become more integrated in the urban landscape than they are now. I also think that we will see animal productions, such as fresh dairy, poultry meat and eggs relocate closer to consumer markets. An interesting development is aquaponics, the combination of greenhouse produce with fish production in tanks. The production of non-perishables will not relocate. It does not have to. What will probably change is the transportation infrastructure in many areas where these commodities are produced.  This is good news for coffee drinkers and chocolate addicts. After all, transport of commodities over long distance is not just the result of cheap oil. The Silk Road and the spice trade by the Dutch took place before mankind even knew about oil. Trade has always been a force of progress for humanity. It helps an increasing number of people to have access to goods that make their lives better. The rules of trade may not always be fair, but like all human activities, it is a work in progress. Limiting our food supply to 100 miles would be a regression. Subsistence agriculture has not demonstrated that it could feed the world. Most of the people suffering of hunger live in subsistence agriculture areas.

Copyright 2010 – The Happy Future Group Consulting Ltd.

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Posted by Christophe Pelletier

The danger of a weakening US dollar

November 1, 2010

The global economic situation is still fragile, and one of the symptoms is the nervousness about currencies. All it takes is a rumor to see a particular currency drop within minutes. The actions taken by central banks during the financial crisis have consequences. The amount of debt and the ability, or inability, of individual countries to manage the situation will influence the relative strengths of all currencies.

One currency has a special status. Because of the economic and political influence of the USA since World War II, the US dollar is the currency for most commodities. This special status also influences the actions of financial markets. Since the stock market plunge of October 2008, investors have become cautious. The value of stocks and commodities does not follow fundamentals anymore. A lot of cash has left the markets and, more than before, the active players in the market place their bets for short-term returns. Most transactions are computer-generated. Software programmers have developed algorithms that allow computers to make transactions based on technical analysis within a millisecond. This maybe a technological beauty, but such programs do not analyze data. They act mechanically, in a very sophisticated manner of course, but mechanically nonetheless. When it would have taken half an hour for traders to panic, the computer can now deliver the same result in less time than it takes to blink. When you add to this that investors, and especially speculators, borrow large sums of money to play with derivatives instead of doing so with the actual assets, the consequences for the real economy may be rather high.

Considering the amount of debt that the Federal Reserve Bank has issued, also known as the amount of money they printed, the burden for both taxpayers and the American economy is heavy, and will remain that way for a long time. The bank crisis is not over. Unpaid mortgages and foreclosures will keep on weighing on the health of the financial sector for quite some time.

The low interest rate may help the American economy to some extent, but the key for a true economic recovery will be job creation. So far, the unemployment situation does not seem to present much improvement anytime soon. To consume, Americans need to make money. With the tightening of credit conditions, they now have started to save money again, instead of spending it at the mall. Before the crisis, on average, Americans were spending 105% of their income, thanks to credit cards and loans based on their theoretical home equity, which supposedly would only go up. Retail accounted for 70% of the GDP. Clearly, this model will not come back. All of the above explains why the US dollar will weaken over the long-term. To alleviate this trend, the USA should increase interest rates, but in the current situation this probably would stop the recovery. The USA are somehow stuck.

Lately, it looks like most of the trends in stocks and commodities prices are linked to the relative strength or weakness of the US dollar. Commodities have become currencies. When the US dollar drops, the price of stocks and commodities goes up, and vice-versa when the currency drops. The logic behind this is simple. Investors are interested in protecting the value of their capital. Instead of owning actual dollars, they prefer to own assets. This is why the demand for materials, oil and agricultural commodities is firm. By switching from cash to finite resources, investors want to ensure that they will, at the very least, be protected from the erosion of the currency. Most of the demand is not for the real commodities, though, but for futures contracts. By borrowing money, they can buy even more of such investment vehicles than they normally would, or should. The higher demand for commodities results in an increasing price, in US dollars that is. Since they buy as the US dollar weakens, they will get more dollars back when they sell, although with the potential depreciation, this might not be an actual profit, but at least it is not a loss.

