In earlier Trade Watch articles I've identified nations that are major customers or competitors. In the case of China, they're both.
China has become the 800-lb. gorilla in the world soybean market and is a huge force in all global commodity markets. Its appetite for commodities had been one of the driving forces in the rally in the commodity markets since the lows in 2002. Of the world's supply, China uses:
- 31% of the coal
- 30% of the iron ore
- 27% of the steel
- 25% of the aluminum
- 21% of the copper
- 7.7% of the crude oil and
China also imports one third of the soybeans traded around the world.
China has the world's largest population at 1.3 billion and is the world's fastest growing economy. It has a GDP of about $1.4 trillion vs. the U.S. GDP of $11.6 trillion.
China is becoming increasingly urbanized. As more of the population leaves the farm and moves to urban areas, demand for meat, soybean meal and edible oils continues to grow. China will likely be a major player in the global grain markets because it has 25% of the global population and just 7% of the arable land in the world.
China is not only a large trader in the world grain, metals and energy markets, but it has also become a major force in world currency and bond markets. With record trade and budget deficits, the U.S. has borrowed $620 billion from foreign capital markets in the first three quarters of 2004. China now holds more than $600 billion in U.S. government and corporate bonds, with China buying a mind boggling $111.3 billion in U.S. securities in 2004.
China has the liquidity and the ability to move global commodity and currency markets, and its traders are willing to take greater risks in search of greater rewards.
What is the likely short-term and long-term impact of China on U.S. grain prices and farm profitability?
In the short term, U.S. soybean and wheat farmers are likely to see fewer than hoped for exports to China.
Last year, China's booming economy, the smaller soybean crop in Brazil and the wheat production problems around the world had the U.S. futures market jumping. Soybean prices rose to more than $10 and wheat rallied to more than $4/bu.
With the slowdown in the Chinese economy, a good crop in 2004, large supplies of soybeans out of South America and competitive wheat out of Europe and countries like Russia and the Ukraine, U.S. exports have dropped and will likely fall below last year's levels.
In other words, don't expect Chinese buying to give you a chance at $10 soybeans or $4 wheat this year. As U.S. food exporters, we hope to see a gradual slowdown in China's economy commonly referred to as a soft landing, continued growth in China's urban employment and increasing consumer demand for more meat in 2005.
Long term, as an additional 345 million Chinese move from rural to urban areas in the next 25 years, Chinese, U.S. and South American farmers will be challenged to grow enough food and feed to provide adequate supplies to this growing market. With this increased Chinese demand for basic commodities, input costs for everything from fuel and fertilizer to steel and tractors will be moving higher in future years.
Editor's note: Information in this column is based on REFCO Global Research information.
Actions Speak Louder Than Words
What to watch for in trade with China? Getting accurate grain stocks information out of China is difficult. The key is not analyzing what you think is the updated supply/demand situation in China, but rather what they do.
As a large trader, China will often generate negative news and then buy large quantities on the break. They will come out with bullish projections just to turn around and sell out of long positions.
The key long-term factors are sustained economic growth, expanding livestock production and an increasing number of middle class buyers who want more meat in their diets. Watch what China does — not what they say.