You are what you eat and—judging by the fast-changing diet of China’s vast population—we can see that China is becoming richer. This is evidenced by a dramatic shift in Chinese consumption trends that is seeing more money being spent on food.
Never before has there been such a dramatic shift of so large a group of people—and the result will be a transformational impact on the world’s food market.
Farmers, manufacturers, energy producers, retailers, and consumers across the country are about to see their lives changed forever by what more than a billion people are choosing to eat.
For some companies, the challenge to determine how to profit from the new trend will be too great, and they will struggle to survive. For others—those who take smart action now—the opportunities to prosper in one of the world’s fastest-growing markets are immense.
The Chinese will spend nearly $1,000 billion a year on food in 2020—up from $350 billion a year in 2010, according to analysis by The Boston Consulting Group. This is because a growing number of Chinese with disposable incomes are buying more meat, fresh vegetables and dairy, as well as fewer grains.
In 2010, pork and chicken accounted for 19 percent of the average Chinese citizen’s diet. By 2020, we expect this figure to rise to 28 percent. Put another way, in 2020, the Chinese will be consuming 215 billion more servings of pork and 185 billion more servings of chicken than they were in 2010.
The statistics are astonishing.
The increase in meat-eating will drive up the demand for corn, which is needed to feed pigs and chickens. BCG calculates that an additional 166 million metric tons of corn will be needed—equivalent to 20 percent of global corn production in 2010.
This, in turn, will potentially drive up the price of corn—from $186 per metric ton in 2010 to as much as $292 per metric ton in 2020.
Although there will be productivity gains over the next decade, this price increase will find its way through the system and all the way to the consumer in the shopping mall.
In the U.S., the lowest 40 percent of households earn $40,000 or less and, on average, spend $3,000 per year on food. If, let’s say, they had to face a 10 percent increase in food costs—and that’s significantly less than the 57 percent increase in corn prices over the next ten years—then they would have to allocate an additional $300 per year to food: anywhere from half a week’s pay to a full week’s pay.
There are other side effects—notably an increase in greenhouse gas production. The extra pigs and chickens bred are calculated to produce as much as 34 percent more nitrous oxide and 18 percent more methane.
For farmers, landowners, agricultural equipment manufacturers, and suppliers of raw materials, energy, and water, the news is good. For food manufacturers and retailers, the news could be good or bad. It depends on what they do next.
One hazard that they will have to deal with (in addition to a sustained increase in prices) is greater price volatility prompted by speculation or natural weather-related production changes. For example, if China’s current drought forces the country to increase wheat imports, then the global price could rise by up to an additional 20 percent—and above the 2008 peak.
The answer is a threefold price, recipe, and hedging strategy.
On price, companies need to respond quickly with price changes—up or down—and this requires meticulous preparation; raise the price by either lifting the price point or shrinking the size of the product; and collaborate (with retailers or manufacturers) in order to retain the loyalty of the shopper.
On recipes, companies need to ensure that their products can be made from a variety of raw materials—and that they have a sufficiently varied and flexible list of reliable suppliers.
And on hedging, companies need to expand this capability, so that they can lock in profit.
Do these things, and the smart food manufacturer or retailer could steal a march on their rivals, turning these anxious times in their favor.