Like all governments, the Chinese government is interested in promoting stability. Nothing promotes stability like a full stomach, nor incites instability like the threat of an empty one. Today’s article argues that in spite of uncertainty in the investment landscape, grain prices and US farmland are two things that should perform relatively well in almost any circumstance.
We are living in a time where many people feel uncertain about their investments. Particularly compared to the 1980s and 1990s, there does not seem to be a clear winning investment or product in which individuals can confidently invest. Not only does the investment landscape now appear cloudy, it also appears to be very uncertain. Not only does GDP growth appear to be depressed, but monetary policy is generating much disagreement and confusion. In such a scenario there are very few "sure things." One thing that does appear certain is that the Chinese have amassed a fortune of foreign exchange reserves and that their economy has grown by leaps and bounds for the past 30 years. While this economic growth may not continue, their stock of money is undeniable. And so long as world economic growth continues, China will almost certainly lead the way. If, on the other hand, we suffer through a deflationary depression, then China’s stash of cash will become an even more formidable arsenal for purchases. Either way, China will have significant purchasing power in the coming decade.
Demographics Point to Higher Grain Prices
As incomes increase from subsistence to middle class, people are able to afford more meat. While different countries vary greatly in their individual propensity to consume meat, it is a general rule that meat consumption increases with income. The significant of this is that the acreage required to produce a calorie of meat is several times the acreage required to produce a calorie of grain. Thus, as populations move away from vegetarian diets and toward more meat intensive diets, it increases the total demand for grain1. Figure 1 shows a scatter plot of GDP/capita and animal product consumption per capita. Countries above and to the left of the line have a lower propensity to eat meat given income, and those below and to the right of the line have a higher propensity to eat meat given income. While India and Russia are slightly below average in their propensity to eat meat, the other BRIC countries, Brazil and China, are significantly above average, as is Pakistan. The linear regression line indicates that the average meat consumption increases by approximately 200 calories per person every time GDP/capita doubles.
Figure 1: A scatter plot of countries comparing GDP per capita [PPP, log scale] and meat consumption in calories per person per day. Source: IMF, FAO
The Elephant in the Room
While other countries' increases in meat consumption are important, China has the largest population in the world and also has arguably the world's most impressive economic machine. Whatever effect China has on grain markets will be augmented by other country's growth, but China is the keystone for this issue. If China's GDP grows at 7% a year for the next decade, their GDP will double by 2020. Using the calculation from the previous paragraph, if GDP doubles (from ,500 to ,000 per person) we would expect to see their meat consumption increase 35%, from 575 calories to 775 calories per person2. While the calculations used here are rather crude, other research has given similar estimates. After estimating long-term income elasticity for a variety of individual meat products, Masuda and Goldsmith estimate an increase in meat consumption of 37% between 2010 and 20203. When the quantity of meat consumption increases by 200 calories per person per day in a country of 1.3 billion, this would indicate the need for 95 trillion additional meat calories per year! Assuming that animal products take an average of 4 times the grain to produce as would a strictly vegetarian diet (China’s primary animal product is pork) this would imply an increase of 285 trillion calories/year of grain. Amazingly, this is almost exactly the amount of grain calories that is dedicated for all current US meat consumption.
How Much Grain Is That?
That's a lot of grain. We can get an idea of how much acreage is required to grow these crops by looking at the acreage that currently is necessary to produce the meat Americans consume each year. According to the National Corn Growers Association and the American Soybean Association 900 million bushels of soybeans and 5.2 billion bushels of corn are dedicated to feed for domestic animals in the US. This is 25% and 40% of the respective total crops from 2009. Since the US exports roughly 20% of its production of beef, pork, and poultry, we can come to a rough estimate that 20% of our crop land is dedicated to raising feed for domestic consumption of meat. Therefore if China grows at 7% a year for the next decade, the US would need an additional 25 million acres of soybean and 14 million acres of corn to satisfy China’s growing demand of meat! Additionally, since the US has among the highest crop yields in the world, it implies even more acres in other parts of the world.
Conclusion
This article compares income per capita and meat consumption and establishes the relationship between the two. Assuming that developing nations continue to have dynamic economies with fast growth in GDP, they will also increase their consumption of meat; and the consumption of meat translates into a four-fold consumption in grains. Ultimately, although meat consumption is only one of many determinants for grain prices, this factor is very likely to play a role in higher grain prices for the next decade. For investors interested in a safe haven, farmland and agri-business are two possibilities for some certainty in an uncertain investment landscape4.
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1 It takes 7 calories of grain to produce one calorie of beef, 4 for pork, and roughly 2 for chicken.
2 This is a conservative estimate since some GDP growth will come from population growth which would have an even larger effect on increased meat consumption.
3 China’s Meat Consumption: An Income Elasticity Analysis and Long Term Projections, 2010, Masuda and Goldsmith, National Soybean Research Laboratory and Department of Agricultural and Consumer Economics. https://ageconsearch.umn.edu/bitstream/61601/2/Poster11972AAEA_MasudaGol...
4 For those interested in pursuing the idea of investing in farmland, here are a couple of resources from recent financial media: WSJ Article, Cash Crops: Buying Farmland for Income. https://online.wsj.com/article/SB200014240527487036506045753133437436496...
Jim Puplava interviews Ned Schmidt on the Financial Sense Newshour: https://www.netcastdaily.com/broadcast/fsn2009-1107-3a.mp3
