China's Role in Worldwide Food Prices: A Guest Post

In 2007 and 2008, food prices around the world spiked, prompting concern in the developed world and full-blown riots elsewhere. Pundits blamed everything from China’s growth to the increased use of biofuels. Then, in the summer of 2008 food prices receded. This created significant confusion over the determinants of food prices and the likelihood of future crises.

Patrick Westhoff, the co-director of the Food and Agricultural Policy Research Institute (FAPRI) and a research associate professor at the University of Missouri, investigates the events of 2007 and 2008 in his new book The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices. He explains the factors that lead to price increases and that may drive food prices in the future. Westhoff has written a guest post addressing one potential driver of food prices: the growth of China’s middle class.

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Will Changing Diet Demands in China Lead to Runaway Food Prices?
By Patrick Westhoff

Since Lester Brown‘s book Who Will Feed China? Wake-Up Call for a Small Planet was published in 1995, concerns about China’s effect on world food markets have waxed and waned. When prices for food, oil and other commodities were soaring in 2007 and early 2008, many people pointed to demand growth in China as a major culprit. Some worry that the current recession is just a brief respite and that rising Chinese demand will soon push commodity prices sharply higher again.

In the case of food, the basic argument is pretty simple. As the incomes of Chinese consumers rise, they will want to eat more meat. To supply that additional meat, more hogs, cattle and chickens will consume more corn, soybean meal and other feeds. Because China is such a large country, this increase in food demand will put enormous pressure on the world food system, and the inevitable result is higher food prices for everyone on the planet.

This simple story is not far-fetched, and it is very possible that rising incomes in China and other countries will make it hard for world food supply to keep up with demand. It is easy to find a wide range of supporting statistics. Here are just a few to set the stage, all based on USDA-reported data:

  1. China already consumes a lot more meat than the United States. While per-capita consumption remains much higher in the United States, China’s population is more than four times as large.
  2. The increase in Chinese consumption of pork between 1998 and 2009 was greater than total U.S. consumption of pork in 2009. Chinese beef, poultry and dairy product consumption are also growing at phenomenal rates.
  3. More than half of the world’s hogs live in China.
  4. China is already the world’s largest consumer of wheat, rice and soybean meal, and trails only the United States in the case of corn.

There is another side to the story. China may be a huge consumer of many food products, but it is also a huge producer. Food self-sufficiency has been a major policy objective of the Chinese government, and current trade statistics suggest that policy has been successful for many major food commodities. According to the latest USDA data, China is expected to be essentially self-sufficient in wheat, corn, rice and pork this year-less than 1 percent of domestic consumption will be imported, and less than 1 percent of domestic production will be exported.

If a country does not trade with the rest of the world, it cannot have a large direct effect on world markets. In a certain sense, it does not matter to consumers in the rest of the world if Chinese food consumption skyrockets or plummets, as long as China does not use imports or exports to balance its domestic food markets.

There are three problems with this argument. First, China is not self-sufficient in every major commodity. China gave up any pretense of being self-sufficient in soybean production a long time ago and is now the world’s largest soybean importer. In fact, China is expected to account for more than half the world’s soybean imports this year. The country imports soybeans to make soybean meal to feed to livestock and soybean oil for direct human consumption. Chinese demand for soybeans means more land in the United States, Brazil and Argentina must be devoted to soybean production, which pushes up prices for all major crops.

Second, even though China is self-sufficient in many major food commodities today, it has been a major player in world markets in the past, and will be again in the future. In the case of corn, for example, China has sometimes been the second leading exporter in the world, but it has occasionally also been a significant importer. Just the rumor of potential Chinese corn imports can send prices in futures markets soaring. Many analysts think it will be difficult for China to keep up with growing demand for grain as livestock feed, and that eventually the country will become a major importer. Even proportionally small swings in Chinese pork trade had a big impact on world pork markets in 2008 and 2009.

Third, when China tries to maintain self-sufficiency in some food products, it can have important spillover effects on other related markets. The soybean market is one example of this. Also, China uses more fertilizer than any other country, so it has a big impact on world fertilizer markets, with implications for farm production costs around the world. Likewise, when Chinese farmers buy and use more machinery, it impacts the prices of everything from steel to oil.

China is an important part of the story of world food prices, but everything from biofuel production to the weather also affects what people pay for the food they eat.

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  1. Debbie Friedman says:

    Excellent article. But it clearly points out the need for two things. 1) More people around the world need to move toward a plant-based diet. The added demand for more crops to feed livestock needs to be reduced. Those crops will be needed to feed the growing population directly. 2) We need to rethink the image of better wealth equaling meat consumption. Whenever a country starts developing economically, restaurants serving meat push themselves right in there to convince those who have arrived to their new socio-economic status that eating more meat is a symbol of success. As Mr. Westhoff points out, other factors affect world food prices. But choosing what we put on our plates everyday is something we can all do to make a difference.

