Grainy Problems

Have you checked the manhole covers in your street lately? Maybe it would be a good idea to take a quick look: just in case. The reason this might be an advisable course of action is that hot on the heels of those other two Asian scare stories ? Sars, and chicken flu ? comes a new one: manhole-cover theft. The latest to be hit was the UK city of Gloucester, where a sudden wave of ?heavy-metal crime? left the city?s streets with 40 top-less manholes. But this unusual craze has in fact had a global reach, with cases stretching from Milwaukee, to Taegu in South Korea to Shanghai, China. And the cause of it all: rising metal prices as the needs of Chinese industrialisation and development hit the realities of a supply constrained world. In fact while China previously exported much of its steel to the US, it is now buying up US scrap metal for its own steel consumption. As a result worldwide scrap metal prices have almost doubled in the last 6 months, and it is this price explosion which has produced the sudden surge in activity on the manhole front.

The reach of the China phenomenon is not, of course, confined to such bizarre activity, nor is it even restricted to the domain of metal. Currently the whole of Latin America could be said to be riding on the back of a China driven commodities boom which extends from soya in Brazil and Argentina, to copper in Chile to zinc and tin in Peru.

The Brazil soya case is an interesting and important one. Brazil will surpass the US this year as the No. 1 exporter of soybeans. The growth in soybean production in Brazil, where farmers this year increased plantings by an area the size of Israel, means that agriculture and related activities now account for 29 percent of gross domestic product, 46 percent of exports and more than a third of all employment, with the consequence that China?s expansion has given a big boost Brazil’s trade surplus and pushed the Real ever onwards and upwards against the dollar. Recent estimates suggest that foreign sales of soybeans last year reached $8 billion, or 13 percent of all exports, and this year they are set to rise still higher. The scale of this impact was graphically brought home to me recently in a mail from a friend living in Curitiba, Brasil who said that the 100 Km truck queue to the port at Paranagu was backed-up right outside his house.

The reason this is happening: the Chinese are getting richer, and eating more and better quality food. According to Lester Brown, president and founder of Washington- based Earth Policy Institute. “As Chinese become richer they are moving up the food chain and consuming higher protein food, especially more animal protein, that requires ever-expanding imports of soybeans to produce soybean meal to supplement grain in livestock and poultry rations.”

Now all of this has it’s good side and it’s bad side. It is one clear example of how global trade is beneficial, with foreign direct investment in China creating factories which then export products via ‘Big Box’ US sites like WalMart to help keep down the cost of living for American workers. In their turn the Chinese spend part of the money received on soya and provide, in so doing, work for Brazilian farmers.

But there is another side to this impact, and that is the global chase for what are, at least in the short term, restricted resource supplies. And one immediate consequence of this chase is that global commodity prices are on the rise. This is not good news for a Europe which is heavily dependent on raw material imports: in fact it effectively means that the terms of trade just changed against us.

After a remarkable expansion of grain output from 90 million tons in 1950 to 392 million tons in 1998, China’s grain harvest has fallen in four of the last five years?dropping to 322 million tons in 2003. Putting this in some perspective, the drop of 70 million tons exceeds the entire grain harvest of Canada.
However, again according to Earth Watch, the recent price rises may be only the early tremors before the big quake. China’s most recent harvest shortfalls have been covered by drawing down its formerly massive stocks of grain. But these will soon be depleted, and the government forced to cover the shortfall with imports.

The fall in China’s grain harvest is due largely to a shrinkage in the grain harvested area from 90 million hectares in 1998 to 76 million hectares in 2003. This fall is the result of a number of converging factors including: the loss of irrigation water, desert expansion, the conversion of cropland to non-farm uses, the shift to higher-value crops, and a decline in double-cropping due to the loss of farm labour in the more prosperous coastal provinces.

When China finally turns to the world market, it will inevitably turn to the United States, which controls nearly half of world grain exports. This presents an unprecedented geopolitical situation which will see 1.3 billion Chinese consumers who collectively currently enjoy a $120-billion trade surplus with the United States ? a quantity large enough to buy the entire U.S. grain harvest twice over ? competing with their American equivalents for the right to eat U.S. produced food. The probable consequence of all this: a food price explosion both within the United States and across global markets.

Of course the impact of this in the poorest countries may be very serious indeed.

Here in Europe there seem to be two immediate implications. In the first place the Common Agricultural Policy, whose funds have long been directed to supporting farmers from prices which were considered to be too low, may find them increasingly committed towards protecting urban consumers from the consequences of world foodstuff prices which are considered to be too high. In the process the whole debate about farm subsidies may take a new and unexpected turn.

Secondly the impact is also surely going to be felt in the area of community policy towards GM foods. The pressure to improve agricultural productivity, and to keep down the relative price of key items on the household diet, will doubtless be considerable. Already the signs are there. Gerhard Schroder, recently insisted that his agriculture minister, Renate Kunast — a member of the Green party, and a resolute opponent of GM crops to boot — announce that Germany will proceed with trials of GM crops later this year. Soon after this, the Commission announced its willingness to support a proposal to allow imports of at least one type of pest-resistant GM maize — the Bt-11 variety developed by the Swiss agrochemical giant Syngenta. Further evidence may be garnered from recent discussions surrounding biotech labelling. All in all, it is clear the agenda is changing. Could it be that once more the need for a cheap food policy will be back on the European agenda, and that high on the list of those responsible for this will be none other than those newly affluent Chinese consumers we seem to see so much of in the TV news these days?

