5. Implications of the Livestock Revolution for World Trade and Food Prices

An emerging, central feature of world markets for meat, milk, and feed is that they are increasingly interlinked. IMPACT implicitly takes this interlinkage into account with its annual market-clearing feature, which allows prices to move until supply and demand are in balance. Domestic markets are cleared in the model through backward and forward iterations between sets of domestic and world prices. World prices differ from domestic ones by means of fixed price wedges specified for each country group that catch the effect of protectionist policies or major transport costs to remote markets.

Domestic prices in equilibrium may always be above or below world prices for meat and feed, depending on the country group in question, but they are always affected in the model by movements in world prices. This interlinked movement of prices is a better approximation of reality than delinked markets. In IMPACT, changes in demand for livestock products in Asia, for example, affect livestock and cereal feed prices everywhere. No part of the world will be unaffected by the events in Asia or India or changes in feed use efficiency.

Trade flows are modeled in IMPACT as the net annual residual between production and consumption at world market-clearing prices for each country group and commodity, leading to either net exports or net imports (negative net exports) for that commodity and country group in the year in question. The model does not determine trading partners, but the worldwide sum of net exports for a given commodity is zero for each year in equilibrium.

Projected Trade in Livestock Food Products and Feed to 2020

Net exports of specific commodities by region are given in Table 24, for 1993 and 2020. World beef trade was minimal in the early 1990s. Roughly 0.4 million metric tons flowed on a net basis from the developed to the developing world. WANA imported the most, while Latin America accounted for 18 percent of net world exports of beef. Developed countries imported a net total of 0.7 million metric tons of pork from developing countries in the early 1990s, much of it from China. Developed countries had net exports of 0.5 million metric tons of poultry, almost 19 million metric tons of milk, and a little more than 93 million metric tons of cereals.

Beef is projected to become the most significant meat import of developing countries in 2020, at 2.7 million metric tons net. Pork will remain a net export of developing countries, though only marginally. Poultry imports will rise to 1.8 million metric tons. Milk will almost double in size as a net export of the developed world. Cereals will continue to be the most significant net agricultural export from the developed to the developing world. Compared to 1993, net exports from developed to developing countries are projected to rise by 133 million metric tons, an amount equivalent to approximately 60 percent of the entire U.S. average corn crop in the early 1990s (FAO 1998).

Changes in Net Exports under Changed Asian Assumptions

The livestock and feed trade picture in 2020 changes significantly under the severe Asian crisis and high Indian meat consumption scenarios (Table 25). The extreme assumptions in the Asian crisis scenario do not change aggregate livestock consumption by much. However, they do promote large changes in projected world cereal feed flows. The changes in feed flows are in fact the most significant result of the severe Asian crisis assumptions, especially because the absolute amounts of feed traded in the baseline scenario are already large. Baseline livestock trade is relatively modest, which should be borne in mind when interpreting the large percentage changes shown for livestock items in most cases.

Table 24 - Net exports of various livestock products in 1993 and 2020, baseline scenario

	Beef		Pork		Poultry		Milk		Cereals
Region	1993	2020	1993	2020	1993	2020	1993	2020	1993	2020
	(million metric tons)
China	0.1	0.1	0.7	0.3	0.1	0.3	-0.9	0.5	-0.9	-46.2
Other East Asia	-0.4	-0.6	0.0	-0.1	-0.3	-0.6	-0.5	-0.4	-20.0	-31.9
India	0.1	0.1	0.0	-0.1	0.0	0.0	0.0	0.1	1.3	-7.1
Other South Asia	0.0	-0.3	0.0	0.0	0.0	-0.3	-0.6	-2.8	-4.5	-21.9
Southeast Asia	-0.2	-0.6	0.2	0.6	0.1	0.5	-4.0	-7.8	-3.2	-5.4
Latin America	0.7	0.6	-0.2	-0.2	0.1	-0.1	-5.7	-5.6	-16.0	-13.0
WANA	-0.7	-1.7	0.0	0.0	-0.4	-1.3	-5.0	-12.2	-37.7	-74.6
Sub-Saharan Africa	0.0	-0.2	0.0	-0.1	-0.1	-0.2	-1.5	-1.8	-11.6	-24.9
Developing world	-0.4	-2.7	0.7	0.2	-0.5	-1.8	-18.7	-30.9	-93.3	-226.1
Developed world	0.4	2.7	-0.7	-0.2	0.5	1.8	18.7	30.9	93.3	226.1

Source:

Projections are from IMPACT.

