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

November 29, 2011

The complete story about this topic and how it will influence the future markets can be found in my book We Will Reap What We Sow.

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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Hunger is about more than just food production

December 4, 2010

Everyone who works in agriculture and food knows that there are about one billion people on Earth suffering from hunger. The temptation to think that the cause is a lack of food production is great, but it does not reflect reality. Quite a few serious organizations and personalities claim that one Earth is not enough to feed nine billion people by 2050. Some claim that we would need two Earths. Others even go as far as mentioning the need for three, and even four, of our blue planet.

There are two possibilities with such statements.

If they are true, then humanity has a problem, because there is only one Earth, and we will not get a second one. In such a case, the only way for supply and demand to get in balance is a reduction of the world population. This could happen through famine, disease and/or wars. Since in such a scenario there is a maximum to the world population, once this number is reached, there must be a constant elimination of the couple of billion people too many, through one of the means just mentioned. This is not a particularly happy thought.

On the other hand, if such statements are erroneous, there is hope to feed the increasing world population with one Earth.

Then, is one planet enough or not? Simple math should help finding the answer. If we need two Earths to feed nine billion, one planet would only feed 4.5 billion people. Currently, the world population is around seven billion, out of which one billion is hungry. Conclusion is that we currently can feed about six billion people. We are not doing that bad. Is it possible to find ways of feeding three more billion on this Earth? From the simple math above, it is clear that those who claim that we need three Earths or more are wrong.

Out of the six billion who do not suffer hunger, it is estimated that one billion is overweight, a part of which, mostly in the USA, is obese. They clearly ingest more calories than they need. Purely theoretically, if those were to share the excess food they consume with the ones who have too little, the billion hungry people would have about enough. This means that today there is already enough food available to feed seven billion people.

Another interesting factor is waste. According to the FAO, about 40% of all the food produced is lost and wasted. In rich countries, most of the waste takes place at supermarkets, restaurants and households level. People simply throw away food. In developing countries, the waste takes place mostly post-harvest. The food does not even reach the market. The food is spoiled because of a lack of proper storage facilities and logistics. The food ends up rotting, contaminated with mould or is eaten by vermin. To fix the problem, the FAO estimates the cost to improve infrastructure at US$ 80 billion. This is less than the amount the EU just made available to bail out Ireland. What to say of the US$ 3.3 trillion that the US Federal Reserve lent to banks to alleviate the financial crisis? Of course, it will be impossible to achieve an absolute zero waste, but if we were to achieve 10%, this will feed many people. I have heard the statement that if post-harvest losses were eliminated in India, the country would be fully food secure. Per 100 tons of production, 40% wastage means that only 60 tons are available for consumers. By reducing waste from 40% down to 10%, there would be 90 tons available. This represents an increase of food available by 50%! Since we could already feed seven billion with the 40% waste, reducing wastage to 10% would allow feeding 10.5 billion people.

There are also many debates about whether we should eat meat or not. The nutritional need for protein is easily covered with 30 kg of meat per capita per year. I had shown in an earlier article that if Western consumers were consuming just what they need instead of eating superfluous volumes (very tasty and enjoyable, though), it would free meat to feed 1.4 billion people the yearly individual 30 kg. In China, the average meat consumption is already up to 50 kg per capita per year. The consumption is very unevenly distributed, but this is the average. Cutting 20 kg per capita over a population of 1.5 billion would free meat for the nutritional needs of an additional one billion people.

The other area of potential is Africa. The FAO estimates that the area of arable land that is not exploited is about 700 million hectares. This is about the size of Australia. To simplify and get an idea of the potential, we can calculate what it means in wheat equivalent. With the assumption that wheat yields would be the same as the current African average, a low 1.5 tons per hectare, this adds up to 1.05 billion tons of wheat. Since a person needs about one million calories per year, and there are about 3,000 calories in a kg of wheat, one ton of wheat can feed three people, the 1.05 billion tons of wheat can feed more than 3 billion people. Normally, there would a crop rotation of at least two harvests per hectare. With proper investment and financing, farms should be able to reach easily the US average of 3 tons of wheat per hectare. Clearly, this performance could be achieved with traditional techniques and good quality seeds. This is not even about high-tech or GMOs. This tremendous potential of Africa is why China, India and Arab countries are very active developing farming there. They did the math. This scenario also shows that Africa can easily become a strong net exporter of food. In this case, the world map of food looks very different. Without Africa being able to produce large amount of foods, the prospects for food security in Asia and the Middle East are a bit bleak. They can depend only on Western Europe, Russia, Ukraine, Kazakhstan, North and South America, and with Australia to a lesser extent. With Africa as a net food exporter, the world map looks a lot more balanced, East-West as well as North-South. Sea routes from Africa with the Arabic Peninsula, the Persian Gulf, and farther away with India and China create a much safer feeling of food security for the countries in those regions. For Africa itself, it may change the relations between Sub-Saharan country and the Maghreb countries. This in turns changes the type of relationship that the Maghreb may have with Europe, by creating more economic activities to the South. Africa’s success –or failure- will affect the whole world.

With the above, everyone can develop further assumptions, but these calculations show that this one Earth can produce enough food to cover the needs of between 12 and 15 billion people. It almost sounds impossible to believe, yet these numbers are not even ambitious. I have not even taken into account that in 2009, 25% of the corn produced in the USA was destined to feed cars, not people, via ethanol production, and that number is expected to grow to about one-third for 2010. The potential is even higher when one considers that a large part of the US corn goes into soft drinks, while it could be used to produce tortillas, with a side glass of water, a much healthier alternative.

That said, if the potential for food production supply looks adequate, actually producing it may not be as easy. The human factor, especially through politics and leadership, will be crucial to succeed.

