The New Alchemy, Part 2: Oil and Water Into Food

This is the second part of an article on the dynamics of oil, water and food. In part one, Marc Chandler discussed how rising commodity prices are having 'real world' effects.

Hydrocarbons are involved with food production more directly than in the production of fresh water. The tripling of food output between 1950 and 2000 required not only the tripling of land being irrigated but a nine-fold increase in fertilizer. Non-organic fertilizer is largely a derivative of fossil fuels. It takes about 5.5 gallons of such fuel to restore a year's worth of lost fertility of an acre of eroded land.

Grain is increasingly used not to feed people but to feed livestock. In 1960, for example, Mexico used only 5% of its grain harvest to feed livestock. Now it is closer to 50%. Egypt used 3% of its grain to feed livestock in 1960; now it is a little over 30%. In the same period, China's livestock increased their take from 8% of the PRC's grain harvest to more than a quarter. About 80% of the U.S. grain harvest goes to livestock.

As the world's population grows (by about 70 million a year) and there is greater prosperity, the demand for animal protein increases. Some animals are more efficient than others in converting grain to protein. Cattle on a feedlot (grain fed as opposed to grass-fed) require about 7 kilograms (roughly 15.5 pounds) of grain for one kilogram of beef. Swine are more efficient, with a 4 to 1 ratio of grain to meat. A chicken is even more efficient at a little more than 2:1. Herbivore fish are the most efficient by requiring less than 2 kilograms to produce a 1 kilogram of meat.

Making a Better Chicken

There is a clear long-term trend toward focusing on the most efficient producers of animal protein. Between 1990 and 2005, beef created on feedlots was flat, while pork production grew by 2.5% a year. Pork output surpassed beef in 1979, and in 1995 poultry surpassed beef. Poultry production grew 5% a year from 1990's 41 million tons to 80 million tons in 2005. The output of fish farmers grew at an average rate of 10% a year between 1990 and 2003 to reach 42 million tons.

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Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.