CME: Livestock production boosted by productivity gains

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In our discussion yesterday we focused on the expansion in global economic activity and population and whether cattle and hog supplies have increased fast enough to properly meet the growth in demand. We noted that the global economy has about doubled since 2000 and the world population has increased by 1 billion people while inventories of hogs and cattle have barely increased. The topic is broad enough for a PhD thesis but a number of additional points are worth noting:

1. While livestock units may have been constrained, producers have been able to benefit from efficiency gains and have increased overall production. The ability to do this depends greatly on the species and feed conversion rates. It is a lot easier to grow pork production by savings more pigs per litter and increasing weights than it is to increase cattle production where calf production is limited by biology. The top chart illustrates the point. Much of the growth in protein production in recent years has come from the broiler industry, with world chicken production in 2010 up some 50% and expected to grow further in 2011 and 2012. Pork production during the period 2000 through 2010 rose 22% while beef production increased only 7%. Total beef, pork and chicken production in the past decade increased by 24% and it is expected to growth by 1.7% in 2012.

2. Productivity gains are one way to boost production but this does not work the same across all species and productivity  gains have to contend with biological barriers. Eventually you will need more animal units to support the surge in demand, especially in beef. There are a number of factors which have limited supply growth but essentially it boils down to resource availability. In the US, the shift towards using more corn for ethanol has limited feed supplies available to US cattle and hog producers. About 40% of the US corn supply will go into making ethanol fuel. Ethanol by-products can go into livestock production but this displacement is a costly proposition (transportation, management, animal performance). Would feed prices have increased had it not been for ethanol. Probably, given sharply higher energy prices and weather events. However, the entrance of ethanol has shifted the entire demand curve for corn, thus leading to higher price points for a given supply level. Demand elasticity has also changed by linking the feed industry directly to energy markets. While the US ethanol policy has directly impacted US producers, it also has impacted feed price benchmarks worldwide. Government intervention is not solely a US phenomena. Argentina used to be a large global beef supplier but cattle numbers there declined sharply following government decisions to limit beef exports. Faced with higher feed costs, Argentine producers liquidated their herds. And finally, don't forget Mother Nature. Australian cattle herds were decimated for a good part of the 2000s while recent droughts in the Southern US have cut numbers here as well.

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