A growing middle class should sustain high U.S. commodity prices
The world is hungry. In Asia, particularly China and India, and other developing regions, the demand for food will continue to increase well into the next decade. That’s good news for U.S. producers who will be among those who benefit.
"In my 30-year career, I’ve never seen a better environment and outlook for American agriculture," says Mike Dwyer, director and chief economist for USDA’s Foreign Agricultural Service (FAS).
Five Fastest-Growing Economies in the World
GDP growth, 2011–15)
Since 2000, economies in the developing world—Asia, Latin America, Eastern Europe, the Middle East and sub-Saharan Africa—have been growing rapidly. As incomes rise, people increase the amount of food they eat and shift away from grain-based diets to those higher in animal products.
Brazil, Russia, India and China, also known as the BRIC nations, are the largest countries in the developing world and account for 46% of the world’s 6 billion people. What occurs in these countries and the rest of the developing world in the next five to 10 years will help drive global agricultural prices.
China’s Rising Middle Class. In 2009, 100 million households in China were classified as middle-class. By 2020, there will be more than 300 million middle-class households. "This growth represents a food demand tsunami," Dwyer says.
In the world’s most populous country, which is still growing, diets are shifting to include more meat, and incomes are increasing by 7% to 9% annually, says Fred Gale, senior economist with USDA’s Economic Research Service (ERS).
"Millions of people are migrating to urban centers where they eat more meat," he says. People living in Beijing today eat about 30% of their calories away from home. Half of all meat consumed in China is being consumed in restaurants and factory lunchrooms.
According to the Food and Agri-culture Organization of the United Nations (FAO), China is already eating much better than it was 10 years ago. From 1990 to 1992, 210 million people, or 18% of the population, were undernourished. By 2007, the number of undernourished people in China had fallen to 130.4 million, just 10% of the population.
Robust demand from China is the most powerful force driving the soybean market, but Chinese soybean imports could slow. "In 2008, the Chinese government got scared when international commodity prices spiked and it decided to build its soybean stocks," says Phil Abbott, Purdue University economist. The country’s stocks-to-use ratio for soybeans grew from 4% to 23%, or from 3 million metric tons to 18 million metric tons, at the end of 2010.
That said, China still has an increasing number of people who have to eat, so imports are unlikely to return to 2008 levels of 30 million metric tons in the near future.
China’s impact on the global corn market is also increasing. USDA expects China to import 2 million tons of U.S. corn in 2011/12. Some private estimates, however, call for 15 million tons or more of annual corn imports by 2015. "There is concern whether China’s yield growth will provide enough new corn to feed its booming livestock and poultry industries," Dwyer says.
India, Asia’s Hunger Pocket. The other large Asian country experiencing rapid growth in incomes and food demand is India. In the past 20 years, the number of hungry people in India has nearly doubled, and more Indians than Chinese are undernourished. According to FAO, 327 million Indians, or 21%, were undernourished in 2005 to 2007, compared with 172 million, or 20%, in 1990 to 1992.
"We are talking about a really robust food demand situation," says Maurice Landes, senior economist with USDA–ERS. "Most observers are confident this growth will continue."
In the next 20 years, estimates put India’s annual gross domestic product (GDP) gains between 8% and 9%, which means India’s standard of living would double in eight years.
India’s rapid growth is pulling many people out of poverty and into the middle class. "The middle class claims between 10% and 20% of the population," Landes says. The roughly 220 million people in India who are now middle-class are looking for more diverse and nutritious diets.
For the most part, though, India feeds itself—at least for now. "Next to the United States, India has the best agricultural resource base in the world," Landes says.
Crop yields in India are about half the world average, which leaves a lot of untapped potential for production growth. To reach that potential, major policy changes need to occur to attract investment in agriculture. Currently, India’s agricultural policies favor small farming operations and low-income consumers.
Homegrown in South America. The wealthiest of the BRIC nations and an agricultural powerhouse, Brazil launched a successful Zero Hunger program in 2003. FAO statistics show that from 2000 to 2002, 16.3 million Brazilians, or 9%, did not have enough food to eat. By 2005 to 2007, only 12.1 million people, or 6%, remained undernourished.
Douglas Southgate, an agricultural economist at The Ohio State University and co-author of The World Food Economy, does not expect additional gains in income in Brazil to lead to more spending on food. "If income gains are spent on food, volume won’t change much; instead, Brazilians will send out for pizza," he says. "I’m not looking for a big increase in food demand from Brazil, but value-added products like cheese could do very well."
Brazil imports wheat, rice, some meat and some dairy products, but for the most part, the country is self-sufficient in food.
The Russian Dilemma. While demand for food is growing in Russia as incomes rise, the magnitude of the country’s economic and income growth is nowhere near that of India or China.
"Russia is the only BRIC country that will experience a population loss," says Daniel Whitley, deputy director of trade and biofuels for USDA–FAS. In 1991, Russia’s population was 150 million. Today, it’s estimated at 140 million.
"Over the past 10 years, the value of Russia’s agricultural imports was at least twice as much as the value of its exports," says Bill Liefert, senior economist with the Russia team at USDA–ERS. The country imports meat and livestock products and a lot of processed, high-value foods from the European Union.
Since 1998, Russia’s annual GDP has increased 7%, according to the CIA World Factbook. However, economic growth is expected to slow to less than 5% moving forward. Russia will likely battle inflation for the foreseeable future, which means its agricultural exports, mainly wheat, will suffer from U.S. competition.
Africa and the Middle East. "Sub-Saharan Africa is the poorest, most rural place with the most limited economic prospects, particularly for women," Southgate says. "There are more poor, hungry people in Asia, but in terms of the percentage of the population affected, hunger problems are worse in Africa."
The region accounts for a total of 1.1 billion people, according to the United Nations Population Fund.
In 2009, only 17 million households were considered middle-class. By 2020, 30 million households are expected to fit that category. Food demand in sub-Saharan Africa will grow slowly due to political upheaval, trade restrictions and limited economic growth.
The region of the world referred to as MENA (Middle East and North Africa) has the second fastest-growing population. In 2007, the area had 432 million people, making it one of the least populous in the world, according to the Population Refer-ence Bureau. However, the population is young and expected to grow to 700 million by 2050, surpassing the population of Europe.
According to a joint study by the University of California and the University of Naples Federico II, Italy, as much as 35% of calorie consumption in MENA comes from wheat, and the region is collectively a net importer of 58.1 million metric tons of cereal, making it the largest net importing region in the world. Import dependence is projected to increase from 56% in 2000 to 63% in 2030, leaving the region even more vulnerable to high and volatile international market prices.
Supply Response. To feed the world’s growing population, experts say, untilled land and higher yields are needed. Brazil is poised to play a major role in supply, with about 90 million hectares of land to bring into production, Whitley says.
USDA price projections, which call for corn, wheat and soybean prices to remain high through the rest of the decade, are based on more land coming into production, an increase in yields and existing land that is cropped more intensively in some developing countries, including India.
Finding enough land to meet growing demand for soybean production will be the biggest challenge moving forward, says Bill Lapp, economist and owner of Advanced Economic Solutions, Omaha, Neb. Rising palm oil production might be enough to offset rising demand for vegetable oils, but protein meals for livestock will be in shorter supply.
"Prices on many crops might be peaking, and we could see them scale back if acreage and production catch up with world demand," Lapp says.
In less than 10 years, 36% of households in the developing world will be middle-class, up from the current 20%, Dwyer says. With this "seismic shift," as he describes it, and so much new demand for food, prices won’t dramatically decrease for row crop commodities.