Notes:

Net trade in 2020 is projected production minus consumption for the commodity and region shown. Metric tons are three-year moving averages centered on the two years shown and, for meat, refer to carcass weight. Milk is cow and buffalo milk and milk products in liquid milk equivalents. Cereals include wheat, maize, rice, barley, sorghum, millet, rye, and oats. Net export figures may not sum to zero overall because of rounding. WANA is West Asia and North Africa. Minus signs indicate imports.

Table 25 - Difference between baseline projections of net exports in 2020 and projections with changes in assumptions about the Asian crisis and Indian consumption

	Severe Asian crisis				High Indian meat consumption
Region	Beef and mutton	Pork and poultry	Milk	Cereals	Beef and mutton	Pork and poultry	Milk	Cereals
	(percent difference between new scenario and baseline)
China	211	556	62	27	169	612	321	-2
India	86	53	18,857	19	-4,038	-2,719	-55,464	-480
Other Asia (including WANA)	21	293	13	-1	28	66	30	4
Latin America	-172	-527	-55	4	168	176	95	-2
Sub-Saharan Africa	-112	-119	-90	-15	141	24	157	33
Developing world	2.9	261	43	4	-47	4	-83	-10
Developed world	-2.9	-261	-43	-4	47	-4	83	10

Notes:

The severe Asian crisis incorporates lower projected income growth and depreciation in exchange rates for countries in Asia. Depending on the country, income growth projections are 30-45 percent lower than in the baseline scenario, and exchange rate depreciation results in 5-13 percent higher domestic prices.

The high Indian meat consumption scenario incorporates a shift in tastes toward consumption of animal foods and increases in production and feed use ratios by Indian livestock producers. Income elasticities for animal products rise to between 1.5 and 2.0, depending on the commodity. The trend growth rate of Indian herd size rises by 0.3-0.7 percent (depending on the commodity), and feed conversion ratios rise above those typical in developing countries.

Mutton includes sheep and goat meat and edible products. Milk includes all dairy products in liquid milk equivalents.

The large percentage changes for meat and feed in India reflect a low initial base. WANA is West Asia and North Africa.

Geographically the severe Asian crisis scenario sharply decreases projected net imports of livestock foods and decreases projected net exports from Latin America and Sub-Saharan Africa. ¹⁰ Projections of net imports of feedgrains by Asia also decline appreciably, by as much as 27 percent in China. Net cereal feed imports by developing countries decline by 4 percent. Net Chinese meat exports rise by 3.4 million metric tons and milk exports rise by 0.3 million metric tons.

¹⁰ The concept of “net exports” could equally well be expressed in this case as increasing net exports from Asia or decreasing net imports by Latin America and Sub-Saharan Africa.

For Asia other than China and India, the severe Asian crisis scenario changes the region from a net meat importer in 2020 to a net exporter of 3.2 million metric tons. The region’s net milk imports decrease by 5.3 million metric tons. The effects of the Asian crisis decrease domestic demand and increase competitiveness in world markets. India remains a minor participant in world trade of livestock products in 2020 under the baseline and Asian crisis scenarios. Countries outside Asia tend to increase their imports of livestock products under severe Asian crisis assumptions because of lower world prices.

