14 Mar 2012 The coming boom in agriculture

A coming boom in agriculture? I think so. The old way of looking at food supply and demand is giving way to a new emphasis on the changing diets of hundreds of millions of people. Those changes will substantially increase demand for grains, putting upward pressure on prices, writes Forbes journalist, Bill Conerly.

The old approach to agriculture economics emphasized the stability of demand. Consumers don’t change their food consumption much as their incomes change, nor as the price of food products change. Over the course of the recent recession, for instance, spending on food in the United States dropped by three percent, compared to 22 percent decline for car sales, 14 percent for furniture, etc. Within the food category, the drop in spending was primarily a shift from high value foods to economy foods rather than a decline in total calories consumed.

Food supply, on the other hand, is wildly variable in the traditional analysis. Weather and pests cause booms and busts in agricultural production, along with a long-run trend toward greater productivity by farmers. All the action was in food supply, not food demand.

Things are different today. Bugs and weather still affect production, but the biggest story is the growth of demand for meat by formerly-poor people around the world.

Let’s begin with the grain demand of different diets. An ounce of meat takes about ten times as much grain as an ounce of grain eaten directly. Those animals have to be fed, after all. The exact ratio depends on the type of grain, the type of meat, the location of production, but the number is fairly huge in its impact.

If I have a good year, with lots of companies calling me for help with their business plans, I don’t consume more calories. I might spend more on filet mignon and less on hamburger. But I’m not the guy who’s moving the market. Go to India, China, Indonesia. There are many millions of people moving from poverty into the middle class, or what is the middle class in their context. With higher incomes they are spending more on food. In some cases they are adding calories, but in many cases they are shifting from grains and vegetables to add chicken, pork and beef to their diets.

Let’s say that a family on a path from poverty to middle class has increased it’s income by five percent (inflation-adjusted). They would typically increase food spending by about four percent. A large portion of that four percent gain would go for more meat. And meat has that 10-to-1 ratio of grain demands. Our newly middle class family may be spending only four percent more on food, but it could have triggered a 40 percent increase in demand for grains….

Forbes: commentary by Bill Conerly: Read the full story