Could middle class boom in China spark U.S. food shortages, inflation?

March 5, 2013

While many American restaurant chains aggressively expand throughout India and China, some experts warn of a "boomerang effect" if such growth isn't controlled.

New research from The Boston Consulting Group (BCG) shows that the rise of the middle class in China and India could potentially prompt widespread food shortages and inflation, particularly if investment, policy and technology don't keep pace.

BCG concludes that smart and quick action is needed by the private sector and government in both countries to avoid commodity volatility, runaway food prices and worldwide water shortages. This unexpected impact of Asian growth on the U.S. is known as the "boomerang effect."

BCG consultants Michael J. Silverstein, Abheek Singhi, Carol Liao and David C. Michael, recently published a book titled "The $10 Trillion Prize: Capturing the Newly Affluent in China and India" (Harvard Business Review Press) about the boomerang possibility.

"Chinese and Indian consumers are celebrating their newfound wealth by eating like Americans: they're shifting their diets from grain to meat," Silverstein said. "Their wealth is a good thing. It creates new markets and new opportunities. But it can also lead to global traumas: highly inflated food prices across the U.S., as well as dangerous worldwide shortages of key natural resources, especially water.

Silverstein said boomerang effects have happened before.

"In the early 1990s, direct investment in China led to a flood of cheap goods and permanent shifts in the U.S. labor market," he said, for example.

However, this scenario is different because the middle class in India and China has developed new food preferences that could lead to "hypercompetition" for commodities such as feed, corn and water.

"Climate change is already creating droughts worldwide and bringing the threat of famine, food riots and water wars in Asia. This new surge in consumer demand will worsen the strain in Asia and the U.S. as well," Silverstein said.

That's not to say the scenario will result in chaos, however. Smart investments and policies can limit the impact of both inflation and shortages.

A look at possible scenarios

According to BCG's research, there are only a few steps between changing tastes in China and India and global crisis, including:

  • Wealth — and consumption — is skyrocketing in both India and China. By 2020, there will be 2 billion economically able Chinese and Indian consumers — 1 billion of them new to the middle class. In both nations, lifetime consumption patterns are changing radically. Chinese born in 2009 will consume 38 times more than those born in 1960. Indians born in 2009 will consume 13 times more than those born in 1960.
  • Doing well means eating well, and that means eating meat. Consumers in China are celebrating their wealth by abandoning their traditional diets, shifting from grain toward chicken and pork. Chicken and pork accounted for 4 percent of daily calories in China in 1960; by 2020 they could account for as much as 28 percent. The surge in demand is forcing China to become a net importer of chicken and pork.
  • For meat, you need livestock. For livestock, you need feed. Feed is in short supply. Demand for chicken and pork means demand for feed grain. It takes 2 kilograms of feed to produce 1 kilogram of chicken and 6 kilograms of feed to produce 1 kilogram of pork. In 2010, 99 percent of China's corn production went for feed — a figure that also represents 20 percent of global corn production for that year. The result is that China is no longer self-sufficient when it comes to corn. China's corn imports will increase from 1.7 million tons in 2010 to 15 million tons in 2015 — the equivalent of U.S. exports of 600 million bushels.
  • Put a strain on the global feed supply? You're going to pay for it. All the figures above mean that China's corn consumption will have significant global impact, and prices will surge well beyond current levels. Global corn consumption is projected to rise 3.2 percent per year from now through 2020. That means a 40-percent increase in overall consumption. And that means corn prices could increase as much as 57 percent from 2010 through 2020.
  • Expensive corn means expensive food — including here at home. Demand for corn in China drives up beef prices in the U.S. Feed is 55 percent of the cost of raising cattle. And grain is 60 percent of the total cost of feed. So a 57-percent increase in the cost of feed by 2020 could lead to a 20-percent increase in beef prices.
  • There's no meat without feed and no feed without water. To grow feed grain, you need large quantities of water. China's shift to meat consumption leads to a 10-fold increase in the need for water. And the water supply is already in crisis. Worldwide, water consumption is already ahead of sustainable supply and is growing at 2.2 percent a year. In China and India (which depends on China for much of its water), water supplies are strained by drought. India could have 600 million people without water in 25 years.
  • Water is a problem in the U.S., too. It is becoming difficult to irrigate land there, and a new dust bowl is a real possibility. Water restrictions are already in place in Western states, and the price of water in some U.S. cities is already equivalent to those in Israel. Scarce water means costlier food. The last dust bowl — from 1931 through 1936 — killed off 30 percent of corn production and drove corn prices up 115 percent. Right now, U.S. food exports to China require an 18 percent annual increase in water consumption. Higher corn prices, the result of drought alone, leaving out other factors, could double the price of chicken by 2018.

Getting ahead of the crisis

While all of those scenarios are possible, they're not inevitable.

"Famine and food riots are a reality in India, and water wars between China and India are a genuine risk. But innovation can help. Smart policy decisions can mitigate the worst effects and create opportunities for companies that are sharp and nimble," Silverstein said.

BCG suggests private- and public-sector initiatives that could help:

  • Microirrigation that delivers water directly to plant roots could increase the efficiency of water use by 50 percent.
  • Innovations in seed technology, including genetically modified organisms, can mean higher food production with no increase in water consumption.
  • New policies that price water at market rates, could, said Silverstein, "lead to more efficient water use, as it already has in Israel."

Read more about food trends.

Topics: Equipment & Supplies , Food & Beverage , International , Operations Management , Sustainability , Trends / Statistics

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