The high Indian meat (and milk) consumption scenario turns India into a major world importer of meat, milk, and cereal feed in 2020, a substantial shift from its minor trading role in the baseline projections (Table 25). Other regions of the world increase their net exports of meat and milk, although China and Latin America actually marginally increase their imports of cereal feed in response to the expanded meat and milk export opportunities. The very large percentage changes for India are caused by the very low projected trade levels in the baseline projection. Baseline net exports of 77,000 metric tons of liquid milk equivalents in 2020 turns into 42.6 million metric tons of net imports in the high Indian meat consumption scenario. Even in the face of the unrealistic assumptions of the high Indian scenario, the world system is flexible enough to adjust without major dislocations in consumption.

Changes in Net Exports under Changed Assumptions about Feed Efficiency

The previous chapter assessed the sensitivity of baseline results to assumptions about feed conversion ratios and found that consumption patterns of livestock products did not change much, but cereal use as feed rose or fell depending on whether efficiency decreased or increased. The results are different for trade, as shown by the wide geographic variation in trade projections relative to the baseline (Table 26).

An equal percentage increase in feed conversion efficiency applied to all developing countries leads to differing results in different countries, including a 25 percent increase in net exports of beef from India and a 9 percent decline in net beef exports from China. The price changes that result from decreasing feed conversion efficiency work to increase net exports of cereal feed from the developed countries, India, and Sub-Saharan Africa, and increase net imports of cereal feed by China and Latin America. The small percentage of trade in total baseline production and consumption causes the large percentage trade responses seen in some cases.

Past Trends in Real World Prices for Crop and Livestock Products and Projections to 2020 under Different Scenarios

Debates over the use of cereals as feed need to be cast in the context of steadily lower returns to feeding cattle for meat production over the past 25 years. Real world agricultural prices have slipped steadily relative to manufactured goods prices since the early 1970s (Table 27). Clearly, livestock producers have felt the pain in recent years. Beef in 1994-96 was priced at only 34 percent of its inflation-adjusted level in 1970-72, while maize was 54 percent of its inflation-adjusted price in the same period.

Table 26 - Difference between baseline projections of net exports in 2020 and projections with changes in assumptions about feed conversion efficiency

	Increasing feed conversion efficiency				Decreasing feed conversion efficiency
Region	Beef and mutton c	Pork and poultry	Milk	Cereals	Beef and mutton	Pork and poultry	Milk	Cereals
	(percent difference between new scenario and baseline)
China	-9	16	-6	46	7	-21	5	-53
India	25	2	-1,075	-32	-26	-2	1,075	36
Other Asia (including WANA)	-1	-3	8	5	1	3	-9	-6
Latin America	-5	-14	1	26	6	14	-1	-40
Sub-Saharan Africa	-3	8	46	-31	1	-11	-50	34
Developing world	-2	2	6	9	2	-3	-7	-12
Developed world	2	-2	-6	-9	-2	3	7	12

Notes:

The increasing feed conversion efficiency scenario assumes an increase in the efficiency of converting maize to meat. This results in a decreased rate of increase for conversion ratios in regions where they are increasing, and an increased rate of decrease for conversion ratios in regions where they are decreasing.

The decreasing feed conversion efficiency scenario assumes a decrease in the efficiency of converting maize to meat. This results in an increased rate of increase for conversion ratios in regions where they are increasing, and a decreased rate of decrease for conversion ratios in regions where they are decreasing.

Mutton includes sheep and goat meat and edible products. Milk includes all dairy products in liquid milk equivalents. WANA is West Asia and North Africa.

Table 27 - Past trends in real prices of selected crop, feed, and livestock products

Year		Wheat	Rice	Maize	Soybeans	Soymeal	Fishmeal	Beef	Pork	Poultry	Lamb	Milk
		(constant 1990 US$/metric ton)
1970-72		232	524	215	476	415	750	5,144	n.a.	n.a.	3,248	485
1980-82		236	534	169	384	338	615	3,536	2,344	1,474	3,730	413
1990-92		135	288	104	234	195	444	2,585	1,781	1,139	2,440	280
1994-96		156	270	116	238	192	424	1,761	n.a.	1,113	2,474	261
World Bank projections
	2000	135	279	102	230	189	n.a.	1,773	n.a.	n.a.	n.a.	n.a.
	2010	118	262	92	236	196	n.a.	1,629	n.a.	n.a.	n.a.	n.a.

