Global Policy Forum

China Crops in Short Supply as Fewer Farms Spur Food Prices

China’s farmland is shrinking due to increased urbanization. Rapid growth of cities and rising incomes are placing pressure on global food supplies. If China’s grain production were to experience an unexpected shortfall, world grain markets would come under intense pressure. Recent developments may portend a trend of increasing prices as a wealthier China edges out competitors by driving up food prices on global markets.

April 19, 2011

Across the road from Zhao Yuanyi’s wheat field in China’s Shandong province, Chonche Group is expanding a rail-car factory on what used to be 227 hectares of farms. Nearby, Geely Automobile Holdings Ltd. (175) makes sedans on an 87 hectare site that four years ago was covered by crops.

The factories sprawling from Jinan city, 350 kilometers (220 miles) south of Beijing, put Zhao on the front line of a clash between a policy of food self-sufficiency and industrial growth that made China the world’s second-biggest economy. Industrialization is winning, signaling prices for crops like wheat and corn will rise as China is increasingly unable to feed itself and vies for supplies on global markets.

“This year, maybe next, they’ll develop my field,” Zhao, 63, explains as he stands beneath a China Mobile Ltd. cell-phone tower on the edge of the land he’s tended all his life. The local government will buy his land, paying compensation through an annual allowance of 1,800 yuan ($276) per mu, which amounts to about 2,700 yuan for each person in the village.

China’s farmland shrank by 8.33 million hectares (20.6 million acres) in the past 12 years, Premier Wen Jiabao’s top agriculture adviser Chen Xiwen told reporters March 24. Land under cultivation has already fallen almost to the government’s 120 million hectare limit after being consumed by apartments, factories, desertification and a forestation campaign. Drought has also hit the country’s main wheat-growing region.

“China’s increased demand for agricultural commodities will mean an increase in prices for the entire world market,” said David Stroud, chief executive officer of New York-based hedge fund TS Capital Partners. “China can outlast any other bidders for the commodities it desires.”

Price Forecasts

Investors should bet on crops in shortest supply in China, with wheat and corn offering the best opportunities, he said.

Wheat futures in Chicago may average $8.05 a bushel this quarter, 89 percent higher than the past year’s low, as farmers struggle to rebuild global stockpiles, according to Rabobank International’s Agri Commodities Monthly e-mailed April 18. Corn futures may reach a record, jumping to as high as $10 a bushel, Alex Bos, an analyst at Macquarie Group Ltd. said April 6.

“As China continues to grow, demand and supply will struggle to keep up,” said Abah Ofon, a Singapore-based commodities analyst at Standard Chartered Plc. “This would be a problem for any country. For China, the world’s biggest consumer and producer, a small deficit can result in huge demand for imports.”

Riots, Poverty

A 5 percent shortfall in China’s overall grain harvest would potentially require 20 percent of current global grain exports to meet the country’s annual needs, Ofon said. Wheat in Chicago reached its highest level since 2008 in February on concern drought was damaging China’s crop, raising the risk the country would drain the world market.

Rising food prices cause riots and civil conflict, and widen the gap between rich and poor, according to an International Monetary Fund working paper by economists Rabah Arezki and Markus Brueckner published last month on the organization’s website. World Bank President Robert Zoellick said in February that the price surge was “an aggravating factor” in uprisings sweeping the Middle East.

Hong Kong-listed Geely and closely held Chonche are using land that China needs to offset shortfalls in more developed areas. The spread of cities and factories in wetter grain- growing coastal regions such as Jiangsu and Zhejiang has put more pressure on drier provinces like Hebei and Shandong.

“Food production is increasingly being focused in northern areas that have water shortages,” agricultural adviser Chen wrote in December. That’s “very worrying for food security.”

Wen Focus

Wen has pledged to rein in food costs and has said that inflation, which threatens social stability, was the government’s top priority.

Scope for raising yields may be limited as wheat farmers in China are already 51 percent more productive than their American counterparts per land area, according to data from the Department of Agriculture in Washington.

While investment in irrigation and technology such as genetically modified crops may boost that, land and water shortages and migration of labor to cities is putting grain production “on a shaky base,” said Qian Keming, head of the Agriculture Ministry’s market and economic information division.

“With rising living standards, and more consumption of meat, eggs and dairy produce, grain consumption is inevitably on the rise,” Qian said.

Chicken, Pork

The Chinese ate 20 percent more chicken last year than in 2006, while pork consumption rose almost 11 percent, USDA data show. It takes 2 kilograms of feed to produce one kilogram of chicken, and about double that for pork, according to the Washington-based Earth Policy Institute.

China, the world’s biggest grain producer, was a net exporter of soybeans until 1995. This year it’s forecast to import 57 million tons, or almost 60 percent of global trade in the oilseed used in animal-feed and tofu.

Archer Daniels Midland Co., Bunge Ltd. (BG) and Cargill Inc. were among U.S. food companies that in January won $6.68 billion of deals to supply China with soybeans, the U.S. Soybean Export Council said.

China’s imported food as a percentage of domestic consumption is “tiny” at about 3 percent, said Frederic Neumann, a Hong Kong-based economist for HSBC Holdings Plc. “If you doubled that to 6 percent, that implies enormous purchases on the world market. The guy with the most financial firepower is going to drive up the price and smaller countries are just going to have to cough up.”

Global Shortage

Global food output will have to climb 70 percent between 2010 and 2050 as the world population swells to 9.1 billion people and rising incomes boost meat and dairy consumption, the UN’s Food and Agriculture Organization said last year.

Soybean futures in Chicago are up about 37 percent in the past year. Wheat is up 70 percent, while corn more than doubled.

By 2015, 51.5 percent of China’s population will live in towns and cities, Wen said in March. That’s up from 36 percent in 2000, World Bank data show. China’s population is currently more than 1.3 billion.

Growth of cities in China is part of a global trend pushing up food prices, said Jeffrey Currie, London-based head of commodities research at Goldman Sachs Group Inc.

With acceleration in demand because of “urbanization and the shift in diet to more protein, we need to grow more acreage,” Currie said in February in Hong Kong. The trouble is, “we have a finite amount.”

Illegal Use

China’s farmland per capita is less than half the world average, and one-sixth that of the U.S., according to China Comment, a Communist Party magazine. Actual land loss may be greater than the government’s numbers suggest, as local officials fudge figures and illegal use proliferates.

The Land Ministry said there were 53,000 cases of illegal land use in 2010, including factories, industrial parks and golf courses. Demand for land was more than double the 400,000 hectares the government allocated, according to the ministry.

Local governments made 2.7 trillion yuan in 2010 selling rights to farmland for non-agricultural purposes, with total land sales constituting 60 to 70 percent of revenue, according to Landesa, a Seattle-based organization that works to secure land rights for the poor.

A few villages north of Zhao’s field, Zhao Daochun, 43 and who is no relation, was supervising a team of 10 men building a factory on what used to be 2 hectares of fields. His boss wouldn’t tell him what the building would be used for, he said.

Forced to Sell

About 120 kilometers south, near Qufu, the home of Confucius, wheat farmer Hu Bo, 36, said officials forced villagers to sell about 33 hectares of land to build a coal- washing factory that’s now shuttered.

“The officials don’t give a damn if the business is profitable,” Hu said. “They just want to receive kickbacks from investors who get the money from banks and probably don’t care much about profitability either.”

“I don’t know what I’ll do” once the land has been rezoned, said Zhao Yuanyi.


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