beyondbrics

When the world was hit by a food crisis in 2007-08, one factor made it different from previous episodes: rising demand.

Today that trend is as important as ever – and it frames a series of posts that beyondbrics will publish over the next two weeks exploring the production and consumption of food in emerging markets.

In the past rapid rises in food prices tended to be triggered by supply shocks such as crop failures. But more recently demand shocks are playing a bigger role as countries such as China, India and Brazil become richer.

Yes, crop failures still play a big role, as they did this year after drought devastated grain crops in Russia – prompting an export ban – and floods struck Pakistan.

But the most important underlying trend is the rise of emerging markets, where there are not only a growing number of mouths to feed, but where people with rising incomes want to eat higher-quality food – notably chicken, pork and beef. That in turn increases global demand for grain for animal feed.

When food prices rise it still means the poorest members of society will struggle to get enough to eat, as always. But it also means that the emerging class of sophisticated new consumers will struggle to satisfy their own menu aspirations.

Corporate executives are already adjusting their strategies to the shift in global food demand: BHP Billiton has bid for PotashCorp, a fertiliser maker, and Louis Dreyfus, a big commodities trading house, is developing dual plans for a change of ownership and a possible merger with Olam, a Singaporean rival.

With food still accounting for 30-70 per cent of household’s spending in emerging countries, compared with 10-15 per cent in Europe, Japan and the US, central banks will also struggle to contain inflation when food prices rise as they did in 2007-08.

Following events this year in Russia and Pakistan, the cost of wheat has risen 60-80 per cent from July; corn has jumped 40 per cent; and the cost of barley has doubled.

This is hurting most in the poorest importing countries: seven people were killed in Mozambique earlier this month in protests at a 30 per cent rise in the bread price. But China and India – two nations of 1bn people that traditionally consume most of their own production – are not immune from worries about food security.

After the “Green Revolution” led to a rise in agricultural production – and productivity – in the 1960s and 1970s, output has stagnated more recently as urbanisation reduces the availability of farmland, water, and agricultural labour.

But governments are trying to reverse the trend: Beijing has increased its spending on farming to Rmb140bn ($20.5bn) a year, up tenfold from Rmb14bn in 2004, according to estimates by Deere & Co, the world’s largest manufacturer of tractors and combines.

To get a better grip on the demand factors at play, Rob Subbaraman and Sonal Varma, two economists at Nomura, recently examined how Taiwan’s food consumption has changed since 1980 and published their findings in a report called “The coming surge in food prices”.

They chose Taiwan because the country’s diet is similar to that of mainland China and other fast growing countries in Asia. The country’s per capita income in 1980 – around $3,500 – was similar to China’s today, and that allows them to theorize about what will happen to Chinese food consumption if its middle-class expansion mirrors Taiwan’s.

Their findings are striking. While per capita consumption of rice and vegetables in Taiwan fell from 1985 (when per capita income was $3,368) to 1995 (when per capita income was $13,103), the demand for meat, milk and fruit “increased substantially”.

Looking at meat specifically, the average Taiwanese ate an average of 43kg in 1985; by 1995 it was 73kg.

This is typical. As a country becomes richer, its population’s diet improves, moving away from staples into meat and other protein-rich food. The big increase usually happens between incomes per capita of $2,000 and $8,000. Once the figure is above $12,000 the shift traditionally slows and even starts to stabilize.

In a recent study the Hong Kong Monetary Authority found that a 10 per cent increase in household spending per capita translated into a 11.5 per cent jump in meat spending in China, but only a 1.1 per cent increase in the US.

So emerging markets, as both food consumers and food producers, are transforming their own diets at an unprecedented pace. That means the way the whole world eats is going to be transformed too.