Sources:

Past data are from USDA 1997a and b, IMF 1997, and World Bank 1993. World Bank projections and the Manufacturing Unit Value index used for expressing values in constant 1990 U.S. dollars are from World Bank 1997.

Notes:

Wheat is U.S. no. 1, hard red winter, ordinary protein, export price delivered at Gulf ports for shipment within 30 days. Rice is Thai 5 percent broken, WR, milled, indicative survey price, government standard, f.o.b. Bangkok. Maize is U.S. no. 2, yellow, f.o.b. U.S. Gulf ports. Soybeans are U.S. c.i.f. Rotterdam. Soymeal is any origin, Argentine 45-46 percent extraction, c.i.f. Rotterdam, prior to 1990, U.S. 44 percent. Fishmeal is any origin, 64-65 percent, c.i.f. Hamburg, n.f.s. Beef is Australian/New Zealand, cow forequarters, frozen boneless, 85 percent chemical lean, c.i.f. U.S. port (East Coast), ex-dock. Pork is European Community pork, slaughter wholesale price. Poultry is broilers, twelve-city composite wholesale price, ready-to-cook, delivered. Lamb is New Zealand, frozen whole carcasses, wholesale price, Smithfield market, London. Milk is U.S. whole milk sold to plants and dealers, U.S. Department of Agriculture, n.a. indicates that comparable prices for those years are not available.

Furthermore, the 10 percent global expansion of cereal feed use by weight between the early 1980s and 1990s (Table 15) occurred at a time when maize and soybeans declined in price by more than one-third. This lends support to the argument that additional concentrate feeds will be supplied with little real increase in price. This argument is tested by the IMPACT model, which produces a series of market-clearing world prices in equilibrium (Table 28). For comparison, single-equation price projections to 2010 by the World Bank are reported at the bottom of Table 27.

Compared to the World Bank projections to 2010, the IMPACT baseline projections show 38 percent higher maize prices and 3.5 percent higher beef prices. The global food supply and demand approach of IMPACT captures the effect of the Livestock Revolution on cereals prices, whereas single-equation methodology does not. Even so, IMPACT projects that real world maize prices in 2010 will be only about 10 percent above actual 1994 - 96 prices, which were historically low. Thus, the Livestock Revolution prevents cereal prices in the baseline projections from falling further from their currently low levels, and perhaps even increases them slightly, but nowhere near their level in the early 1980s.

The severe Asian crisis assumptions decrease real world prices in 2020 by 7 percent for maize and 5 percent for beef. These are significant effects, but the assumptions for this scenario are extreme because they posit that the crisis lasts though 2020. The high Indian meat scenario increases world maize prices by 13 percent and world beef prices by 9 percent. Changing tastes in India have even greater effects on world livestock markets than does a severe economic crisis in Asia, but in the opposite direction.

Increasing feed conversion efficiency lowers real world maize prices by 17 percent relative to baseline projections for 2020. Decreasing feed conversion efficiency increases maize prices by 21 percent. Livestock prices, on the other hand, are hardly affected. Cereal producers and consumers clearly have a lot at stake in feed conversion efficiency. Livestock producers in individual countries have a lot at stake as well, even if technology is shared by all producers, because increasing feed efficiency favors some producers while decreased feed efficiency favors others. Livestock consumers have surprisingly little at stake, at least as far as the cost of livestock food products is concerned.

Why Is the Livestock Revolution Not Likely to Raise World Cereal Prices Significantly?

