This past week, I once again had the opportunity to attend the annual Kansas City Federal Reserve Ag Symposium. This year’s event was titled Structural Transitions in Global Agriculture. As you might surmise from the name, the program addressed the shift that is occurring in agriculture from a period of rapidly growing demand and record profitability, particularly in the grain sector, to one of tighter margins (losses) and realignment. This is a topic that I have written quite a bit about over the past couple years and addressed last year with our publication A Look Forward. Agriculture has always been a business of boom and bust cycles that offer both great opportunity and just as equal risk, particularly for those who mistakenly want to believe the pattern will not repeat itself time and again. What can make things particularly challenging in Ag is that the cycle unfolds over such a long period; it can be difficult to keep in perspective. While not ignoring the obstacles and realignments that will need to take place over the short to intermediate term, by which I mean 10 to 15 years, the information that I found most intriguing at the conference came from those looking at the livestock sector. As I have pointed out in previous articles and presentations, commodities need a growth engine to move prices into new levels. While expanding world population numbers provide part of that engine, most recently we had rediscovered the locomotive by the name of renewable energy that pushed demand into new realms and ultimately prices, but it would appear that driving force has leveled off or at least slowed down the rate of advance. Looking forward, we very well could be reverting to what was traditionally the driving force in demand, livestock.
Livestock production and prices have been a hot topic as of late so it should not be a surprise that one of the segments of the symposium was devoted to the outlook for livestock production. But the discussions had less to do with the current situation and more to do with longer-term projections for the growth of meat consumption worldwide. In the United States and in much of the developed world, we have confronted years of declining per-capita red meat consumption, which has partially contributed to the lowest cattle inventory in the United States since the early 1950’s. Yet the advance in prices over the past year would appear to have at least stabilized and possibly began a reversal in that trend as producers appear to be increasing the size of their herds. More importantly for the future is the potential for demand growth worldwide and particularly in developing nations. History has taught us that as the GDP of a nation grows and by extension the income level of the citizens, one of the first things people do is improve their diets, eventually leading to greater meat consumption. According to the USDA, over the past 40 years globally the increase in per capita meat consumption has grown at a compounded annual rate of 1.56%, which is actually a bit higher than the growth in real GDP worldwide for the same period. Consider then that the population of the world is projected to increase by another 28% between now and 2050 and that the income levels of the developing world are projected to grow the most rapidly, it would appear the potential for livestock expansion, and by extension the demand for increase grain production is tremendous. The Worldwatch Institute believes from the turn of the century to 2050 that in sub-Saharan Africa and South Asia alone, the demand for livestock products will have doubled.
There has always been a bit of debate as to feed conversion rates for animals but even just looking at poultry and pork, where we should see the largest increases in production numbers, it is generally assumed that it will require one and one-half to two pounds of grain to produce a pound of chicken and three to four pounds of grain to produce a pound of pork. Cattle of course convert feed at a much lower rate but of course in many place around the world, ruminant animals will be raised on grasses, including for the production of dairy. Regardless, the amount of grain demanded to feed this growing base of animals will need to increase in proportion.
Domestically we are already witnessing the impact on the growing world trade in meat. One of the presenters at the event was the Vice President and Chief Hedging Officer from Smithfield, the largest pork producer in the United States. If you recall, in 2013 it was announced that this company was being purchased by the Chinese meat company Shuanghui and several investment houses including Goldman Sachs, who are all evidently positive about the future of world trade in meat. Regardless, he pointed out that in 2014 exports for pork have increased 9.4% above last year, beef 7.9% and chicken 1%. Considering that the actual pork production year to date is virtually unchanged but beef down 4.8% and chicken down .5% it is not difficult to understand the run up in values that we have witnessed at the retail counter. One of the more interesting statistics that he quoted was from sales data from one of the major grocery retailers who reported that even with pork cutout values more than 26% higher than a year ago, demand has only slipped 1%. Have we reached the point that meat demand has become inelastic in this country?
One final tidbit of information that I found interesting concerns the second largest of the BRIC countries, that being India. We generally do not think much about India and meat consumption, as 80% of the population is Hindu who believe the cow is sacred and pigs unclean. Of course, the current population of India is estimated to be 1.237 billion people, which would mean that there would be nearly 250 million that could be potential consumers of these meats. That represents 80% of the population of the United States.
Suffice it to say, if the projections for rising world incomes are correct, the outlook for Ag is extremely positive, unfortunately we have a period of realignment to work through before that is realized.