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  2. Cameron Murray says:

    “This simple story is not far-fetched, and it is very possible that rising incomes in China and other countries will make it hard for world food supply to keep up with demand”

    I thought we had a price mechanism to resolve this age old problem?

    If food prices rise, people on marginal agricultural land around the world will start farming again.

    However, if you argue however that there are limits to agricultural production due to natural contraints of suitable land, then price may be able to rise significantly.

    Finally, no country these day is ‘self’sufficienct’ with their food production.. Many are net exporters (Australia, NZ, Brazil) but that does not mean that they do not import any food. They simple grow what they are good at and import foods other countries are better at producing.

    Some musing on this issue at http://ckmurray.blogspot.com/2009/09/value-of-food-security.html

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  3. Lystraeus says:

    Or 3), we move ahead with the moon farms.

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  4. Alex says:

    China has just announced it will stop imports of soybean oil from Argentina, allegedly for quality issues.

    Whatever the real cause for this move, it is definitely not quality: the local chinese quality is much lower than the argentinean soybean oil, and China has been importing soybean oil from Argentina for years without problems.

    The real reasons behind this move may be a combination of several causes (1) unusally high inventories of soyean oil in China ; (2) retaliation against Argentine import tariffs for Chinese textiles; (3) Provide incentive to local soybean oil industry.

    It will be interesting how this is played out in terms of Game Theory: China consumes some 50% of the world’s soybean oil, and Argentina is the biggest exporter. Both cannot live without the other. The Chinese government has the upper hand due to its large inventories, but this may prove transitory: eventually when the inventories run low they’ll have to lift the import ban. The question is if the Agentinean government will support the pressure to provide long term concessions to the Chinese. If they resist, they may have the upper hand if Chinese inventories fall and Argentineans rise (this is harvest time in the southern hemisphere).

    Meanwhile, the rest of the soybean world will follow. Eventually the Chinese may import from USA/Brazil, and Argentina may sell to their markets. This is probably not efficient, and will bring costs up.

    To follow.

    http://www.businessweek.com/news/2010-04-20/china-ban-on-argentine-soy-oil-imports-is-crushing-strategy.html

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  5. dr. cosa says:

    increased demand for crops coupled with rising prosperity will allow for greater efficiencies via machinery investment on Chinese farms.

    there is no reason to believe that chinese farms wont be able to increase their yields per acre for most crops they grow as their economy modernizes.

    the difficult consideration is how much the flight from farms to urban centers is offset by development of farmland for commercial/residential use.

    will masses of farmers fleeing to cities leave less farmers to cultivate more land with better technology, that will allow for greater food production above and beyond nominal growth and demand?

    importing any one crop is not in and of itself bad, it simply means their resources are better allocated doing other things. self sufficiency isnt always the most efficient.

    people fail to appreciate how big china is and how much room there is for overhead development in agriculture. they can improve their efficiency over time to theirs and our own benefit.

    food prices did spike across the board 2 years ago but have not come close for most to the prior highs, blow off top or harbinger?

    its too early to call, people have called for food shortages and exploding prices for decades. perhaps the broken clock will be right once again?

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  6. Hydra says:

    More people around the world need to move toward a plant-based diet. The added demand for more crops to feed livestock needs to be reduced.

    Won’t work because if more people shift to plant based diets it will lower the price of meat for others to eat.

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  7. Johnny E says:

    Ever hear of the Population Bomb? Wouldn’t that affect food prices?

    China has a high yield per acre because the peasants treat their plants with TLC. Replacing that model with a highly mechanized agribusiness model with have all sorts of social disruption in China as well as degrading their environment.

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  8. Neil Sorensen says:

    From a farmer’s perspective, higher food prices are very good news. Farmers have been expected for over two decades to produce on the cheap, and get only a tiny fraction of the retail price due to retail and trading monopolies.

    During the last food crisis, the high prices only benefited farmers in a limited number of countries, where agriculture is able to respond quickly enough to market signals. Hardly any farmers in Africa or other developing regions of the world were able to take advantage of these high prices.

    At the same time, many NGOs and consumer groups highlighted the increase in consumer prices as something negative that had to be stopped, focusing on Mexicans demonstrating in the streets for higher tortilla prices. For farmers, the NGO reaction to this situation made it clear that farmers are on their own; the NGOs demonstrated they were not interested in establishing long-term sustainability, but were more interested in jumping on the bandwagon whenever it was convenient or could put them in the limelight.

    The question of China is a major one. Their farmers do not function under democratic conditions. The farms are controlled by the government, and they do have an increasingly large impact on world agriculture. Will they increase prices? Probably. Why is that such a bad thing? The main question is ensuring developing countries can take advantages of those market signals.

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