Chinese premier Wen Jiabao’s visit to the United States this week has implications for agriculture markets.
We have written much lately about China’s effect on grain prices.
Most recently, a U.S.-China trade spat over textiles and televisions caused the latter to cancel soy and wheat buying missions. The soy mission is now back on, perhaps as a signal of China’s approval of Washington’s decision to drop steel tariffs.
This shows how farm trade between the two is tied to other issues. Taiwan is an example.
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Although Taiwan has acted independently since 1949, it has never formally declared independence, but its government is now considering it. China says Taiwan is a breakaway province and wants to discourage U.S. support for an independence vote in Taiwan.
China might attempt to win support through a goodwill purchase of a million tonnes of wheat and continuation of its soybean spending spree.
But beyond these immediate issues is China’s long-term food security.
China’s ability to feed itself and become a leading corn exporter has surprised many.
But it faces obstacles. It has a fifth of the world’s population but only seven percent of its arable land.
Between 1998 and 2002, 24.5 million acres, or 7.6 percent of its total farm area, was lost to urban and industrial development.
The reduced farm area, weather problems and a focus on growing higher value crops have resulted in total grain production dropping to 435 million tonnes, a shortfall of about 45 million.
China’s rulers want to reverse this and increase the income of the country’s 500 million farmers to stop them from moving to overburdened cities. But it must do so without contravening its commitments made when it joined the World Trade Organization two years ago.
Water availability and management will be the keys to increasing China’s grain production. There is lots of land in the north, but it is dry. China is already investing in gigantic river diversion projects, but it must also improve irrigation efficiency.
China most likely could supply all its food needs, but at an enormous cost. Its probable course will be to seek a cost-efficient balance between modest domestic production increases and growing food imports.
And in doing so, China will win support from its food suppliers, notably the U.S., for its other political interests, such as Taiwan.
