Monday, July 18, 2011

China Food Security Strategy and its Impact on the World

July 14, 2011

The Bacon Uprising: How China's Top-Secret Strategic Pork Reserve Is Burning Down The Amazon

1. The Strategic Pork Reserve

Since Deng Xiaoping, China’s leaders have been obsessed with “food security” the same way America’s are haunted by not having enough oil. And as Chinese diets become more meat centric, fears of the dangers in the fluctuation of pork prices led China to establish a top-secret “strategic pork reserve [1]” in 2007, the only one of its kind. But maintaining all those pigs has led to a massive dependence on corn and soybean imports for animal feed, which in turn is leading China’s agribusinesses to fan out abroad in a quest to control the means of production. China's attempts to control the means of production in other countries just rising out of developing world is causing tension with its natural allies, and could be just the first step in an ever-escalating series of resource-based conflicts.

In 2006, a fatal outbreak of PRRS (aka porcine blue-ear disease) devastated China’s swineherds, killing millions of pigs. The losses comprised just a tiniest fraction of its total herd of 660 million--more than the next 43 largest producers combined--but even the slight shortfall led to soaring pork prices [2] a year later. Hence, the pork reserve, which would allow Beijing to move quickly to keep its citizens in ribs should there be another interruption in production.

China’s strategic pork reserve is the direct consequence of an emerging, meat-eating middle class and a government determined to feed them. As the sociologist Mindi Schneider points out [3], Deng’s economic reforms in the late 1970s privileged industrial farms over small plots to guarantee a steady supply of cheap pork. As a result, the average citizen’s meat consumption has quadrupled since 1980, while pork consumption has doubled in the last two decades. And China’s meat packers are just getting started--only 22% of China’s pork production takes place in industrial feedlots, compared to 97% of America’s. In the future, it will always be the Year of the Pig.

2. Soybeans: They’re Not Just For Tofu Anymore

Until a few years ago, however, the pork on ice was American--60 million pounds purchased from Smithfield Foods. Vowing porcine independence for its meat-eating middle class, in 2009 China began massively scaling up its own pork production, which required turning to other countries for the farmland necessary to feed the pigs.

Once the Politburo decided to feed China with pork, the question then became: What would China’s pigs eat? One answer is corn. Last week, China purchased 540,000 metric tons of U.S. corn for delivery after August, according to the USDA, more than agency’s forecast for the entire year. About 70% of that order is bound for making feedstock, mostly for pork, which last year required 74.5 million tons of corn--up 20% from 2009, according to China’s Agriculture Ministry.

But China’s corn imports--1.5 million tons last year--pale in comparison to its reliance on foreign soybeans. China imported more than 50 million tons of soybeans in 2010, mostly from the U.S. and Brazil, accounting for more than half of the global soy market. They also comprised almost three-quarters of China’s soy consumption, according to Schneider, and were used exclusively for animal feedstock and cooking oil. The USDA expects China’s soybean imports to rise more than 50% by 2020. It hasn’t helped that China actually lost 20 million acres of farmland between 1997 and 2009 due to natural disasters and rapid urbanization. Rather than guaranteeing its food security, China’s hunger for pork has made it utterly dependent on farmers in the Midwest and Minas Gerais instead.

The Politburo’s solution was to command state-owned enterprises to “go out” and buy or lease farmland by the millions of acres. Last fall, Heilongjiang Beidahuang Nongken Group--China's largest state-run agricultural conglomerate--agreed to develop [4] almost 500,000 acres of farmland in Argentina, followed by another 200,000 hectares this year. A month later, Chongqing Grains’ announced a $2.5 billion deal to produce soybeans in Brazil.

While much has been written about China’s lopsided deals in sub-Saharan Africa, Latin America is a more likely candidate to become the world’s next bread basket. Last fall’s controversial “land grab” report by the World Bank noted that, since 1990, Latin American soybean yields grew at twice the speed of America’s. “Brazil’s soybean technology is world class,” says Robert L. Thompson, a professor at the University of Illinois who is a former director of agricultural and rural development at the World Bank. “Soybeans came in as a new crop with no traditions and state of the art technology,” including soil remediation techniques capable of converting dry savannah to arable farmland.

“While China is limited to 140 million hectares of agricultural cultivation, Brazil is using 80 million hectares now, has another 200 million hectares of pasture for cattle, and can insert another 140 million hectares into production without encroaching on ecologically protected areas,” argues Charles Tang, president of the Brazil-China Chamber of Commerce. His last point is a matter of some contention. While Brazil was able to quadruple its soybean production between 1995 and 2009, it came at the cost of nearly half of the Cerrado, destroying 1 million square kilometers of the richest savannah in the world.

For that reason, among others, Brazilian officials have begun to balk at China’s overtures. Last summer, Brazil’s attorney general reinterpreted a law already on the books making it harder for foreigners to acquire land. “Nothing is preventing investment from happening, but it will be regulated,” he promised The New York Times [5]. This has China’s advocates crying foul.

