CAP reform update December 2013

Is something up in the State of China?

While recent attention has focused on other areas such as production problems in Ukraine and the USA. China, as a major driver of consumption, has huge influence on world trade but are there problems lurking?

 

While recent attention has focused on the Ukraine, where high inflation and political unrest may result in a significant production shortfall for one of the major maize-exporting countries,  and emerging drought and frost kill in the USA might damage production in the biggest exporting country, there are also some bearish influences. China is a major driver of consumption but are there problems lurking?

Chinese economic growth is still exceptional compared with the West and low debt makes it economically robust. In contrast to much of Europe and the West there is far less likelihood of an economic downturn getting out of control.  However, Chinese GDP growth is slowing down as illustrated in Graph 1.

 
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There have also been some trade issues:

• Since November, China has rejected 1.45 Mt of US maize, ostensibly because it contained an unapproved genetic modification, according to the US National Grain and Feed Association. However, the genetic modification has been accepted in the past.

• The USDA has reduced the volume of anticipated wheat imports by China.

• According to Reuters, China has defaulted on 0.5 Mt of US and Brazilian soya bean. Part of the problem is that avian flu has reduced demand by 30% in the first quarter of 2014 and, overall, may remain 15% below that of last year.

A more complex issue is the fall in price of globally traded milk. This is illustrated, in graph 2,  by the falling price of milk products in the international electronic auction managed by Global Dairy Trade.

 
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The graph shows the general overall upward trend in traded volumes and price. While not unique, the current dramatic fall in price is unusual at a time when traded volume is also decreasing. China is the largest importer of dairy products in the world.

Part of the problem is that China has had to modify its objectives. The by-products of unfettered economic growth, such as food scares, disparity of wages, severe pollution and so on, are not politically acceptable even in China. Thus, China has adapted economic policy away from maximum growth to take into account these other aspects. Food scares have reduced food production in China to ensure quality of supply, increasing the import of rice and milk products. In isolation, the fall in production might have been expected to raise prices, but this has not happened.

Also is there a larger problem in the economy? Barclays Capital point out that Chinese steel production, which has been an important driver of the economy, is continuing to rise while the price of steel falls – a situation which is unsustainable!

In conclusion, China and its trade with countries around the world will be an important area to watch.

 
 

Key contacts

Ashley Lilley

Ashley Lilley

Director
Food & Farming

Savills Cheltenham

+44 (0) 1242 548 012

+44 (0) 1242 548 012