The “tortilla crisis” that shook Mexico in January may not have been a flash in the pan. If Jing Ulrich, the Hong Kong-based chairwoman of China equities at J.P. Morgan Chase & Co., is correct, everything from beer to steak might just become more expensive globally.
Ulrich’s case is built around a statistic and an observation: It takes 7kg of grain to produce 1kg of beef; and “Chinese people are eating more meat as consumer wealth increases”, she says. If China’s export-driven growth is deflationary for the world, its hunger for a protein-rich diet combined with an inability to produce it at home may prove to be inflationary. Worldwide, meat consumption is forecast to increase by more than half from 1997 to 2020; most of the new demand will come from China. The implications for grain demand are staggering.
This conclusion itself isn’t new.
In 1995, Lester Brown, then president of the Worldwatch Institute in Washington, had seen the avalanche coming in his book Who Will Feed China?
Since then, China has done a good job feeding a fifth of the world’s population with less than a 10th of global farmland.
What has changed in recent years is the sustained increase in oil prices and the consequent diversion of food crops globally to the production of ethanol.
Corn futures prices have risen 60% in the past year on the Chicago Board of Trade. So China is going on an Atkins diet just when global food security is perceived to be facing a threat from ethanol. The combination, as we saw in Mexico, could be explosive.
The price of corn-made tortilla, a component of Mexico’s core inflation, tripled to 15 pesos ($1.40) a kilo in January before President Felipe Calderon brokered an agreement with retailers, forcing them to hold the price at 8.5 pesos.
This is just the beginning. Throw in livestock demand in China, and the prognosis for corn and soy may well be for a multiyear bull run.
According to the Food and Agriculture Organization of the United Nations, per-capita meat consumption in China grew to 50kg a year in 2000, from 20kg in 1985. The trend may continue unabated even as China exhausts the ability to meet growing demand for meat and feedstock from internal resources.
China’s import of soybeans has doubled in the past five years. “Strong demand for soybeans is attributed to rising use of soybean meal as a protein source for swine, poultry and aquaculture production,” the US Agriculture Department said in an August 2005 circular.
Muted Indian demand
In India, the only other billion-person economy, growing affluence is translating into rising demand for poultry because religious preferences limit consumption of beef and pork. Poultry production is three times more efficient in terms of grain usage than, say, beef. That explains why, at least for the next decade, India will meet most of its protein requirement domestically. Where India may have to allow more imports is in pulses, which are a cheap source of vegetable protein and a big part of the Indian dietary tradition.
That won’t have much of an impact globally because world trade in lentils, peas and chickpeas, which are together referred to as pulses, is almost insignificant.
And what will be the consequences of the surge in China’s meat consumption? With cities and towns encroaching upon what always was a short supply of farmland—not to mention a growing shortage of unpolluted water—China will increasingly depend on the rest of the world to feed its people and animals. “The bull market for agricultural commodities will continue,” Ulrich notes in her study. “Potential knock-on effects may include rising beer prices as barley has become more expensive. Steak prices have also increased as producers pass on the rising costs of feed to the end consumer.”
Haven’t we heard this before?
After all, back in 1996, corn had risen to more than $5 a bushel only to crash to less than half that amount by mid-1998. The grain is now at about $3.70 a bushel. What’s the guarantee that this dawn will also not be short-lived?
For one, some of the anticipated competition between food and fuel may never materialize. Venture capitalist and alternative-energy evangelist Vinod Khosla has invested in a New Zealand-based company that will create ethanol from carbon monoxide. Khosla’s argument is that by the time ethanol is produced in large quantities, the key ingredient won’t be corn, but residue such as barley straw.
That may well turn out to be true 10 years from now, though at the moment, corn is integral to the ethanol frenzy.
Unless oil goes back to $30 a barrel and stays there, the current rally in farm produce may not peter out any time soon. The global inventory of food is at its lowest since 1972, according to investor Jim Rogers, who in 1999 correctly predicted the start of the commodities rally. Even if you forget ethanol, world food production can’t rise at the pace at which China will demand more meat. Tortilla trouble is already here. Brace now for beer brawls and steak strife.