4. Another BRIC in the Wall

Brazil has good reason to be nervous about its burgeoning trade relationship with its fellow BRICs. Nearly all of its exports to China are raw materials--including soybeans, which are crushed on arrival--while nearly all of its imports are cheap manufactured goods, which are crushing its industrial sector. Brazil may be booming, but so is household debt, leading to debates [6] over whether a credit crisis looms. (The resource booms-and-busts of its neighbors Argentina in the 1940s and Uruguay in the 1950s aren’t very reassuring, either).

China’s policies aren’t the problem, retorts Tang; Brazil’s sky-high interest rates and taxes are. But Brazil’s uneasiness and China’s voraciousness raises questions about the future of the BRICs (Brazil, Russia, India, China and, as of last year, South Africa) as a political and economic block. On the one hand, the five nations have already held three summits [7] under the BRICs banner, but on the other they spent much of the last meeting in April lobbying China to buy less commodities and more manufactured goods. It’s a bad sign when you suspect your ally of trying to bankrupt you.

“When the G20 was created, that almost guaranteed the BRICs were going to form some kind of cohesive unit,” says Ian Bremmer [8], president of Eurasia Group and author of The End of the Free Market. [9] "Where they may have lots of things they disagree about — soybeans is one of thousand — they all agree they don’t want the developed countries to command this stuff.”

While Bremmer predicts the BRICs will unite to defend their mutual interests in tactical matters, he also believes “food and water are going to be the new oil. Resource nationalism, export controls, price controls and all of that is going to create greater inefficiencies in production,” perversely spurring the desire to control the means of production. It all seems to be a high price to pay for moo shu pork for all.

Jul 18, 2011

Seeds of insecurity in China's food security strategy

By Michael Richardson

CHINA appears to have reached a watershed in its food security strategy, which has long set a target of 95 per cent self-sufficiency in four key grains - rice, wheat, corn and soya beans.

If recent trends continue, the world's most populous nation and second-largest economy will become a leading importer of staple foods for its 1.3 billion citizens, as it has in industrial raw materials and energy, including oil and more recently natural gas and coal.

In a tight market, this will push prices higher in Asia and elsewhere, as China - the biggest producer of rice and wheat, and the second biggest grower of corn after the United States - becomes more dependent on imports to meet rising domestic demand.

Last year, China imported some 95 million tonnes of these grains, about 17 per cent of domestic production. The bulk of imports were soya beans from North and South America, mainly to feed pigs, cows and other livestock as increasingly affluent Chinese consume ever more protein-rich meat, milk and dairy products.

This year, China has added to its feedstock demand. Imports of corn are projected to reach record levels.

Traders say that China has bought 3.7 million tonnes of corn from the US so far this year, with sales for the year likely to reach five million tonnes. Such a volume would dwarf China's corn imports of 1.6 million tonnes last year and mark the second consecutive year it has been a net corn importer, after 15 years of net exports.

China's growing reliance on major agricultural exporters such as the US, Brazil and Argentina has important strategic implications. In the case of the US, it is likely to add a stabilising factor in relations, just as US reliance on Chinese purchases of Treasury bonds and other US dollar assets has enabled Americans to keep buying Chinese goods and kept US inflation low, thus strengthening Sino-US interdependence.

In the case of Brazil and Argentina, China is rapidly becoming a top resource development investor, committing US$15.6 billion (S$19 billion) to both countries in the year to the end of May, nearly three times more than the previous year's figures. This includes major capital spending by Chinese companies to lease and develop farms to grow wheat, corn, soya beans, fruit, vegetables and wine grapes for export to China.

China has done phenomenally well in maintaining a high level of self-sufficiency in food grains in recent years. It has 21 per cent of the global population, but only 8.5 per cent of the world's arable land and 6.5 per cent of water reserves.

China's grain production quadrupled from 1950 to 2010, helped by development of high-yielding crop strains and extensive use of irrigation and tube wells. Last year's harvest was the largest ever.

This impressive expansion provided a basis for economic reforms that lifted hundreds of millions of people out of poverty and kept retail food prices at affordable levels, legitimising Chinese Communist Party rule.

Today, this food security strategy is under intense strain as China tries to maintain as much self-reliance in grains as possible, while increasing imports to check food price inflation and ensure adequate supplies.

Much of the grain imported last year was not for immediate consumption, but for storage in case of crises. Chinese officials say that the national grain reserve amounts to 40 per cent of annual consumption.

The minimum average raw grain requirement per individual in China is about 400kg. Supplies at this level are considered sufficient not only to meet basic subsistence needs, but also to allow significant amounts of grain to be allocated to animal feed and processing purposes.

Economics professor Robert Ash, at the School of Oriental and African Studies in London, has calculated that taking population growth into account, China will need to produce at least 580 million tonnes of grain by 2020, up from 546 million tonnes last year, to maintain the policy of 95 per cent self-sufficiency.

While this seems an achievable target in the light of previous Chinese success in grain output, serious resource and environmental challenges make China's food security prospects difficult to predict.

They include continuing loss of some of the best farmland to the spread of cities and factories, extensive land degradation, and serious water shortages, including in the northern plains where much of China's wheat and cotton are grown.

China is so big that if some unforeseen contingency forces it to import grain on a large scale when global supplies are tight, the consequences for other importers could be very uncomfortable indeed.

The writer is a visiting senior research fellow at the Institute of Southeast Asian Studies.

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