One would ask why there is hunger if we can produce so much food. The answer is simple. Hunger is not just about food production, it is about poverty. People are hungry because they do not have money to buy food. They do not have money because they do not earn enough, as they have low paying jobs or simply no jobs at all. By developing the economy in these regions, people would get better wages. They could afford more food. The demand would drive the development of food production. Agricultural development would then be a normal and natural activity. Trying to develop agriculture if the locals cannot buy the food cannot work. Recently the FAO estimated that two-thirds of the world’s malnourished live in only seven countries: China, India, Pakistan, Bangladesh, Indonesia, Ethiopia and Congo. These are countries where most of the population is poor, and most of which lives in rural areas. The other proof that hunger is not only a consequence of low food self-sufficiency can be found in two agricultural exports behemoths: Brazil and the USA. In the latter, a recent survey carried out by Hormel Foods, the deli producer, shows that 28% of Americans struggle to get enough money to buy food, or they know someone who struggles. Last year, the USDA had estimated at 14.6% the percentage of US households that do not have enough food on the table. Food will find the money and vice-versa. If Bill Gates decided to move to the poorest and most food insecure place in the world, and would fancy a lobster, I am sure that someone would manage to find him one and deliver it within reasonable short notice.

My book, Future Harvests, investigates the possible scenarios to increase food supply and meet the demand at the horizon 2050.

Copyright 2010 – The Happy Future Group Consulting Ltd.


Two-thirds of world population live in the 16 most populated countries

August 17, 2010

When looking at their respective demographics, economic situations and food security status possible future scenarios can arise from this list.

The most obvious is probably that many countries on this list have little food security. Considering that many of these countries have a young, poor and increasing population, political stability is quite fragile. As long as this remains, the consequences of food inflation must be taken very seriously.

Country

Population

% of world population

China

1,337,320,000

19.6

India

1,180,220,000

17.3

USA

309,199,000

4.5

Indonesia

231,369,500

3.4

Brazil

192,860,000

2.8

Pakistan

169,410,000

2.5

Bangladesh

162,221,000

2.4

Nigeria

154,729,000

2.3

Russia

141,927,297

2.1

Japan

127,530,000

1.9

Mexico

107,550,697

1.6

Philippines

92,226,600

1.4

Vietnam

85,789,573

1.3

Germany

81,882,342

1.2

Ethiopia

79,221,000

1.2

Egypt

78,200,000

1.2

 Total  

4,531,656,009

 

66.7

 

What came to my mind when I saw the list the first time was the following.

The cluster Pakistan-India-Bangladesh represents 22.2% of the world population. This region is very sensitive to climate events, as the current floods in Pakistan demonstrate. The monsoon is the main factor that influences the level of crop production. These countries are below food self-sufficiency, and their agricultural infrastructure (and overall infrastructure in general) is in bad need for further development. However, the quality of agricultural land is good with around 40% of arable land. The task of India is huge. It has about 70% of its population in agriculture, and if the USA had India’s population density, there would be 3 billion Americans, 10 times its current population. In such a situation, the USA would not be self-sufficient, either. Agricultural reforms are necessary to improve yields and economic development is necessary to provide more inhabitants with higher revenue. It will take time, but expectations for the Indian economy are positive. Subsistence is not a good economic model. A good relationship between India and Pakistan is paramount for the stability of the region. A stable Pakistan is essential for the stability of the world.

In North America, I can see dramatic change coming. With two countries, Mexico and the USA, in sharp contrast with each other in the top 16, something will happen. The USA will remain an economic superpower and any events in that country will affect the world economy and politics. Mexico is growing but it needs to improve its economy and achieve better social stability. Poverty is fuelling many issues and the price hike of corn of 2008 has showed that it would not take much to cause food riots. The issue of immigration of Mexicans into the US will not go away, and no wall will stop it, especially with Mexico having a strong population increase. The difference in population numbers of the two countries will shrink. The USA and Mexico will have to develop a joint economic development program for the region to avoid an uncontrollable situation in the long term. I think that we will see more and more Mexicans settling in the USA and become the farmers of the future over there. However, climate conditions will probably affect the geographical distribution of productions. The southwest of the USA is increasingly suffering from water scarcity, and the area spreads. This will affect the distribution of the population over the continent, and it will affect Canada as well.

South East Asia has three representatives on this list: Indonesia, The Philippines and Vietnam. This region shows a strong population increase. From a food production point of view, geography tells that aquaculture has to be a leading, if not the leading, food source for the future. And this is exactly the direction that these countries are following. Rice is essential in this part of the world, and there is no doubt that the South East Asian Emergency Rice Reserve will be tested at some point in time.

Brazil is growing, demographically and economically. It is becoming an economic powerhouse, in particular in agricultural products. However, much still needs to be done to improve infrastructure and performance. In the future, I expect to see joint agricultural policies between a number of Mercosur countries, especially with Brazil, Chile, Argentina and Uruguay as the initiators. Export has led agricultural production of these countries in the past, but I expect to see them to rebalance policies towards feeding the South America market as well in the years to come.

The other thing that jumped out of the list is Africa. I doubt that many people would have expected Nigeria to be ranking #7. Africa will be an important element in the 21st century economy. The continent’s population will double in the coming 40 years and many African countries are attracting foreign investments. If this happens in orderly manner, which is far from sure at this stage, I would expect Africa to experience a boom comparable to the one that China has had over the last three decades. The continent is open for business and the rules of engagement are exactly what adventurous pioneers can wish for. Africa has tremendous potential for food production and foreigners are developing agriculture actively for their own food supply, but neither African countries nor investors should forget to include the Africans in the wealth creation, and help them earn the money to feed themselves. What will happen in Africa, will affect all of us.

Copyright 2010 – The Happy Future Group Consulting Ltd.