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An Uncertain Future

by 5m Editor
22 December 2008, at 12:00am

"Is it the beginning of the end of a golden decade for US animal agriculture and a signal of an impending decline or a hiccup on the growth curve ready to resume when the global slowdown reverses?" asks Dr Dennis DiPietre, swine consultant in Columbia, Missouri.

With the tremendous increases in net exports achieved by the United States pork industry over the last decade, the industry would do well to begin to develop a better understanding of the dynamics that globalization brings to our economy and the economies of other trading nations around the world. Forces at work in global markets are fierce and can transform the competitive environment rapidly. Most animal agriculture production companies are in the worst financial shape in their history at a moment when US achievements in exports and market expansion have never been greater. The ground is changing fast. Is it the beginning of the end of a golden decade for US animal agriculture and a signal of an impending decline or a hiccup on the growth curve ready to resume when the global slow-down reverses?

When nations enter the global marketplace, economic forces begin the process of allocating the scarce resources of each nation in the most efficient manner. The desire for profits carries this out rather quickly. One of the first things nations experience is a kind of upheaval of the status quo, as inefficient and wasteful processes are weeded out and a new order emerges. The response of nations to this upheaval sets the stage for either mutual wealth creation or a win-lose environment.

All production can be categorized as a product of capital and labor. While capital is allocated around the world with minimum restriction, labor is not so 'tradable' largely because of the actions of governments to preserve jobs and their own national identity. Various barriers, like import duties, are erected to prevent the loss of jobs, and work permit restrictions are raised to prevent the wholesale flood of foreign workers into the country seeking new opportunity.

The United States has seen a breathtaking flight of manufacturing from its shores in the post World War II environment. As factories and jobs moved to other countries seeking out inexpensive labor, this nation has become a net importer and is building an ever-growing trade deficit balance. As a result, workers in the United States who performed relatively repetitive and low-skilled tasks have been replaced by workers in other countries, often demanding a fraction of the pay earned by their U.S. counterparts. The conventional wisdom is that these displaced workers whose factories and jobs no longer exist can be re-tooled for other, higher value occupations. The progression from manufacturing to service jobs is often touted as the natural evolution of first-world countries. That has not happened very well in the United States or at least at the same rate that the factories have packed up and headed for lower cost environs.

As a result of capital and manufacturing fleeing the United States largely to China, India and the other emerging nations, the United States must continue to create value in order to have the income and wealth to purchase goods formerly made in this country, otherwise it buys on credit hoping for that time to come. The result of the loss of manufacturing has been a dramatic reallocation of income in the U.S. Those who have made the transition to service and high-skilled occupations have seen their incomes advance handsomely, while areas of the country like Detroit, Michigan, a good portion of Ohio, Pennsylvania and Indiana are being hollowed out with millions of people stuck in either low-wage or no-employment situations. The real income of assembly line, blue collar and lower middle class people in the United States has fallen and their prospects of something new and better are not promising.

This leads us to consider the likely transformation of agriculture and its associated processing functions as globalization progresses. Without question, swine production is growing dramatically in China and to a lesser degree in other emerging nations like Brazil and Russia. China is in a unique situation, even though it is not blessed with an abundance of natural resources like Brazil, Russia, Canada or the United States. Its growth in the production of pork is related to the fact that it is the meat of choice there. In addition, more people living in rural areas are benefitting from employment and the resultant increase in living standard and buying capacity that flows from creating the products formerly made in the United States. They will not be able to produce sufficient corn for expanding animal production to self-sufficiency but are already seeking strategic alliances with places like Africa to either buy or contract large tracts of land to do so. Chinese companies and their managers are already there, presiding over the extraction of all kinds of needed mineral resources using African labor. Chinese corn production in Africa seems likely in the foreseeable future if the mineral extraction ventures are successful over the long term, but they may descend to a kind of colonialism that will be rejected.

Russia has a tremendous capacity to expand and modernize its agricultural production, but it is not likely to begin realizing its potential for at least another generation as it is presently floundering in the political morass of re-emerging totalitarianism, corruption and the kind of economic death that accompanies the enthronement of bureaucracy. All of that slams the door tight on capital investment. Its oil wealth has been like a drug, fueling a single-minded path to national income that will not sustain it in the long-run. Brazil has a similar problem attracting capital at the rate that its capacity to grow in swine production could handle. While much more successful than Russia, the bureaucracy and uncertainty that comes from a government lacking a consistently pro-capital investment environment are still big problems. Available feed ingredients other than soybeans are also a constraint to growth.

While the United States currently enjoys increasing demand for its pork on a global scale, one must ask what prevents its production from gradually being reallocated to other places around the world with lower labour costs and sufficient ability to attract the needed feed ingredients?

Next time, we will take up the conflicting forces at work, with no clear victor. These forces will determine whether the US pork industry begins to look more lot like the empty shell that its non-agricultural manufacturing cousin has become, or if it will remain a dynamic, wealth-creating part of the US economy.

Dr Dennis DiPietre is a swine consultant in Columbia, Missouri.

December 2008