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Monday, March 15, 2010

Thomas Malthus couldn't foresee this

In 1798, Thomas Malthus, in an essay on the principle of population, put forth the idea that "the power of population is indefinitely greater than the power of the earth to produce subsistence for man.” Ever since, people have been worried about the capacity of human beings to produce enough food to sustain their growing population. Yet, the data seem to indicate that the inevitable conclusion of Malthus’ theory – food shortages & starvation -- are a long way off.

Malthus could not have foreseen how modern farming methods have transformed the productivity of the farm. Machines have taken the place of farmhands, and computers have revolutionized the business. Farms are getting larger and productivity higher. In the last 30 years, for example, sow productivity (for pork production) has increased by 70%. With high protein diets, it now takes only 6.5 months for a piglet to become a 260-pound hog. Corn yields in the U.S. have increased from about 40 bushels per acre in 1950 to 150 bushels per acre today (U.S. Dept of Agriculture). Other farm industries are experiencing the same level of productivity growth.

Last year I had the opportunity to visit a state-of-the-art dairy farm in Canada. The whole concept of the farm is too maximize milk productivity by keeping the cows fat, happy, and pregnant.

The barn is divided into gated areas: one for milking, one for eating, and one for resting. Each cow has a radio controlled collar that limits the amount of time they spend in each area. When a cow has been in the feeding area, if it wanders near the gate of the rest area, the gate will open and allow the cow to pass. Once in the rest area, the collar will only open the gate to the milking area, and not back into the feeding area. Thus, the cows go from milking to eating to resting on a rotating basis.

The rest area consists mostly of “water beds” (that look like large yoga mats) for the cows to lounge on. If they get bothered by flies, overhead fans whisk them away. If their backs get itchy, the cows stroll over to the automatic back scratcher. Comfortable, low-stress cows produce more milk, so no expense is spared.

Once they become uncomfortably full of milk, the cows walk themselves to the milking area and their radio collars open the gate. In the milking area a laser scans the udder, and a robotic arm attaches the milkers. A computer interface keeps track of each cow’s production, analyzes the milk (and therefore the health of the animal), and sends the information to a central computer. Any minor problems, such as a non-milking teat, also gets relayed to the computer. The milk itself flows into a stainless steel storage tank. Once done milking, the suction cups detach and the cow is free to stroll back to the feeding area.

The farmer pointed out to me that in addition to keeping stats on the cows and opening gates, the radio collars also keep track of the cow’s movements. When cows go into heat, they get frisky and tend to pace. Thus, a spike in activity indicates a cow that can be taken out for artificial insemination. I asked if I could borrow one of these collars for my girlfriend, but the farmer basically ignored me.

All told, the farm is virtually self-sufficient. Once the cows know the process they do most of the work themselves. In general, farms are becoming larger and more businesslike.

In recent years, the trend has been to accept Malthus’ theory, and to believe that with the rise of India and China food shortages will soon become a reality. Long-only commodity index funds, which assume rising food prices, are popular. Yet, while theorists talk about shortages, the reality is that every year foodstuffs such as apples, peaches, hogs etc. are left to rot or culled to reduce gluts caused by overproduction and/or lack of demand. Other industries, such as sugar, milk, and Japanese rice production are heavily subsidized.

Thomas Malthus’ theory of population growth may become true some day, but not for a long, long time. Investments that assume a steady rise in food-related commodity prices are not, in my opinion, a good way to make money.

“…cattle are ruminants, a term that refers not to their capacity for deep thought but rather to their distinctive ability to digest plant fibers.” Dunsby, Eckstein, Gaspar and Mulholland: Commodity Investing