China Crops in Short Supply as Fewer Farms Spur Food Prices

Across the road from Zhao Yuanyi’s wheat field in China’s Shandong province, Chonche Group is expanding a rail-car factory on what used to be 227 hectares of farms. Nearby, Geely Automobile Holdings Ltd. (175) makes sedans on an 87 hectare site that four years ago was covered by crops.

The factories sprawling from Jinan city, 350 kilometers (220 miles) south of Beijing, put Zhao on the front line of a clash between a policy of food self-sufficiency and industrial growth that made China the world’s second-biggest economy. Industrialization is winning, signaling prices for crops like wheat and corn will rise as China is increasingly unable to feed itself and vies for supplies on global markets.

“This year, maybe next, they’ll develop my field,” Zhao, 63, explains as he stands beneath a China Mobile Ltd. cell-phone tower on the edge of the land he’s tended all his life. The local government will buy his land, paying compensation through an annual allowance of 1,800 yuan ($276) per mu, which amounts to about 2,700 yuan for each person in the village.

China’s farmland shrank by 8.33 million hectares (20.6 million acres) in the past 12 years, Premier Wen Jiabao’s top agriculture adviser Chen Xiwen told reporters March 24. Land under cultivation has already fallen almost to the government’s 120 million hectare limit after being consumed by apartments, factories, desertification and a forestation campaign. Drought has also hit the country’s main wheat-growing region.

“China’s increased demand for agricultural commodities will mean an increase in prices for the entire world market,” said David Stroud, chief executive officer of New York-based hedge fund TS Capital Partners. “China can outlast any other bidders for the commodities it desires.”

Price Forecasts

Investors should bet on crops in shortest supply in China, with wheat and corn offering the best opportunities, he said.

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Wheat futures in Chicago may average $8.05 a bushel this quarter, 89 percent higher than the past year’s low, as farmers struggle to rebuild global stockpiles, according to Rabobank International’s Agri Commodities Monthly e-mailed April 18. Corn futures may reach a record, jumping to as high as $10 a bushel, Alex Bos, an analyst at Macquarie Group Ltd. said April 6.

“As China continues to grow, demand and supply will struggle to keep up,” said Abah Ofon, a Singapore-based commodities analyst at Standard Chartered Plc. “This would be a problem for any country. For China, the world’s biggest consumer and producer, a small deficit can result in huge demand for imports.”

Riots, Poverty

A 5 percent shortfall in China’s overall grain harvest would potentially require 20 percent of current global grain exports to meet the country’s annual needs, Ofon said. Wheat in Chicago reached its highest level since 2008 in February on concern drought was damaging China’s crop, raising the risk the country would drain the world market.

Rising food prices cause riots and civil conflict, and widen the gap between rich and poor, according to an International Monetary Fund working paper by economists Rabah Arezki and Markus Brueckner published last month on the organization’s website. World Bank President Robert Zoellick said in February that the price surge was “an aggravating factor” in uprisings sweeping the Middle East.

Hong Kong-listed Geely and closely held Chonche are using land that China needs to offset shortfalls in more developed areas. The spread of cities and factories in wetter grain- growing coastal regions such as Jiangsu and Zhejiang has put more pressure on drier provinces like Hebei and Shandong.

Food production is increasingly being focused in northern areas that have water shortages,” agricultural adviser Chen wrote in December. That’s “very worrying for food security.”

Read more @ bloomberg


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