What may be the consequences for food prices? We have had a flavor of what a run on commodities can do in 2008. This time, the level of leverage will be lower than by then, because investors will not be able to access loans as much and as easily as they could prior to the financial crisis. Nonetheless, increased demand for oil futures contracts together with an increased demand for agricultural commodities futures contracts will result in food inflation. Ironically, the most vulnerable country for this are the USA themselves, because the price inflation will be in US dollars, and that is the only currency that they have. Food inflation will put more stress on the income of Americans, and depending on the level of inflation, this can bring the country back into a recession. Considering the importance of the US economy, the whole world would suffer the consequences.

Food inflation will hit globally, because the demand on paper will be higher than the physical demand, and because, the focus will be in the price expressed in US dollars only. The exchange rate between other currencies with the US dollar will not be taken into account immediately. This will happen when consumers start to offer enough resistance. The resistance can be less consumption of consumer goods in rich countries, but it can be riots and violence in poor countries. Although food inflation has not hit consumers too much, yet, the high price of animal feed ingredients is already a concern for companies involved in animal productions. Processors will face a dilemma between a decrease of margins and the need to fill their plants at full capacity to keep costs down. Their margins and the farmers’ margins will be under pressure, because the retailers will resist price increases as long as they can. Another area of margin pressure for farmers will come from the price of inputs, fertilizers in particular. If the rumor, based on paper contracts, turns into the idea that demand for agricultural production is really increasing sharply, suppliers will hike their prices as soon as they can. If farmers get higher prices for their products, they also will pay much more for their inputs.

Reactions to food inflation will be the strongest in Asia. The situation is already sensitive, and the share of food in the household budgets is still relatively high, especially compared with Western countries. For many people, food is already difficult to afford. The situation is such that the Indian government is considering offering subsidized grains to 75% of the population. This represents about 800 million people. This is roughly the combined population of the EU, USA, Canada, Australia and New Zealand together!

What happens with currencies, stocks and commodities exchange markets will have direct as well as indirect consequences. We all need to follow the developments, because we all will feel the consequences in our wallets, eventually.

Copyright 2010 – The Happy Future Group Consulting Ltd.

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Posted by Christophe Pelletier

The quiet revolution of food retailers

October 28, 2010

While many debates continue in the political and “parapolitical” world about many aspects of food production systems and the impact of human activity on the environment, retailers lead a quiet revolution. Without making the headlines, they gradually change the way their suppliers will do business in the years to come.

Such an evolution is certainly welcome, especially in a time where important decisions need to be made. Political leaders seem unable to reach any agreement on environmental issues, as the world could see at the late Climate Summit of Copenhagen. In the food sector, there are many discussions going on about sustainability and genetic engineering, to name the two hottest items, but the political class does not seem to generate clear and concrete action plans.

Just like what happened in the 1990s about food safety in Europe, retailers are taking the initiative to create momentum on the current issues. The problems that plagued the food industry in Europe, such as salmonella in poultry, the mad cow disease, or the dioxin in Belgian fat for chicken feed showed a number of weaknesses that needed to be addressed. In the case of BSE, UK retailers did not wait for British or European legislation to demand meat and bone meal-free feed for farm animals. As I was working for a company supplying the UK market with chicken meat, I can testify that these were dramatic times. Tough decisions had to be made on a very short notice that had serious financial consequences. By then, a couple of reasons made the retailers took the lead. First, the inability of the government to prevent and tackle the issues was creating a bit of a vacuum on leadership. Consumer confidence in their institutions was fading, and retailers were the only ones, true or not, perceived to take the proper actions to protect the public. The second reason was the fact that many retailers had their own private labels. In this case, the problem was not the supplier’s problem anymore because the supermarket chain could have risked serious PR damage if a food safety issues would have been associated with their brand.

This time, retailers are again in the position where they can present themselves as the consumers’ champions. Legislation is slow to move and make significant decisions. The involvement of interest groups adds to the infighting and delays decision-making.

To prepare for the future, they already have come out with plans and communication on how and where they want the food they sell to be produced, and they try to offer a choice to consumers. By doing so, the most active among them are setting new standards, and forcing the whole production and supply chain to think about the things to come.

