China's New Affluence

Despite explosive economic growth, the country still needs imported grain, says one insider

Few people are more qualified to discuss China's ag potential than Ruan Wei, a Chinese citizen and economist who works as Senior Researcher for the Norinchukin Research Institute, Tokyo. While China works to achieve self-sufficiency in grains, it will still need to import about 10% of its corn needs over the long-term, she says.

We asked her to give Farm Futures readers an insider's view of china and its future economic growth.

Farm Futures: We hear there are a million new middle class in China every week. What are some of the ways you're seeing that trend on the street?

Ruan: You can see China's economic growth in several trends now. For example, people are able to buy cars and as a result, traffic in the big cities is terrible. The forecasters are 10 years behind when it comes to the Chinese and their ability to buy vehicles.

More and more people can afford to care about food quality, just like in Japan or the United States. Chinese people now want to buy fresh foods and cook themselves, and they want to buy more frozen, cooked and instant food.

The other change in China is travel. The growth in number of Chinese people traveling overseas is amazing. In the old days two people would share one room traveling to stay at a Japanese hotel; today they get their own rooms and are spending more money.

The current 10% annual GDP growth will begin to slow, but it will still be growing, probably at a more modest 7 to 8%. That's still high compared to developed countries. Salaries grow at a lesser rate, so even though poor people are making a little more money, high income people are making a lot more money. The gap between high income and low income population is getting bigger and bigger.

Will we be selling China more grain in the future?

I think so. First, there's the population. Today there are 1.4 billion Chinese. By 2020-2030 China will add another 130 million people. That's the whole of Japan's population today and nearly half of the U.S. population alone. Meat demand will increase along with grain demand.

Another factor is land. Chinese agriculture has no opportunity to expand its land base. In fact, it has to decrease, to make more room for cities and industries.

Another factor is water. Water shortages will become more serious in the future.

China imported over 30 million metric tons of soybeans last year, and a lot of soybean oil. About 11.6 million metric tons were from the U.S., 10 million metric tons from Brazil and the rest came from Argentina.

China produces a combined total of about 400 million metric tons a year of the three major grains, rice, wheat and corn. I used to believe it would be possible to raise the output by up to 50 million tons. However, it has become unlikely to see a dramatic increase in production, because the nation's farmland has been shrinking due to urbanization of coastal areas.

Will China do more to control population growth?

China still has a policy of one child per family. This policy started 30 years ago. It is still in place, but when an only child marries another only child, they are allowed to have two children. Why? Because there are four elderly parents that those children would need to take care of. The government's reasoning is that a couple can and should have two children to take care of their parents as they get older.

China is different from the west, culturally and socially. In a poor country you don't have as much money for nursing and retirement homes like you do in developed countries.

Even so, we believe this one child policy is controlling the population. Without it there would be more people and China couldn't produce enough food to feed them. A lot of people would starve or we would be forced to import more grain from the U.S.

The country has a painful history. In 1959 China had the so-called "Great Leap Forward," where the communist government had a plan to turn the country into this great industrial state. It was a national catastrophe. China's grain output dropped 15% and food supply plunged to 70% of 1958 levels in the following two years. The country suffered a great famine. By the end of 1961 over 20 million people had died.

What is China's public policy toward food self-sufficiency?

We believe the most basic human right is that people should have food.

Forty years ago China said its goal was to become self-sufficient and be able to produce enough food to feed its own people. Then they had that experience when 20 million people died. And 30 years ago they did not have the money to buy food from overseas customers.

Even so, the self-sufficiency policy is still in place. In other words, China's goal is to try to produce enough food to feed its own people. Whether it happens or not is in question.

What is your outlook for China's future food needs?

The basic thing is, China has a food shortage. China can't have 100% food self-sufficiency. In the future China will need to import more corn, but it will try to remain self-sufficient in rice and wheat.

It doesn't mean we won't import wheat. In the 1970s and 80s, China imported around 10 million metric tons of wheat every year.  In recent years they have not needed to import wheat and wheat yields are getting higher. A thousand metric tons is only 7% of the wheat China needs in a year.

What is China's position on Genetically Modified food?

I could see GMO seed playing an important role helping China boost cotton yields, especially drought-resistant seed for dry weather. Lots of people don't want GM food. But unlike Japan, which refuses any GM food, China is closer to having an open policy about GM technology. The 30 million metric tons of soybeans that China brings in for animal feed is GM.

Why was 1996 such a pivotal year for Chinese agriculture?

In 1996 grain prices surged, in part because China bought a lot of grain, mainly from Canada, U.S. and Australia. Leaders in developing countries, including Africa, worried that if China imported more grain, prices would stay high, limiting how much grain those countries could afford to buy. So China announced its goal was to become 95% self-sufficient in grain.

It was a turning point for the country. It's a very strict policy and all 30 provinces were told to increase grain production. In the four years following 1996, Chinese grain production made record highs. It dropped gradually starting in 2000 and started rising again in 2003.

Because world prices from 1998 to 2001 were low, China's domestic prices were low as well, so the government tried to increase the price and let farmers keep their incomes. They did so by buying grain and storing grain. So the government had huge stores of corn, wheat and rice. Within four years the government had no more place to store grain and lots of it spoiled.

Is that when China got into the biofuels business?

Yes. China made a policy to start making ethanol from the old poor quality grain, not just corn but also wheat and rice too.

Ethanol production started in 2002, and by 2006 world prices were going up because the U.S. had ethanol fever. By 2006 with higher prices China found itself making ethanol but they still had a food shortage. So by the end of that year the government decided it would not give any new permits for ethanol plants. There are only four ethanol plants now, all being subsidized by the government. They try to make ethanol from non-food crops like sweet sorghum and cassava, grown on marginal lands.

Are mandates and other policies that promote biofuels good?

For now it's good. For over 30 years, agriculture prices were very low. The main reason is because poor countries didn't have enough money to import grain. Supply was larger than demand for those years. So how do you fix that? You cut the supply for one thing. A lot of countries found ways to do this, including CRP and set-aside acres in U.S.

Now the U.S. ag policy is to increase demand with biofuel mandates. That's a very big change in the U.S.

Because prices are now at a new level a lot of countries will increase food production. It's not good for people who want cheap food, but for the agriculture sector it's an efficient policy.

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