Confidence in China’s continuing growth has been shaken by economic tremors in the giant nation, challenging assumptions that it can keep consuming ever-greater amounts of commodities.
However, whether those tremors presage a quake that will break China’s demand for Canadian crops is impossible to know.
“There are already elements of fragility,” said New York University economist Nouriel Roubini in a recent Bloomberg interview.
China is a huge market for some Canadian crops.
It has been Canada’s biggest export customer of canola, both seed and oil, for the past two years, is often the second biggest buyer of peas, can be a major buyer of flax and has been the biggest buyer of barley.
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China purchased just over 20 million tonnes of wheat, corn, barley and sorghum last year, that is well below the 60 million tonnes purchased in 2021-22.
And as with many commodities outside agriculture, China’s demand has increased over recent years, helping drive some crop prices to historical highs.
An economic slump in China could immediately affect exports of Canadian crops and meat.
However, China is also the primary source of strength for the global commodity bull market, which has been arguably the main source of strength for crop prices. China has imported vast amounts of iron ore, coal, copper and crude oil as it feeds its voracious industrial appetite, causing commodity prices to soar in 2008 and again in 2010-11.
Various supply and demand fundamentals for individual crops have a big impact on the spread between various crop prices, such as that between canola and wheat, but many analysts believe today’s high crop prices have more to do with overall commodity market strength.
The present worries occupying analysts and traders come from China’s booming inflation rate, which was 5.5 percent in May, and its government’s attempts to cool it. The Chinese central bank has already crimped the amount of money that its nation’s banks can lend, raising reserve requirements five times this year.
As well, it has repeatedly raised interest rates to douse inflation.
While the country’s economy seemed to initially shake off these attempts at restraint, May statistics show that Chinese bank lending was 20 percent lower than expected, and the money supply expanded at the slowest rate since 2008.
This worries the commodity markets because the function of these moves is to reduce the ability of Chinese businesses and consumers to spend money, much of which would be spent buying commodities or products that require commodities to manufacture.
Many analysts expect China will achieve a soft landing for its economy, relieving inflation while not causing a recession. This seems to be the case particularly among agricultural market analysts, who believe food demand will resist efforts to control inflation.
“To me it’s not just turning off a tap and saying, ‘let’s import less peas,’ ” said Brian Clancey of Stat Publishing.
He doubts the government will be able to easily dampen food demand because the Chinese have more money and will find a way to buy food.
While demand for industrial goods or luxuries could drop as money tightens, many agricultural-based analysts think food consumption is the last thing Chinese consumers will reduce.
However, some Canadian crops exported to China end up in the equivalent of luxury items, such as peas turned into bar snacks, barley into beer, and canola oil used in rich food.
How well demand for those items holds up if Chinese wallets become thinner remains to be seen.
CHINA’S ECONOMY &TRADE
•World’s second largest economy after the U.S.
•Largest exporter and second largest importer of goods
•Third largest importer of Canadian agriproducts
