China's buying spree still growing

by Ron Sterk
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"Equity markets fall on China worries,” or “Market rises on talk of China buying,” have become familiar headlines indicating the significance of China in the world economy. The impact of economic growth in China, the world’s most populous nation with 1.3 billion people and counting and the world’s largest agricultural economy, has been well publicized. That influence continues to grow as Chinese import demand tied to population growth and increased annual income broadens into corn, meat, nuts, dairy and other food products.

“China is the world’s largest agricultural economy,” the U.S. International Trade Commission said last year in its investigation of China’s Agricultural Trade: Competitive Conditions and Effects on U.S. Exports. “It is the leading producer of many ag-ricultural commodities, supplying more than half of the world’s pork; one-third of the world’s horticultural products, rice and cotton; and close to 20% of the world’s wheat, corn and poultry. With about one-fifth of the world’s population, China is also the largest consumer of many agricultural products; its current share of global pork consumption is 50%, 40% for cotton, 30% for rice and more than 25% for soybeans and soybean oil.”

China has been a net importer of agricultural products since 2003, according to the I.T.C., and on a global trade basis the country now accounts for about 60% of soybean imports, nearly half of cotton imports, about 30% of hides and skins, and the list goes on.

“China’s trade pattern in agricultural commodities follows its comparative advantage: it tends to import land-intensive commodities (soybeans, cotton, barley, etc.), and it exports labor-intensive commodities (fish, fruits, vegetables, etc.),” the U.S. Department of Agriculture’s Economic Research Service said.
Just as China itself is almost too much to comprehend, so is U.S. agricultural trade with China that has seen an amazing 80% increase in the past three years and tripling from 2005 to 2010.

According to the U.S.D.A., U.S. agricultural exports to China were valued at $19.9 billion in fiscal 2011, equal to 14.5% of total U.S. ag exports, and compared with $18.6 billion, or 13.5%, for Canada, which had been the largest importer for the previous 10 years; $17.7 billion, or 12.8%, for Mexico; and $13.9 billion, or 10%, for Japan, which was the leading buyer prior to Canada in fiscal 2000 and earlier.

In February at the U.S.-China Agricultural Symposium in Des Moines, Iowa, U.S. Secretary of Agriculture Tom Vilsack and China’s Minister of Agriculture Han Changfu signed a Plan of Strategic Cooperation intended to guide agricultural relations for the next five years. Acting U.S.D.A. Undersecretary for Farm and Foreign Agricultural Services Michael Scuse is leading a trade mission of about 40 companies to China this month.

As the symposium in Des Moines concluded, China signed an agreement to buy more than 13.4 million tonnes (494 million bus) of U.S. soybeans in the next year. The signing was mostly ceremonial as China typically buys far more than that amount, taking about 900 million bus, equal to more than a fourth of U.S. production in 2010-11.

China’s soybean imports long have been a key factor in global markets, especially for Brazil, the United States and Argentina, the world’s top three soybean exporters in that order, accounting for about 88% of total global shipments.

But in the past few weeks U.S. corn futures prices climbed to six-month highs near $6.70 a bu in part on Chinese demand, or at least on “talk” of such. The sheer size and buying power of China are enough to send ripples through the market if only at the rumor level. China was long a net corn exporter but in recent years has become an importer as it needs more livestock feed to produce more meat-based protein to meet demand from the growing Chinese middle class. For the current marketing year, accumulated exports of U.S. corn to China were 2,765,000 tonnes as of March 8, compared with 314,000 tonnes at the same time last year, according to U.S.D.A. weekly export sales data. By comparison, accumulated U.S. soybean sales to China on the same date were 17,889,000 tonnes, down from 21,759,000 tonnes a year earlier. But with U.S. and global corn supplies tight relative to soybeans and wheat, any increase in demand may be a major supportive factor for corn prices.

There have been significant increases in other U.S. exports to China over the past several years as well, all reaching the highest export level since at least fiscal year 1970, according to U.S. Bureau of Census data as reported by the U.S.D.A. For fiscal 2011, those include: cotton at $2,805 million, up 98% since 2007; forestry products at $1,868 million, up 223%; hides and skins at $1,102 million, up 33%; fish products at $1,057 million, up 101%; red meats at $423 million, up 363%; dairy products at $312 million, up 137%; processed fruits and vegetables at $205 million, up 104%; tree nuts at $156 million, up 185%; wine and beer at $53 million, up 309%; and snack foods at $47.5 million, up 101%.

While the total dollar amount of U.S. nuts exported to China at $156 million in fiscal 2011 pales in comparison to cotton or soybeans, the impact on the specific nut markets has been significant. Bobby Tankersley, senior vice-president of In-dustrial Sales at John B. Sanfilippo & Son, speaking at the Sosland Publishing annual Purchasing Seminar last year noted that imports by China were major driving forces in U.S. and world pecan, hazelnut, almond, macadamia and pistachio markets.

“China continues to purchase the majority of the Oregon filbert (hazelnut) crop,” Mr. Tankersley said. “Inshell (macadamia) de-mand from China has driven up field prices in Australia, South Africa and triggered an export ban in Kenya,” and “China continues to drive the (pecan) market as a result of record export demand.”

China’s dairy imports also have become an integral part for the U.S. dairy industry, at least for specific products. The U.S. Dairy Export Council reported U.S. exports of whey proteins to China/Hong Kong in 2011 totaled 154,907 tonnes, up 16% from a year earlier and 34% of total U.S. whey exports.

Wheat may be the exception to rampant demand from China. Much to the chagrin of the U.S. wheat industry, which already has lost out on large gains in yields mostly due to bioengineered traits in other crops, especially corn, and has seen harvested area decline 40% since peaking in 1981, China’s total wheat imports are projected to increase about 20% over the next decade, but from a paltry starting point of only 1.5 million tonnes in 2011-12, according to the U.S.D.A. And China’s wheat exports nearly offset imports in some years.

“China’s imports remain small as per capita consumption of wheat continues to decline,” the U.S.D.A. said in its recent Agricultural Projections to 2021. It should be noted that China is the world’s largest “single country” wheat producer at 117.9 million tonnes, behind only production of 137.5 million tonnes of the combined E.U.-27 and more than double the 54.4 million tonnes of the United States in 2011-12. It is also the single largest wheat consumer at 116 million tonnes in 2011-12 (E.U.-27 at 125.5 million tonnes).
The massive agricultural trade between the two countries has contributed to a positive agricultural trade balance for the United States, estimated at more than $30 billion each of the past two years and in stark contrast to a non-agricultural trade deficit of $995 billion in 2011. China, conversely, has seen a significant negative agricultural trade balance with the United States.

The question some are asking is, “Has the United States become too dependent on China as a trade partner?” On the other hand, with China’s public proclamation of seeking food security, it also may be noted that with such dependence on a small handful of suppliers, especially in the case of soybeans, China is at risk should the United States, Brazil or Argentina suffer a significant crop downturn.

Perhaps Secretary Vilsack said it best in Des Moines in February, “We are the world’s two largest agricultural producers and strong collaborators in agricultural research and education. Our great trade relationship benefits the citizens of both of our nations.”

In other words, China needs the United States as much as the United States needs China as a trading partner.

A future column will look at the influence of some specific Chinese exports on U.S. markets.
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