In previous blog posts, I have mentioned some of such initiatives, and in Future Harvests, I described the increasing leadership role of food retail in agricultural practices.

In particular, I mentioned the carbon footprint labelling on dairy products by Tesco, Wal-Mart’s Sustainability Index questionnaire to suppliers, and the seafood sustainability programs of many retailers. Marks & Spencer started their Plan A in 2007 with the objective of making their business more sustainable. To achieve this, they are involving their suppliers and the farmers producing for them to carry out the changes that M&S finds necessary for a better future.

More recently, new initiatives indicate that retailers are pursuing further on such initiatives. Wal-Mart came last week with their plan for sustainable agriculture. In the UK, Sainsbury let know last week that they were committing GBP40 million to invest in farming. Earlier this week, Carrefour unveiled their “Reared without GMO” program. In their stores in France, they will sell 300 food items labelled as being GMO-free, to offer consumer a choice based on transparent information. If Carrefour ventures into this, one can be sure that they do so because they already know that this will be good for their business. By gaining market share, it is very likely that their competitors will soon react by issuing similar programs. The EU Commission may be struggling to figure out how to deal with GMOs, but Carrefour says “Let the consumers tell us!” Vox populi, vox dei!

Of course, such initiatives do not please everyone. Today, I could read in a blog for a US magazine backed by the meat industry some interesting reactions about Carrefour’s new plan. Some readers were bringing up the typical arguments. Meat would be so expensive in Europe. Well, meat is quite affordable in France, even without GMOs, so think again! The other argument was about freedom of choice: people should be able to eat what they want. By labelling its food item, Carrefour does just that. French consumers are free to buy at Carrefour or somewhere else, and they have the right to choose what label they prefer. The freedom of choice is ironic coming from the US meat lobby, since American consumers do not have that freedom. Reared with GMOs is pretty much the only choice in the US. For now, that is. However, it is interesting to see on Carrefour’s press release that the pictures of fish, chicken and pork chops are exactly the same, regardless of whether they would be grown with or without GMOs.

In the 1990s, British and European consumers, and retailers, were challenging food industry practices because they were worried about their health and about the lack of transparency about food. Nowadays, in the USA, consumers are increasingly suspicious of their agribusiness, because they are worried about their health and the lack of transparency of the industry. Beef recalls because of E. coli, egg recalls because  of salmonella, spinach contaminated with manure are in the news on a (too) regular basis. They are also increasingly aware, and suspicious, of the relations between interest groups and their government agencies, and how this influences decisions on what they eat.

Retailers are now saying that they are not waiting for politicians to make decisions. They have defined their vision, they know what they want, and they are passing the message on to the suppliers. What would happen in agribusiness USA if Wal-Mart took a similar approach as Carrefour?

Copyright 2010 – The Happy Future Group Consulting Ltd.

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Posted by Christophe Pelletier

What a game changer my book is!

September 7, 2010

Future Harvests has been published less than two weeks ago, and it is going to change my company rather profoundly.

What started as a blog on the side of The Happy Future Group Consulting Ltd. is now about to become the very core of my business.

Not only the book sales are already higher than I would have thought, the book is creating much interest for my other activities. The book has already been shipped not only to Canada or the USA, but also as far as South America, Asia and Europe. This is truly amazing.

The reactions to the announcement of the book’s publication have been amazingly enthusiastic and they made me feel like I had just produced something that many were waiting for. This is both very rewarding and very humbling, because working on solutions for future food supply to an increasing world population is a huge task. Since the publication, people with whom I never had contact before, from all around the world, have approached me, thanking me for having engaged in this venture.

New contacts are asking me to participate in conferences and to organize workshops and seminars for them. The CBC (Canadian Broadcasting Corporation) is interested in having me on one of their programs. Of course, the concrete discussions are still to come, but I have to admit that my Food Futurist is now showing incredible potential.

The part on policy making and strategy is getting more attention, too. This activity has the potential to become a solid business that will need to involve more people in my organization. I have already started to develop a plan for this. I can see interest coming from companies, professional associations and governments, not only in Western countries, but in many emerging countries, such as in South America, Southeast Asia, India, or Russia to name a few.

