* Chinese diet demands more protein * American genetics help Chinese breed bigger, healthier animals By P.J. Huffstutter and Niu Shuping ALBION, Indiana/BEIJING, April 20 (Reuters) - Inside a dimly lit barn in northeast Indiana, where the air smells faintly of corn and earth, the future of China's food supply is squealing for attention. A farmhand shuffles through the crowd of pigs inside pen 7E3, patting their fleshy pink backs and checking their water trough. The animals here at the Whiteshire Hamroc farm have been bred for one purpose: to be flown halfway around the world, on a journey fueled by China's appetite for food independence In a country where pork is a culinary staple, the demand for a protein-rich diet is growing faster than Chinese farmers can keep up. While Americans cut back on meat consumption to the lowest levels seen in two decades, the Chinese now eat nearly 10 percent more meat than they did five years ago. China's solution: to super-size its supply by snapping up millions of live animals raised by U.S. farmers as breeding stock - capitalizing on decades of cutting edge agricultural research in America. By taking this step, say breeders and exporters, China will move from small-scale backyard farms, to the Westernized tradition of large consolidated operations to keep up with demand. "I liken it to their telephone system," said Mike Lemmon, co-owner of the Whiteshire Hamroc farm, which specializes in exporting breeding swine to China. "Most of China's mainland went from having no landlines to everyone having a cell phone. They're doing the same thing with farming." Focus on livestock genetics also represents an emerging economic bonanza for two of the United States' most powerful industries: technology and agriculture. Worldwide, the United States exported a record $664 million worth of breeding stock and genetic material such as semen in 2011. But as fortune shines on breeders, concerns are being raised. While U.S. consumption of meat falls, the price of producing a pound of protein rises, meaning meat companies are seeing their margins shrink. That has prompted some critics to question whether the short-term gains of this trend will result in a longer-term loss of a key export market for American meat producers. This is, after all, a well-trod path in China's pursuit of efficiency: import a technology or create a joint-venture; learn the best practices; apply those practices at a lower cost than overseas rivals; and emerge as an aggressive competitor in the global market. Detroit in particular has felt the strain of China's competitive practices as has Silicon Valley. "China is not going to be dependent on us forever, if they have anything to say about it," said John Nalivka, president and owner of Sterling Marketing, an agricultural marketing firm in Vale, Oregon. "IMPACT ON GLOBAL MARKET" In a country wrestling with food inflation, China's population spent 25 percent of its annual income on food in 2010 - compared to Americans spending only about 10 percent. One solution to rising food prices: chicken. A chicken drumstick cost half or less the price of a pork loin, said Wang Xiaoyue, a senior analyst with Beijing Orient Agribusiness Consultant Ltd. It also takes about half as much grain to produce a pound of chicken meat, compared to a pound of pork, Wang said. That has helped fuel more imports of broiler breeder chicks from U.S. farmers. So has expansion by fast-food chains, including McDonald's Corp. McDonald's, which ranks China as its third-biggest market worldwide, opened a record 200 new stores in China last year, and has unveiled plans for more. China, the world's most populous nation, isn't the only country doing this. Sales to Russia and Turkey, the biggest markets for U.S. livestock-breeding exports last year, have risen even faster. But the impact of a vastly larger, more efficient, livestock sector in China would cause a major shift in the global market, particularly for grain demand. China could need an incremental 20 million to 25 million tonnes of corn in the next few years just to keep up with the growth of the swine industry, according to a recent research report by Rabobank. "CLOGGED PORTS, OVERSOLD FLIGHTS" Few people understand the situation better than Yu Xiaohai, a farmer who raises broiler chickens outside Beijing. Inside his white-brick barn, several thousand chickens peck at grain in the dark. Yu used to raise a local breed of broilers - the yellow-feather chicken (Huang Yuji) - which would take about 120 days to grow to market weight. Efficiency convinced him to switch to U.S.-bred broiler chicks that take only 41 days to reach maturity. "It offers a more steady income," said Yu, as he cleaned the cages. Worldwide, the United States exported an all-time record of $664.1 million worth of live breeding animals, semen and livestock embryos last year, an 82 percent jump in two years, according to the U.S. Department of Agriculture's Foreign Agricultural Service. While other countries such as Russia and Turkey spent more last year, China was a big buyer on volume: About 14 percent of all U.S. live animal exports were sent to China in 2011 -- largely breeder chicks. Last year, Chinese companies bought $41 million worth of live breeding animals and genetics - up nearly threefold from five years ago, according to USDA FAS. The demand for breeder pigs, in particular, is zooming after China lifted a two-year ban on hogs and pork imports last spring. In the first two months of 2012 , China imported 62 percent of the total number of U.S. breeder pigs brought in for all of 2011. These animals are not sold for meat. Their value is in their genes, which allow them to grow faster, fight off diseases better and birth more babies that survive than their Chinese counterparts. Even if China's demand cools for U.S. meat exports, the breakneck pace of Beijing's growing demand for grains is unlikely to wane or offer relief to the global agricultural markets that struggle to keep up. "Genetics and nutrition go hand-in-hand," said Mike Phillips, president of the trade group U.S. Livestock Genetics Export Inc. in Salem, Illinois. "The more they use our genetics, the more they're going to need to import corn and soybeans from the U.S. and elsewhere." "BIGGER HERDS, EVEN BIGGER PRICE TAGS" That potential, paired with global demand, has prices rising. U.S. breeder beef cattle prices have increased 40 percent or more in the past six months, amid shrinking global herd sizes, say farmers and breeders. The cost of great-grandparent gilts has tracked the price of hogs. Simlarly, with broiler breeding stock some customers are eagerly spending as much as $25 a chick, say breeders. Import bans prevent China-based farmers from buying live cattle from the United States. So they've snapped up more than 370,000 embryos and straws, the industry parlance for vials of beef and dairy cattle semen. That is down from 2010, but up 15 percent from two years earlier. Fonterra, the world's largest dairy exporter, has taken to inseminating its dairy cows in Tangshan with semen from the United States because the "genetics tend to create more volume and more protein," said Peter Moore, chief operating officer of the company's international farming ventures. After all, say farmers and overseas buyers, anyone can raise a pig or a chicken but only a few people can raise the right kind of animal that will produce more milk, a better pork shoulder or a bigger drumstick. "When you have a nation's diet changing as rapidly as China's, the most efficient way to build up production is to improve your animal genetics," said Ronald Lemenager, a professor of animal sciences at Purdue University in Indiana. "We have the genetics they want." "CONCERNS MOUNT AMID BOOM" All of this is a massive leap forward for the world's second largest economy whose farming systems, although being revolutionized, still lag advances made in Western nations. It could be challenging for the United States to maintain its technological edge. The pace of public investment in U.S. agricultural research is slowing, and the focus shifting away from on-farm productivity and toward issues such as food safety. The budget at the National Institute of Food and Agriculture, the USDA's arm for funding extramural research, was essentially flat for the past three years - and fell 9 percent in 2012. In contrast, China is ramping up investments in agricultural technology research, including its first national research center for improving swine genetics. The goal, according to government officials, is to create a strong base of breeding stock - and curtail its reliance on breeding imports.