25/06/2008 - 22:00

Production shift to meet needs of middle class

25/06/2008 - 22:00


Save articles for future reference.

As the price of soft commodities - referring to commodities that are grown, rather than mined - has departed from historical trend lines, a great deal of attention has been focused on food riots in developing nations, the debate over the environmental ben

Production shift to meet needs of middle class
Growth Sector: Changing lifestyles in developing countries, and the rapidly growing middle class, will inevitably lead to changes in demand for and production of crops. Photo: Courtesy Australian Barley Board.

As the price of soft commodities - referring to commodities that are grown, rather than mined - has departed from historical trend lines, a great deal of attention has been focused on food riots in developing nations, the debate over the environmental benefits of biofuels and the potential for agricultural nations to become major powers.

However, questions surrounding fundamental drivers of the structural change in demand patterns, namely global population levels and the global demographic mix of income and lifestyle levels, are often avoided.

There is also the related matter of the timing of a potential global population peak, of around 10 billion, and whether this is followed by a flattening, or potential decline, in global population numbers.

One of the most significant drivers in the increase in demand for soft commodity resources is the emerging global middle class, particularly in nations with a fast-growing gross domestic product.

With demographic change comes a noticeable change in consumer trends, particularly in the dietary habits of new middle class citizens. When relatively higher disposable incomes are achieved, the pattern of progressing from a grain or rice dependant diet to incorporating meat into regular diets is well documented.

When compared with traditional cereal-dominated diets, a diet that includes meat requires considerably larger quantities of grains to feed animals for meat production.

The following table, extracted from Goldman Sachs, Commodities: Food, Feed and Fuel: An agriculture, livestock and biofuel primer, March 2007, shows the amount of grain required in the production of certain types of meat, and the energy yield from those particular forms of meat in human consumption.

The amount of grain required to support a vegetarian diet is much less than that of a high-protein diet, due to the nature of energy loss in the progressive levels of the food chain. Even with static global population numbers, a change in the mix of people eating meat changes the total amount of soft commodities required. This leads to a high 'exchange-rate', in the conversion from grain to meat.

Even with uneven economic growth and periodic setbacks in so-called developing nations, there will be a significant change to the global demographic mix and the proportion of the global middle class, as a proportion of total population.

In global terms, the transition from national demographics being dominated by the poor, to that of lower-middle class and middle class groups, will accelerate in the period 2010 to 2020. In fact, in a very short period of time, the mix of the division between classes will switch.

A former economist, now working at the Brookings Institute, Homi Kharas, estimates that by 2020, the world's middle class will grow to contain 52 per cent of the global population, up from about 30 percent in 2008.

As the world transitions to a higher proportion of people living a middle class lifestyle, many nations will experience a high demand growth for meat products. Subsequently, this will increase the demand for grain, creating more demand for sub-standard and marginal land to come into production. As the costs of bringing new production on-line flow through to prices, it could be expected that relatively minor demand increases could have significant impact on the price of soft commodities, and ultimately farmland. The demands on farmland during this time will also intensify. Agro-forestry, for carbon credits, and biofuel input production are among some of the competing users of productive farmland.

Perhaps one of the most significant changes during the 2010s and 2020s will be the impact of a new global middle class on the existing Western middle class.

This may, by virtue of its size, make some of the existing items of Western middle class consumption out of reach for members of this group, as they are priced at higher rates.

The adjustments to lifestyle could be particularly difficult for those who have become accustomed to every increasing levels of affluence.

Food and energy inflation in Western countries is starting to bring some of these issues to the electorate's mind. However, more significant or fundamental erosion of Western middle class lifestyles has not yet occurred to any great degree.

As some of these changes flow through to Western middle classes, substantial voter volatility can be expected. The introduction of carbon-pricing systems, which would also place pressure on energy prices, will be problematic to navigate. It may also result in further conflicts and unrest, which may make long-term policy, of all kinds, difficult to implement because of an inpatient populace.

Internationally, the rapid movement to middle class lifestyle, and the associated pressures on soft-commodity markets, could cause flashpoints both within and between societies.

The point at which the majority of the global population became urbanised only occurred in 2007. This relatively slow process took millennia to occur. In contrast, the period in which the majority of the world's citizens transition from poverty to middle class is set to occur over decades.

The impact of this trend has started to be noted over the past 12 months. The overall impact of this large group attaining a lifestyle which will demand a great deal of the earth's resources may also alter the time at which the global population peaks and the subsequent adjustment to a flattening, or even decline, in global population numbers. In this period of time, substantial international adjustments may need to be made, and the risk of conflict will rise significantly.

-Andrew Pickford is a strategic analyst and is the research manager at Future Directions International.


Subscription Options