WHAT HAPPENS WHEN CHINA BECOMES A NET FOOD IMPORTER ? / ROUBINI GLOBAL ECONOMICS ( VERY HIGHLY RECOMMENDED READING )

What Happens When China Becomes a Net Food Importer?

By Adam Wolfe

May 4, 2011


China is the world’s second-largest producer and largest consumer of grains, and it remains broadly self-sufficient despite rapid urbanization. Increased paychecks mean a smaller share of income goes toward food purchases, and consumers can afford more meat and dairy products. However, since it requires several calories of grains to produce a single calorie of meat for final consumption, China’s total grain consumption has increased about 2% annually on average since 1980.

China’s ability to meet its rising grain demand with domestic production is reaching its limit. Land sales for development have reduced China’s farmland by 8.33 million hectares (20.6 million acres) in the past 12 years, and cultivated land has probably already fallen below the government’s 120-million-hectare limit as local leaders illegally distribute farmland to developers.

Rumblings in official circles suggest that policy makers will hold the line here, but even that is unlikely to be enough to keep China self-sufficient in the medium term, as there are few productivity gains to be found. For example, China’s wheat producers are already 51% more efficient than those in the United States, according to the U.S. Department of Agriculture.

Additionally, over-pumping in the North China Plain, the country’s main wheat- and corn-growing region, has artificially boosted production in recent years, but eventually the falling water table will lead to a collapse in output.

Being the world’s largest food consumer means that a small shift in China’s net export position is enough to move global markets, as evidenced by China’s flip from being a net exporter of soybeans and corn to a net importer of both. Until 1995, China was a net exporter of soybeans. In 2010, 58% of global soybean exports went to China, according to the Earth Policy Institute. In 2003, China exported a net 16 million tons of corn, but by 2010 it was importing a net 1.5 million tons. This year it may import nine million tons, according to the U.S. Grain Council.

The fear this year is that China’s wheat production could fall well short of its consumption needs, which would result in a large jump in demand for globally traded wheat. In February, the Food and Agriculture Organization issued a warning that drought and freezing weather in China’s major wheat-producing region could threaten the winter harvest. While growing conditions have improved, in part thanks to the government’s irrigation efforts, prospects for the more important autumn harvest remain uncertain. China has enjoyed a bumper crop for five consecutive years, and a reversion to the mean would imply about a 15-million-ton decline in wheat production for 2011.

China’s wheat stocks are estimated to be somewhere between 60 million tons (U.S. Department of Agriculture) and 100 million tons (National Development and Reform Commission), which should be enough to cover the shortfall for this year. However, in the longer term, China’s wheat imports are likely to follow the path of corn and soybeans.

If China were to source 5% of its wheat consumption from international markets, it would increase its share of demand in the international market from basically nothing to 4.7% and become the sixth-largest buyer after Japan. This would boost global prices and exacerbate the global super cycle in commodity prices.