Agriculture

Bean counting

Will soya and corn shortfall drive up inflation?

Think of Chinese food and you will likely think of soya sauce, a condiment invented some 1,800 years ago in China. But, surprisingly, the main ingredient of this quintessentially Chinese product – the soya bean – is now much more likely to be grown in the Americas than in China itself.

Indeed, while the soya bean may have originated in northeastern China, these days around 80% of the country’s consumption is imported – mostly from South America and the United States.

It’s a trend we reported on as far back as WiC53 – explaining that for a host of reasons the beans are often cheaper to import than produce at home. But the era of cheap soya bean imports may have come to an abrupt end – and that matters, given China’s growing reliance on imported beans.

In the coming months the situation is likely to prove a headache for Beijing, reigniting food inflation. And it has arisen because of events far beyond China’s control.

The soya problem has been triggered by a disastrous drought in the American midwest, causing bean yields to fall dramatically. The US Department of Agriculture (USDA) noted this month that the drought is now curtailing 90% of the American soya bean crop. That’s going to mean problems for Chinese buyers, whom the USDA forecasts will want 61 million tonnes of US beans in the coming year (making China the world biggest importer).

The impact of the drought has already seen prices surge past previous records set in 2008. Spot prices have broken through the $16 a bushel level and, according to the National Business Daily, the price of soya futures sold in China has risen 50% since the start of the year.

This is going to be felt a lot more widely than the price of soya sauce. Soya beans are also used in cooking oils, as well as animal feeds – which will mean an increase in the cost of meat too.

As a result, China’s consumers can expect yet another round of rising food prices.

“In the next three months, China’s consumer price index [the CPI or inflation rate] will bottom and a new upward cycle will begin,” predicts Zhang Tingbin at consultancy CNYUAN. Prior to the drought, China’s inflation rate had been in decline, falling to 2.2% last month. But food prices are watched closely for their contribution to the topline inflation rate and the price of soya beans may not have peaked. Chem99 analyst Yu Yang also told the National Business Daily that a recovery in US yields is unlikely in the short term – even if the weather improves. And if the drought continues, Yu predicts speculation is likely to drive prices even higher.

The drought is driving up the price of other grains too. According to China’s Ministry of Agriculture, 1.97 million tonnes of wheat were imported between January and May; as well as 1.87 million tonnes of corn. Even rice imports were up 217% in the same period.

“The trend shows a substantial increase in China’s imports of these three staple grains,” says Zuo Changsheng, who is a deputy director with the ministry.

Not surprisingly the prices of corn and wheat are rising fast too. The former is an important animal feed for pork and chicken, both of which the Chinese are eating in ever greater quantities. That means that higher meat prices look all but inevitable, and not just for China but for the world as a whole. The Financial Times interviewed Larry Pope, the chief executive of Smithfield Foods, one of the world’s biggest pork producers this week. His verdict on current corn prices? “I’ll use the word catastrophe – that’s my definition,” he told the newspaper.

All told, the US drought comes just as Chinese policymakers thought they could claim victory in the most recent struggle to contain price rises. But rising food costs could rekindle economists concerns about a fresh spike in inflation as food constitutes a third of China’s inflation basket, meaning that it has a disproportionate impact on topline CPI. In recent months, falling inflation rates had seemed to allow Beijing some wiggle room to stimulate a slowing economy. But if prices start to rise too quickly, policymakers will have to prioritise which area to attack first – prices or stalling GDP.


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