Wednesday, April 30, 2014

Projections Show China's Grain-Hoarding Instinct

We have a pet hamster at my house. No matter how much food you add to his bowl, it all disappears. This gives the impression that the hamster is consuming vast quantities of food. But when we clean out the cage we discover hoards of food. We then realize that much of the food going into his bowl is not eaten--it's hidden away under the wood shavings.

Like the hamster, Chinese officials are compulsive food-hoarders. They stash so much grain away in warehouses that the country often imports grain when it is actually producing more than it needs.

Last week, China's Academy of Agricultural Sciences (CAAS) released its first ten-year projections of commodity supply and demand for the next ten years. The main feature that emerges from the blizzard of numbers is hamster-like compulsive stockpiling of grain. CAAS projects that carry-in stocks of wheat, rice and corn will rise from 217 million metric tons in 2014 to a plateau of 300 mmt from 2019 to 2023. CAAS thinks that China will add over 80 mmt of grain to its inventories over the next ten years!

Calculating the ratio of stocks-to-use shows that CAAS expects wheat stocks to rise from an excessive 80-percent of consumption in 2014 to a ridiculous 97 percent in 2023--they will hold an entire year's consumption in inventory. Rice stocks are expected to rise from a mere 46 percent of consumption in 2014 to 70 percent in 2023. Corn stocks-to-use is expected to bump up from 30 to 40 percent by 2018 before falling back to 30 percent in 2023.
Cotton outdoes the grain numbers. CAAS expects cotton stocks to stay at 130 percent of consumption--the result of a price-support policy that went horribly wrong--through 2015 before gradually beginning to slide down to 70 percent by 2023. The Agricultural Development Bank will be financing massive cotton and grain stockpiles for years to come.

In 2014, CAAS anticipates that the country will produce 5-percent more grain than it consumes -- a surplus of about 20 mmt -- yet they think China will import 10 mmt of grain that year. In effect, China will be importing grain to sock away in warehouses. CAAS expects the grain surplus to shrink and turn into a deficit of 18 mmt by 2022. Imports will be slightly less than the annual deficit in those years.
These numbers are not "official"--China still considers grain reserves a state secret. But they are probably close approximations of what the Chinese think grain stocks are. Chinese officials have long said they need higher grain stocks than other countries because their country is vulnerable to disaster and has poor transportation infrastructure. But Chinese officials have built expressways and railroads to every possible corner of the country and they are engaged in a massive grain logistics-building spree. There has been no recent disaster that seriously disrupted grain markets--during the Sichuan earthquake in 2008 supplies of grain and other commodities flowed smoothly. So why will they need to hold even larger stocks of grain? Why on earth will they need a year's supply of wheat in inventory?

Why does a hamster feel compelled to bury hoards of food when his owner fills his bowl daily? It's probably a tendency programmed into his DNA by ancestors who needed a cache of food to carry them through winter months. In the same way, the Chinese have a hamster-like hoarding instinct that is out of step with today's reality.

In effect, China sucks grain out of markets to ensure its own "food security." This sends inaccurate signals of scarcity to the market and undermines global food security.

The CAAS professor chairing the meeting where the projections were released explained that the forecasts are "scientific" numbers that guide markets. Perhaps the most valuable contribution of the numbers is that they give the outside world a clue about China's grain-storage obsession. Observers should not infer that China is short of grain when it imports.


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