The Chinese Diet and the (Horti) Cultural Revolution

THE POPULAR SOUTH BEACH DIET IS A WEIGHT-LOSS PROGRAM based on reducing carbohydrates, sugars and starches while increasing proteins and fiber. Most practitioners of the South Beach Diet are overweight. Many Americans (including yours truly) voluntarily sacrifice the pleasures of beer, pizza, nachos and doughnuts for the health benefits of lean meats, poultry and fresh veggies. In some parts of the world, however, South Beachers have a different mindset. In China, for example, the population is embracing a South Beach-type diet because they can finally afford to do so.

As China urbanizes, its diet improves. This fact might seem counter-intuitive, especially given the romantic notion Westerners have of country living. For example, Farmer Ping leaves the fresh air and pure water of the country for the pollution and crowding of the city in order to make more money. You would think that the big city diet of frozen dinners and ready-to-eat foods could never match the nutritional value of the farm-fresh victuals associated with country living. The facts, however, tell a different story. The Chinese urbanite now gets two-thirds of his nutrition from meat proteins and vegetables. Ping’s cousin back on the farm still gets two-thirds of his calories from grains.

The Chinese are eating more meat and other proteins as their wealth increases. United Nations data indicate that annual per capita meat consumption in China grew from 20 kilograms in 1985 to over 50 kilograms in 2000. Per capita chicken consumption has more than tripled between 1990-2005, but is still at only about half the average of all Asian nations and only one-third of the amount consumed daily in the developed world. Per capita beef consumption is up nearly 10-fold from 1990-2005, but still below the Asia average and less than half that of the developed world. As beef and chicken gain in popularity, pork intake has declined in relative terms; yet per capita pork consumption has nearly doubled since 1990.

Farms or Factories

In recent years, China has done a decent job of feeding 20% of the world’s population with only 10% of the world’s farmland. This may no longer be the case, as protein demands continue to grow. A recent report from JPMorgan highlights some of the challenges facing China’s self-sufficiency regarding grain and protein production.

To create meat protein, you need grain. Demand for livestock feed exerts constant pressure on China’s grain supply as an increasingly affluent population consumes more meat, eggs and dairy products. It takes 7 kilograms (kg.) of grain to produce 1 kg. of beef and about 2 kg. of grain to produce 1 kg. of chicken. Recent biofuel initiatives are another incremental source of demand. Combined, these factors are straining China’s ability to remain self-sufficient in grain production.

While grain demand rises, China’s supply of farmland shrinks. An expanding industrial base continues to encroach on tillable acres. Available arable land has receded from 130 million hectares in 1996 to 122 million hectares in 2006. Excessive use of chemical fertilizers and pesticides has contaminated nearly 25% of the country’s arable land.

China must also contend with a very limited water supply. The country’s per capita water supply is just a quarter of the global average. To that limited supply of water, add the relative inefficiency of irrigation practices. China requires two tons of water to produce one kilogram of grain. This is three times the water Western countries use to produce a kilogram.

Finally, Chinese agricultural interests need to contend with one hard economic fact: A thousand tons of water can produce one ton of wheat with a market value of roughly $250. Chinese factories can create, on average, $14,000 of goods with the same amount of water. If you owned the water, whom would you want as a customer?

Bring Home the Bacon, and Be Quick About It

With ever larger cities encroaching on cropland and increasingly scarce supplies of potable water for irrigation, China will need to make some hard decisions about how to best meet consumers’ demands for more protein. One logical solution would be to import more feedstock grain. Farmers could then switch agricultural production from grains to more labor-intensive cash crops such as fruits and vegetables. Another solution would be to import more meat. As recently as 2003, imported meats accounted for only 3.5% of consumption.

As Chinese policymakers wrangle with the macro issues of how best to acquire more meat proteins for their 1.3 billion constituents, Chinese corporations will have to figure out how best to deliver the goods. Not only are the Chinese (as well as the rest of the Asian world) eating better, they are also in a hurry to do so. According to a recent ACNielsen study, the Chinese are the second most frequent buyers of ready-to-eat meals in the world, behind only Thais and slightly ahead of Taiwanese and Malaysians. Quality control and branding will be more important to consumers should this trend continue.

When analyzing this phenomenon you can see that there are many direct and indirect ways to invest in the Asian protein demand surge. Whether it is commodity futures, stocks of companies involved, or the Chinese meat industry itself, there is money to be made. A lot of people got rich off of the South Beach diet, and now you can, too.

Mike Muehlesk

December 4, 2007

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