Comparison of the IMPACT price projections under various scenarios with the historical rate of decrease of real food prices in the last quarter century suggests that the rate of decline of food prices during the next quarter century is likely to be much weaker than in the past. This is undoubtedly a result of the Livestock Revolution. Real cereal prices, however, are not likely to rise very much by 2020, contrary to the fears of some reported in Chapter 1.

Table 28 - Real prices of selected crop and livestock products as projected by the IMPACT model

Year		Wheat	Rice	Maize	Soybeans	Beef	Pork	Poultry	Lamb	Milk
		(constant 1990 US$/metric ton)
Baseline prices
	1992-94	148	275	126	263	2,023	1,366	1,300	2,032	234
Baseline projections
	2010	146	293	127	244	1,835	1,260	1,175	1,915	217
	2020	133	252	123	234	1,768	1,209	1,157	1,842	199
Severe Asian crisis scenario projections
	2020	124	248	114	221	1,676	1,104	1,074	1,807	187
High Indian meat consumption scenario projections
	2020	148	268	139	267	1,927	1,287	1,259	2,203	219
Increasing feed conversion efficiency scenario projections
	2020	126	243	102	228	1,738	1,188	1,134	1,817	196
Decreasing feed conversion efficiency scenario projections
	2020	141	262	149	242	1,802	1,233	1,183	1,870	202

Sources:

The updated IMPACT baseline projections and the severe Asian crisis scenario are from Rosegrant et al. 1997 and Rosegrant and Ringler 1998.

Notes:

The scenarios are independent of each other. The IMPACT baseline prices in 1992-94 are fully comparable to the actual series given in Table 27.

The primary explanation for IMPACT’s projection that cereal prices will continue to be low even as demand for both food and feed increases is that the world is thought to have considerable reserve capacity for additional cereal production. This assumption not only fits the evidence of the past 25 years, during which world production output changed in response to price, but also accords with the dozens of price response parameters for cereals (for 37 countries and regions times a half dozen crops) built into the model and mostly taken from independent sources (Rosegrant, Agcaoili-Sombilla, and Perez 1995; Pinstrup-Andersen, Pandya-Lorch, and Rosegrant 1997).

The traditional explanation for the high supply responsiveness of cereals found in the empirical literature is that the large grain-exporting countries, such as Australia, Canada, and the United States, have the ability to bring large amounts of land typically not sown to grain into cereal production as prices rise. Furthermore, cereal cultivation by the large grain exporters usually is less input-intensive than in many importing countries. Average wheat yields in Britain, for example, are much higher than in the United States. This leaves considerable scope for exporting countries to increase production through higher fertilizer use, which becomes profitable when cereal prices are high. The tremendous productivity increases in cereals in recent years also attest to the spur of prices. These increases have come about to a large extent in response to the higher cereal prices that made investing in production innovations economic (Hayami and Ruttan 1985).

Another explanation of the high supply responsiveness of cereals is that in a system of global markets, where actors all over the world respond to changing price incentives, individual shocks are smoothed out over time through myriad adjustments throughout the system. In other words, world supply will be more price-responsive than individual country supply, a phenomenon well-captured in IMPACT.

A final phenomenon of direct relevance to cereal supply is that in areas containing a significant share of the world’s poor, the rise in the consumption of calories from animal products is matched by a decrease in calories from starchy staples. People in China’s rural areas, for example, consumed nearly 200 kilograms per capita of grain directly as food in 1991, while people in the richer urban areas consumed an average of 130 kilograms per capita, a figure much closer to average consumption levels elsewhere in the developing world (Huang and Bouis 1996). Rice and wheat are the grains typically consumed in China. These grains have significantly lower average yields per hectare than maize, a feedgrain increasingly cultivated by Chinese farmers. Thus, substitution of meat and milk for grain in the diet liberates some grain from direct consumption as food, and the consequent increase in aggregate grain supply is amplified by the relatively higher yields of feedgrains per hectare. All of this suggests that the Livestock Revolution is intimately wrapped up with nutritional and food security, the subject of the next chapter.