Friday, May 30, 2008

Is China Driving Up World Food Prices?

They are out there. We know they are. Lurking in rice paddies and shoe factories eager for their first taste of flesh. They are the Chinese meat-eaters who are taking a bite out of our precious food supply, leaving less for the rest of us and driving food prices sky-high.

One of the alleged reasons for high food prices rehashed in nearly every article, speech, and Congressional testimony on the matter is "increasing consumption by the middle class in China and India." The logic works perfectly: people in poor countries are getting richer; they are eating more meat; it takes a lot of grain to produce each pound of meat; therefore more of our grain is going to China and India, so prices are being driven up. Nice logic, but no one ever checked to see whether this is actually happening--it's not.

No one really knows how much grain (or meat for that matter) is consumed in China, but we do know that China imports essentially zero corn--the main grain used to feed animals and produce meat. China has warehouses bulging with wheat at the moment (it was the only country to have good wheat harvests in recent years) and it has plenty of rice. Corn use for feed has risen moderately over the years. But consumption of rice and wheat has fallen by nearly the same amount corn has risen. Overall, there has been incredibly little growth in Chinese grain consumption despite huge increases in meat production.

Chinese people have been eating more meat and changing their diets since the 1980s--it didn't just happen in the last couple of years. (In fact, the increase in meat consumption seems to have slowed down since 2002). There have been fluctuations in world grain prices since the 1980s, but NO upward trend until corn prices started taking off in 2006. Minimal or no imports, no upward trend in prices. How exactly is demand in China driving up world prices?

Now China DOES import soybeans--it's the biggest source of world demand growth. But there was an upward trend in soybean planted area in South America that almost exactly corresponds to the increase in Chinese soybean imports. Argentine and Brazilian farmers cheerfully sowed more soybeans to feed the Chinese and there was no upward trend in soybean prices until the last couple of years. The market was taking care of China's hunger for soybeans very nicely, thank you very much--until ethanol disrupted things (when U.S. farmers started switching their acres from soybeans to corn to accommodate the ethanol demand, causing soybean prices to start an upward trajectory like corn's).

Grain prices were actually depressed not long ago--roughly 1999-2003 (in China, in the U.S. and on world markets). The depressed prices followed a spike in prices in 1996 when everyone thought China was going to starve the world (see Lester Brown's Who Will Feed China, published 1994) and we were in a new era of high prices (sound familiar?). China's panicky leaders--worried about the spectre of big bad American grain farmers getting an OPEC-like grip on their country--then ordered farmers to grow, grow, grow grain, imported a bunch of it, and presto they had a glut of grain. Chinese officials resorted to dumping grain on the world market with export subsidies, burning it up in, errr, subsidized ethanol and starch plants (that's right ethanol in China), and letting it rot in warehouses. The Chinese government also burned through a lot of cash storing up massive quantities of grain bought at high prices in the 1990s that they disposed of at fire-sale prices later on.

If China had not overproduced grain in the 1990s and had instead maybe kept importing modest amounts of grain...if U.S. grain prices had stayed at a reasonable level...might the insane idea of burning a quarter of the U.S. corn crop in gas tanks never have seen the light of day? We'll never know.

So don't blame the Chinese meat-eaters. If anyone in China is responsible for messed-up grain markets, it's the bumbling, miscalculating central planners in Beijing who are responsible.

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