Will emerging markets be friends or foes?

It's a simple equation often heard from bullish speakers at agricultural conferences these days: Population is growing, more of the population in emerging economies is becoming wealthy, and wealthy people eat more meat. Conclusion: We need more meat and more feed grain to produce it.

Probably all true, but the gospel that these new markets will go to those who can produce the most meat, most efficiently, may not be as true as some think.

When people take a closer look at developing markets in places such as China, South Korea, Vietnam and the former Soviet Union, they are often flummoxed by the apparent economic irrationality of these emerging markets. There's a lot we don't yet understand about these markets and the cultural dynamics driving them. Ditto for the implications for our own industries.

That reality was brought into sharp focus recently by Dermot Hayes, an Iowa State University agricultural economist specializing in livestock, who was in Winnipeg to deliver the Daryl Kraft Memorial Lecture at the University of Manitoba.

The parts of the animal we like to eat -- the so-called premium cuts such as boneless chicken breasts and pork loins -- are too blasé for the nouveau middle and upper classes in China. "This struck home when I saw chicken feet selling at a premium to boneless, skinless, chicken breast," he said.

To illustrate his point, Hayes popped up a slide of a young woman in an upscale restaurant, ready to savour a chicken head. Deep-fried pork skins and pigs' feet are other delicacies, as are marrow, chicken lungs and blood in Vietnam.

This has potentially two effects on local exports. On one hand, it's value added, an opportunity to capture a higher return on parts of the animal that otherwise end up as waste or in pet food. That means more value for the animals you've processed, but it doesn't necessarily mean you'll process more animals.

Plus, when it comes to meat exports, it only takes one diseased animal -- as Canada saw with BSE in 2003, or an unresolved trade tiff -- for borders to slam shut, causing markets to collapse.

When Russia took exception to the chlorine washes the U.S. poultry industry uses on carcasses in 2010, it cut off purchases of dark cuts that aren't preferred in North America. The products, nicknamed "Bush legs" after president George W. Bush flooded the former Soviet Union with cheap chicken after the fall of the Kremlin, were suddenly in a market-depressing surplus on U.S. markets.

And, as these emerging markets continue to grow, it's still up in the air as to whether they will be buying the meat products or the feed grains to produce their own.

In Hayes' view, building a modern pig industry in China "is a huge waste of grain, energy and people".

On virtually every economic measure -- transportation, production efficiency, manure-management costs -- Hayes believes it makes sense for North America to be feeding and slaughtering livestock and exporting meat and products.

China's people, livestock and most arable land are all compressed into the coastal regions, which also raises the spectre of disease outbreaks. Its productive land base is about 275 million acres, compared with 300 million in the United States and 100 million in Canada. But it is faced with feeding four times the population of the United States and Canada combined.

It's more efficient for it to import meat than grains. For example, the 3.5 million tonnes of corn it has imported so far this year equates to about one million acres of production.

Yet Chinese officials inked deals for another 8.6 million tonnes of soybeans during a February visit to the United States.

Since the fall of 2011, China has also been importing the meat from more than a million pigs each month. That's equivalent to 5.5 million tonnes of corn.

It would appear these countries are more interested in a secure and diversified supply than they are market efficiency. They aren't interested in becoming dependent on single sources because a sudden drop in supply for whatever reason can change the political landscape overnight.

In China, for example, the CPI, or consumer price index as we know it, is dubbed the "China Pork Index" because the cost of pork figures so prominently in the rate of inflation. In 2011, for example, it accounted for 20 per cent of the inflationary pressure -- which ,if running rampant, creates political instability.

Complicating the meat/feed grain equation is the demand for biofuel -- 40 per cent of the U.S. corn crop is now going into gas tanks.

So will these countries be customers or competitors for the North American livestock producer? That remains to be seen.

Laura Rance is editor of the Manitoba Co-operator. She can be reached at 792-4382 or by email: laura@fbcpublishing.com

Republished from the Winnipeg Free Press print edition March 10, 2012 B8