This entry was posted in A Fistful Of Euros, Economics and demography by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

7 thoughts on “Grainy Problems

  1. Not quite sure whether the disappearing person-hole covers in Gloucester – after all, we should be politically correct about this – are better regarded as an unlawful manifestation of what Gordon Brown calls the “Enterprising Society” or an exemplar of the “Tragedy of the Commons” : http://dieoff.org/page109.htm

  2. Edward,

    You state: “When China finally turns to the world market, it will inevitably turn to the United States, which controls nearly half of world grain exports. This presents an unprecedented geopolitical situation which will see 1.3 billion Chinese consumers who collectively currently enjoy a $120-billion trade surplus with the United States ? a quantity large enough to buy the entire U.S. grain harvest twice over ? competing with their American equivalents for the right to eat U.S. produced food. The probable consequence of all this: a food price explosion both within the United States and across global markets”

    Maybe not. Additional upwards price pressure, certainly. But in the above statement you seem to assume that the grain supply is essentially inelastic on price. This doesn’t take into account the huge potential for cheap capacity increases that’s available due to a number of factors. The farm-belt states of the US, for instance, have seen years of rural depopulation due to overcapacity and a lack of pricing power. Further, the ongoing attempts worldwide to decouple subsidies from production mean that in many cases you have available agricultural labor and capital that is essentially being paid to _not_ produce. This all adds up to a great deal of un- and -under-utilized capacity that should prove responsive to relatively mild price signals. (Unlike, say, refinery capacity) A price “explosion” should be unnecessary.

    Bernard Guerrero

    ?In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit.? ? Warren Buffet, 2002 Berkshire Hathaway annual report

  3. “The farm-belt states of the US, for instance, have seen years of rural depopulation due to overcapacity and a lack of pricing power. Further, the ongoing attempts worldwide to decouple subsidies from production mean that in many cases you have available agricultural labor and capital that is essentially being paid to _not_ produce.”

    All of this is obviously the case Bernard, but the problem is that this takes time to come into operation. Most of the detail in the market mechanism is to do with timing, bottlenecks, speculation, things like that.

    So in the short term there could well be an important spike.

    Vis a vis this I will just touch here on a point I want to develop in the future. The Morgan Stanley China-Watch economist Andy Xie recently came out with what I consider to be the economics meme of the decade: stop thinking about the global economy as a series of slightly inter-connected national economies, and think of it as one global *developing* economy with nation state based market imperfections.

    Once you do this glass half-full, glass half empty conversion you can see a lot of things more clearly.

    In particular this.

    It became fashionable back in 2000 to follow Stephen Roach and Larry Summers down the road of speculating that what we had now was a new type of business cycle, with more similarity to the boom-bust variety seen in the 1920’s. The principal conclusion that was drawn from this was that the ‘problem du jour’ might be Irving Fisher style debt deflation. This is necessary background to understanding all the current fuss about Greenspan and 4 years without a rate rise.

    Now………..

    If Xie is right, and I certainly buy this, then maybe even the 1920’s is too recent. maybe we need to go back to the 19th century, and particulary 1875-1914 to get some idea of the kinds of instabilities we might get to see. China is only the first example here.

    Bottom line: we are no longer dealing with a nicely controlled set of fairly ‘mature’ economies, carefully managed. We are up on the roller coaster. Potentially dramatic price swings in agricultural prices would be just one symptom: with of course overshoot up, and overshoot down.

    If this view is right it might also help put other global phenomena (eg Al Qaeda) in another context.

    Needless to say this deserves (at least) a full post. But you asked the question, and out it came :).

  4. I remember that scrap-metal exports to Japan were an issue before WWII. They must be a leading indicator of something or another. Be warned.

  5. Edward,

    “All of this is obviously the case Bernard, but the problem is that this takes time to come into operation. Most of the detail in the market mechanism is to do with timing, bottlenecks, speculation, things like that.

    So in the short term there could well be an important spike.”

    I think we’re just differing in terms of the probable severity. It appears to me that grains are among the easiest commodities to ramp up capacity for, so any spike should be relatively short and mild. The worst effect would be in the futures markets for contracts hitting settlement soon after the initial run.

  6. Edward,

    “If Xie is right, and I certainly buy this, then maybe even the 1920’s is too recent. maybe we need to go back to the 19th century, and particulary 1875-1914 to get some idea of the kinds of instabilities we might get to see. China is only the first example here.”

    Oh, I like that. Fits in nicely with the “China as Wilhelmine Germany” meme that I’ve been carrying since about ’92.

    But we’ve been through this show before. Keep mobility up for capital, labor and finished goods and all should be well. No biggie, right? :^)

    Bernard “Wild-eyed Optimist” Guerrero

    ?Two shekels of silver have been borrowed by Mas-Schamach, the son of Adadrimeni, from the Sun priestess Amat-Schamach, the daughter of Warad-Enlil. He will pay the Sun-God?s interest. At the time of the harvest he will pay back the sum and the interest upon it.? ? Babylonian inscription, circa 2000 BC

  7. “China as Wilhelmine Germany”
    Let?s just hope that the U.S. doesn?t take the place of China in your little equation.

    Edward: We certainly didn?t ever get off the roller coaster. The late 19th century was a rather benign chapter in economic history – more like the 1960s than the 1930s. I am not aware of any major country that suffered a drop in the average life expectancy at the time that could be compared to what Russia experienced in the early 1990s, e.g. (Admittedly I didn?t look at the colonies. I also didn?t previously conceive of all those oil barons as expropriators of Russian Congo.)

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