During his presentation at Manitoba Ag Days, Winnipeg analyst David Drozd pondered the question of whether China could pull a version of the “Great Grain Robbery,” the event that lit the spark that led to the early 1970s explosion in grain prices.
That was when the Soviets showed that they were better businesspeople than the leaders of America’s corporate ag giants and managed to buy up the entire available U.S. wheat crop at a price far beneath what they should have paid. (The Russians approached two U.S. grain companies with multi-million tonne requests. Each company thought it was competing with the other for a single contract. In fact, the Russians signed both contracts, and the grain companies found out there probably wasn’t enough grain out there to fill both orders.)
Read Also
Producers face the reality of shifting grain price expectations
Significant price shifts have occurred in various grains as compared to what was expected at the beginning of the calendar year. Crop insurance prices can be used as a base for the changes.
Prices shot through the roof when it appeared that the Russians had swept out the entire North American stockpile and anyone who wanted supplies would have to bid high, high and higher.
China isn’t the Soviet Union, and grain traders are a little more aware because of the Great Grain Robbery, but some of the conditions are similar. The world is, regardless of big crops last summer, pretty tight for stocks. The Chinese have a major hunger for grains and if their production falls short they’ll be unlikely to just start starving. They’ll almost certainly go out onto the world market and buy what they need. China has a lot of money right now and one facet of a non-democratic, communist government is that it can act swiftly, secretly and boldly.
That was part of the setup Drozd was considering. If China suddenly gets scared that it doesn’t have enough soybeans, it could dramatically move the market. That all depends on weather, of course, and will probably not occur. But it might, which is why Drozd brought up the idea.
I’ve got a different spin on the China situation, although it’s not in contradiction with Drozd’s view. But to me, the greater risk with China is on the downside, with China economically, socially and politically imploding under the pressure of the worldwide financial crisis. People seem to assume China’s sound and safe and will always be growing by leaps and bounds. Even expectations of only four to six percent growth seem pessimistic to many who are used to China booming, booming booming. But to me, China is a powder keg set to explode if ever there is a serious spark of economic trouble. Its success for the past 30 years has been through generally good economic times – a worldwide long term bull market since the early 1980s that has allowed China to expand and fill in bits of demand every year. What if that tide that has been lifting all boats starts flowing the other way?
The world is fixated on the problems in the U.S., but other countries are suffering much more greatly. Emerging and semi-developed societies are suffering the worst, so far, but don’t get too many headlines because they’re not the prime viewing or subscribing base for any of the world’s major media.
So far China is doing better than most of the semi-developed economies, sitting as it is atop a giant mountain of cash (U.S. treasuries) and still moving forward with the momentum of its recent decades of growth. But if the worldwide bull market’s over for a few years, what demand is China going to fill-in to provide jobs for the tens of millions of young men from the country who flock to the cities looking for jobs? Because of the one-child policy, millions of those men don’t have wives to civilize them, and a sea of unemployed, frustrated and angry men tends to be a recipe for big upheavals.
People have gotten so used to China seemingly inexorably growing that you’re treated like some sort of looney if you suggest China could implode, but why is that such a crazy idea? It isn’t like China doesn’t have a history of explosive upheavals: the Boxer Rebellion, the civil wars, the cultural revolution, the Tiananmen Square massacre. But so often we’re transfixed by the most recent history that we take nearby trends – China growing by leaps and bounds – and project those far into the future, as inevitable.
A couple of years ago everyone got excited by the idea of countries like China “decoupling” from the U.S. economy. There was never any real reason to believe that was happening – China is to a great extent a Wal Mart supplier economy – but people allowed themselves to believe that if the U.S. went down, China would pull it up. That assumption now seems a bit shaky.
What does this mean for crop prices? If China starts having significant social unrest, the communist government is likely to try to buy-off the people with things like cheap food. Remember, the first event of the Russian revolution in St. Petersburg was a riotous raid of a food warehouse. The regime would probably want to avoid that. And that would be great for crop prices in the short term. But what happens if, as occasionally in Chinese history, a much bigger and more violent conflagration consumes the nation? Does anyone think Chinese grain traders will be sitting at their desks buying grain? Does anyone think companies over here will be making deals with grain traders that might not be there tomorrow? Regardless of whether Chinese people would go hungry, if China runs into social upheavals that destabilize the system, not a lot of grain business is likely to get done. If China left the world grain markets for six months, or a year, or two years, it would have a big bad effect on the world supply and demand situation.
I’m not calling for China to implode. I don’t have a clue what’s going to happen in the future. But I get the sense that a lot of people simply assume China is always going to be growing, and always demanding more and more of what we offer, and that it is somehow immune to the sorts of economic and political problems that mature democracies like those of the United States and Europe suffer.
If we’re lucky, China will keep growing and be immune to all of our problems in the Western world. Or at least not suffer enough to reduce their need to often buy our crops. But in the present world environment, nothing should be taken for granted.