The first step that results from all of the above is for me to formalize the Food Futurist further into a more structured activity than it has been so far. This has started with my defining and posting the mission on all the business pages of the website. The mission is “To help our clients challenge today’s certainties, shape the future, and manage the transition with a targeted and practical action plan for the coming 10 years and beyond”.

The following step is going to be to develop business around this mission and the principle expressed in Future Harvests.

If you are interested in this, please do not hesitate to contact me. Talking is cheap. If you know people who would be interested, please pass it on to them.

As Humphrey Bogart’s character said in the movie Casablanca, “I think this is the beginning of a beautiful friendship”.

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Posted by Christophe Pelletier

China corn imports forecast to rise 9-fold by 2015

July 8, 2010

Interesting article found on World-Grain.com.

The article is based on a study carried out by Japan’s Marubeni Economic Research. The need for more meat and animal feed will drive the increase.

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Posted by Christophe Pelletier

Insects on the menu

May 31, 2010
I came across a very interesting article from the French newspaper Le Monde, titled “Insects, the steak of the future”.

Photo: AFP/Mario Tama

The article reviews the potential of using insects as a food source to complement the traditional food production in order to meet the needs of the increasing world population.

Here are the main points.

The nutritional quality of insects is high. They are a source of protein, fats, minerals (especially iron and zinc) and vitamins.

The production performance of insects out performs the one of traditional livestock, with a feed conversion ratio (number of kg of food to produce 1 kg of insect) ranging between 1 and 2.

There are already 1,400 species of insects consumed regularly in Africa, Asia and Latin America. Among the favourites, they name beetle larvae, ants, caterpillars, locusts, crickets, silkworm chrysalis, scorpions and spiders (although the two latter ones technically are not insects).

In most cases, insect consumption is the consequence of food shortage, but there is also a festive consumption of the bugs. The author mentions that in the old Roman Empire, caterpillars were a delicacy. Of course, in some Western countries, some restaurants offer insects at a premium price for a certain self-proclaimed sophisticated elite… After all, a lobster looks very much like a large aquatic bug.

Another interesting potential for insect is to use them as a raw material for fish feed. Currently, fish feed is made of increasingly expensive raw materials, such as fish meal, fish oil and agricultural commodities, for which they compete with human consumption, use for feed destined to other farm animals. For many fish species, insects are a natural source of food.

There are talks about organizing the first congress on insect as a food source as early as 2012.

Copyright 2010 – The Happy Future Group Consulting Ltd.

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Posted by Christophe Pelletier

German agriculture Minister says “Eat less meat!”

January 7, 2010

Ilse Aigner made that statement during the “Green Week” held in Berlin early January, one of the largest shows about food and agriculture in the world.

This is quite remarkable to hear a Minister of Agriculture making such a statement, based on the recommendation of the German Nutrition Society that indicates that 300 to 600 grams (that is about 11 to 22 ounces for our American friends, who usually consume this amount in less than two meals…) of meat per capita per week is enough for a person to cover their nutritional needs. Yet, her statement was linked to environmental concerns, since it is fashionable to blame meat production for climate change issues.

From a nutritional point of view, this recommendation is correct. That is all we need. That is less than most of us want, but that is a very different topic. I had addressed this, mentioning that 30 kg per capita per year (equals 600 g per week) was plenty,  in my earlier posting “The future price of meat and fish: up” a few months ago,. I also mentioned that if we ate only what we need, the West would free a quantity of meat large enough to feed a population as large as China’s.

It is unlikely that the Minister’s statement will change consumption patterns any time soon, but the future price of animal protein will. Considering the feed conversion ratio of farm animals and the increased competition between human consumption, animal feed industry needs and biofuels, the production cost of meat will increase. Feed is the main cost in those productions. Further, the amount of water required by farm animals and the manure issues that still linger with intensive animal husbandry, will add to the price pressure.

There is no need to become vegetarians, but the days of gluttony are numbered.

Copyright 2010 – The Happy Future Group Consulting Ltd.

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Posted by Christophe Pelletier

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