Food is the ultimate regressive tax, which is why it might offer some of the most compelling investment opportunities of the next ten years.
The prince dispenses the same number of tuppence for his crumpet as the pauper. But as a percentage of their respective incomes, the crumpet is much more costly for the pauper. This contrast is obvious, but the implications of this contrast for global food prices may be less obvious.
The poor spend as much as they possibly can to nourish themselves. The wealthy spend as much as they wish. In fact, because the cost of food does not rise commensurately with incomes, the cost of food becomes so trivial to the wealthy that they end up tossing the stuff into trashcans.
For perspective, consider the econo-caloric history of the United States, as it progressed from “Emerging Market” to Superpower. According to the Federal Reserve Bank of Dallas, the average American in 1919 had to work two hours and 38 minutes to buy a 3-pound chicken. Nowadays, it takes just 15 minutes.
In statistical terms, Addison Wiggin observes in the latest edition of Apogee Advisory, “Americans spent 23.4% of their disposable income on food in 1929. By 1950 this number had dropped to 20.6%. By 1975, 13.8%. The number finally cracked single digits in 2000. And that figure includes meals eaten both at home and away from home.
“Compare that to Germans,” Addison continues. “They spend 11.4% of disposable income just on meals eaten at home. The French, Japanese and South Koreans spend about 14-15%. Brazilians? 24.6%. And the Chinese spend 39.4% of their disposable income on meals eaten at home.
“Even Canadians, with a much smaller population and their vast productive prairies, aren’t as lucky as we are. They spend 9.2% of their disposable income on meals at home. That’s nearly as much as Americans spend both home and away.”
Therefore, imagine a world in which the global population is rapidly increasing, and in which a growing percentage of that growing population is progressing from mere sustenance levels of existence to conditions of relatively greater prosperity.
You don’t need to imagine such a world; it has arrived.
As the major Emerging Markets of the world like Brazil, India and China continue their progression from chronic underachievers to periodic overachievers, their national wealth will increase. And as this wealth increases, the recipients of it will certainly increase the quantity and/or quality of their diets.
Even if the quantity does not increase much, improving the quality of diet would be sufficient to drive food prices much higher. Replacing one meal of beans and rice, for example, with a meal of chicken and rice may not seem very significant. But it requires 6 pounds of grain to produce one pound of chicken meat, according to the USDA. Therefore, if hundreds of millions of individuals begin opting for chicken over beans, the global grain markets would certainly feel the effects…and these effects would not be limited to the grain markets.
As the organic food website, www.opes.biz points out, “It requires 700 gallons of water to produce one pound of chicken. Instead, farmers could produce 16 pounds of broccoli, or up to 20 pounds of other grains and vegetables… Also, it takes 8 times the amount of gasoline/fossil fuel for production of one pound of chicken as compared to one pound of protein from tofu.”
Therefore, forward-looking investors cannot afford to avert their gaze from global dietary trends. As the Emerging Markets continue to emerge, demand for the world’s finite supplies of grain, water and energy will increased commensurately…and that means much higher prices.
“Americans have become accustomed to cheap and abundant food,” Addison winds up. “Probe the psyche of the average American and he’d probably tell you it’s a birthright. Amber waves of grain and all that. They’re about to get a rude surprise. After a century in which Americans have spent less and less of their incomes on food, the trend is about to reverse.”
Eric Fryfor The Daily Reckoning
Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling.
Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.
I don’t know what these people are eating, but $300/wk x 52 weeks ain’t no single digits.
Bacon – pushing $5 + per pound – 6 months ago $3
Butter – pushing $5 per pound – 6 months ago $2
Lamb – $4 per pound 6 months ago, $6 per pound today
Cheese, sugar, coffee, the list goes on and on and up and up…
We’re freaking doomed!!!
The chicken eating our grain analogy is not accurate. The grains we eat are not the same kind used to feed livestock, therefore, our love for chicken is not directly reflected in the price of bread.
The competition instead comes down to cultivated land. A rise in demand for livestock feed will cause land used for milled grains to be planted for use in livestock feed instead. That could in theory raise the prices for our own grain products, however it will be tempered by the next two facts.
1) The amount of land under cultivation in the US has DECREASED in the past 50 years due to increased out-put. Where I live I drive by forests that had been farmed only a few decades ago and many fields that have simply reverted grassland, just a plow away from being planted again.
2) Production output in 3rd world countries is on the rise. It certainly isnt up to modern standards, but any increase in prices will increase profits, profits allow for further modernizing, modernizing increases production, production is supply etc…
While his first 7 paragraphs are accurate and have a very good point, the rest of the arguement falls as soon as the rest of reality is included.
The cost of meat IS GOING UP! with the government and the corn farmers pushing ethanol as a motor fuel corn is going to become scarce and the cost will increase. The efficiency of ethanol blends of gasoline is less than that of gasoline by its self (about 60% of gasoline) which will require more gallons of the blend to do the same work of straight gasoline.
It looks like the USA will be getting leaner very soon!
Fry assumes indefinite free trade in food. But rising food prices in a country like the USA might mean a political shift towards export restriction.
BTW, World population is actually a good-news story.
Back in the 1980′s demographers were predicting, as the most likely scenario, that world population would reach 12 billion at its crest. Some were even saying 14 billion.
Instead, fertility rates in the developing world have fallen much more rapidly than expected. So world population looks like it will crest at 9 billion. That’s difficult, but by no means insurmountable.
Just one second here, you can’t just compare food costs between industrialized nations as a proportion of income. Do mean NET income or gross income? Because although a European or Canadian may spend more of her net income on food, far more of their living expenses are already covered by the taxes that came out of their gross income. So, the 9.2% that the Candian is spending is AFTER his healthcare costs are covered and the % that the European is spending, takes into account the fact that Europeans commute for shorter distances between home and work,drive less and own smaller cars. I’d be happy to have 100% of my income go to pay my food costs if someone else covered all my other expenses. Also, eating less meat is hardly a dire problem. Increasing food costs may end up being allied with better eating habits and that in exchange may reduce healthcare costs, which would drive down the proportion of disposable income spent on food, etc.
This article oversimplifies.
fish only take 1.2 to 1.5 lbs of grain to make a pound of meat, much better conversion than chicken, and they taste great…. not like chicken at all!
I live in Canada and am constantly amazed at the prices I see for groceries on American food blogs. Even on sale, Canadians pay what New Yorkers complain about paying…for everything.
@ Clayton: THANK YOU!!! I keep telling people to come eat my grains. I doubt they’d like it.
@ Curly: Keep reading the liberal news sites and getting your story wrong. DDGs are a by-product of ethanol so nobody’s losing here. Education yourself.
We farmers are certainly not going to be the ones profiting from the rise in prices. It will be the big Ag companies like Cargill. We are the only business that cannot set the price for our product.
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