The price of many commodities ia going up. Wheat is at $326/metric ton, and corn is selling at $303/metric ton (price figures as of 25 February 2011, see www.Indexmundi.com). This is bad news for so many poor people all over the world. But, in the case of beef, the price increases would mean something else. Because at a certain point, high grain prices will lead to lower beef production throughout the world. People will then be substituting beef with pork and chicken.
Cows have been causing a disproportionate amount of green house warming, because they emit methane (CH4). Methane (which is the same as natural gas, used as LPG ) is 25 times more effective at trapping earth’s heat than CO2. This has made many environmental activists worried that increased beef production would be bad for global warming. Now, we can show that beef production itself has a limit, and that this limit is fast approaching.
Feed Conversion Ratio
How did I come out with this conclusion? It has something to do with what is called the “Feed Conversion Ratio” (FCR), which shows how much grain is needed to produce a given amount of meat. It takes 8 kilograms of grain to produce a kilogram of beef; thus, FCR for beef is 8. Of course, cows could also eat grass, and grass is cheaper than grain, but we can still show that the FCR=8 for beef is still quite important.
The grain that some cows are fed (at least part of the time) is still a big factor in the price and amount of beef produced. In economics, the operation of the market and prices depends on marginal transactions, meaning in this case that the decision to feed grain to cows will be taken as long as it is profitable to do so. Concretely, this has resulted in there being more than 40% more cows in the planet, than could be sustained by grass alone.
Following the logic of the FCR, the price of corn (which on 25 Feb. 2011 was $303/metric ton) should, at the most, be one-eighth of the price of beef (which on 7 Feb. 2011 was $4136/metric ton). At present, corn is about 1/13 the price of beef. When the price of corn rises 60%, it would reach the margin limit for beef prices. If corn prices rise even further, the price of beef will have to rise in response, to keep it at 8:1 ratio with the price of corn. Because if the beef price does not rise, it will not be profitable for farmers to feed corn to their cows, and they will reduce the number of cows that they maintain, increasing the price of beef in the process (and thus restoring the 8:1 ratio). The actual price ratio will be more than that (perhaps 9 or 10) because there are other costs in producing beef than the food that they eat, but let us disregard these other costs for the moment.
Ceiling on Beef Production
But the price of beef could not go up indefinitely. Especially since the price of other kinds of meat are not going to rise as fast. Chicken (with a FCR of about 3) and pork (FCR of 3.5) will increase in price, but only by their FCRs, which means that the price differential between beef and chicken/pork will increase. People will eventually shift their consumption to more of chicken and pork. And farmers will then stop feeding their cows grain.
This development will spell the end of the feed-lot system, where cows which were fed grass in individual farms are gathered together in giant “feed-lots” where they are fattened by being fed grain. When the price of beef could no longer keep up with being 8 times the price of the grain that they eat, feed-lots will no longer be profitable. (Below: Picture of Feedlot)
Less and less beef will be produced until it reaches about 70% of the present level. At this level, the only cows left will those that eat only grass. The price of beef will be quite high, but it no longer pays to feed them grain. Ranchers will be making a big profit. At this point, the environmental challenge will be to prevent people from clearing forests and converting these to grassland. The sky-high price of beef will make this option quite tempting for many people in the third world.
The point when this happens will not be too far in the future. This year, corn prices will probably rise 50 to 80% again (just like it did last year) and the price of beef will have to follow that of corn (with its price 8x that of corn). This will go on, till the time, perhaps in as little as two years, when demand will start shifting to chicken and pork.
The production of pork and chicken will continue to rise for some time. At a certain point, much further in the future, they will also hit their limit, and production will stabilize at that point, with people shifting to eating “farmed” fish (which has an FCR = 2)