China to become net importer of grain -- more customers for Latin America

China Will Become a Net Grain Importer in the Future

By Interfax-China
05 Jun 2008 at 09:08 AM GMT-04:00

SHANGHAI (Interfax-China) -- China will become a net grain importer due to the country's limited capacity to further expand grain supplies, China's Ministry of Commerce (MOFCOM) said today in a research report.

"We should realize that tight grain supplies in China will be a common phenomena in the future. In the mid or long term, we will become a net grain importing country," the report, drafted by MOFCOM's policy research department, said.

Rapid economic growth has fuelled strong demand growth for grain, but production disruptions caused by climate change and natural disasters, as well as falling inventories, have caused global grain prices to rise as supplies tighten. Soaring energy prices and biofuel projects have only added to the upward pressure on prices.

Over the next 10 years, global cereal prices will grow by at least 10% to 20%, the ministry forecast.

China has grown increasingly vulnerable to price swings on the international market, as the sharp growth of international crude oil prices has pushed up fertilizer and pesticide prices, raising production costs for farmers. Meanwhile, the mood of domestic traders is increasingly affected by fluctuations on overseas markets.

For grains like wheat and corn, China still maintains strong control over prices due to its high self-supply sufficiency ratio of over 95%. But for soybean products, China is particularly vulnerable to swings on the international market as 68% of the country's soybeans are imported, according to MOFCOM.

To face the potential grain supply threat, MOFCOM has encouraged the overseas expansion of Chinese agriculture firms through the development of farms in arable land-rich Africa, Southeast Asia, South America and Russia.

Commentary

We have been warning since last year that China would become a net grain importer in the future. This is the first time an official Chinese government agency has echoed this forecast publicly.

The agri business is in fact a business of arable land, fresh water and sunlight. On per capita basis, China is facing shortages of both arable land and fresh water. This convinces us that the end of China's grain supply self-sufficiency is just a matter of time.

Indeed, at a recent Interfax presentation, we predicted that China's self-sufficiency ratio would drop to 83.5% by 2020. Varying factors will contribute to this increased dependency, including: population growth, urbanization, land erosion and changing dietary habits. A full report is available to subscribers.

This MOFCOM forecast, while representing a definite change of attitude, continues to reflect what we believe to be an overly optimistic view.

We agree that at current production levels, and adequate reserves, China maintains grain security in rice and wheat. However, even here, previous high levels of stockpiles are not being maintained. Of more immediate concern is the extremely tight corn market, which is barely balanced even after restrictive usage policies were implemented.

Unexpected natural disasters, such at that seen in the January snowstorms and the May 12 Sichuan earthquake, may well result in China becoming more generally dependent on grain imports much sooner than MOFCOM is ready to concede at the moment. Look for future statements from the authorities.

� Interfax-China 2008. For further information regarding Interfax China Commodities Daily Reports, contact David Harman at david.harman@interfax-news.com. Interfax also publishes a comprehensive China Grains & Soft Special Report, contact David Harman for details.