A US Agricultural Export Boom And China

The Chief Economist of the USDA issued his “Prospects for the US Farm Economy in 2011” The document is barely 10 pages long, but it says a great deal. The US farmer will have an outstanding year. Agricultural commodities prices will remain high. These trends are bad news for China.

The Economic Research arm of the USDA says food prices are expected to rise 3% to 4% and that the increase may accelerate toward the end of this year. The conclusions of the study point out the productivity gains have helped offset the rise in the world’s population during the last six decades. A review of worldwide planting and harvests indicate that will not be true this year. The wheat crops in Russia and China have been decimated by drought. Bad weather in other parts of the world has reduced yields. Modern farm techniques in places like the US and Canada are up against a sort of Moore’s law of agriculture.

The 2011 bounty for the US farmer will be based heavily on exports. The USDA says Fiscal 2011 agricultural exports are forecast at a record $135.5 billion, up $9 billion from the November forecast and $26.8 billion above 2010.  Exports are forecast to exceed the previous record set in 2008 by $20.6 billion.  Sharply higher unit values for grains, soybeans, and cotton account for most of the forecast increase

Imports will increase as well but not nearly to the level of export levels. Americans will consume more cocoa and sugar. The prices of these commodities are rising as well.

The net loser as these trends progress is China:

China is now forecast to be the top market for U.S. agricultural exports in FY 2011 at $20 billion, surpassing Canada at $18.5 billion.  China is a major importer for a number of commodities, accounting for almost 60 percent of world soybean imports, 40 percent of world cotton imports and about 20 percent of total soybean oil imports.  These three commodities accounted for about three quarters of total US agricultural exports to China last year

The People’s Republic’s need for imported food will almost certainly increase in the years ahead as well.

By 2020/21, China is forecast to account for two thirds of world soybean imports and for 45 percent of world cotton imports.

Projections of what will happen a decade out are almost always wrong, but the tide appears to have turned against China and its efforts to produce food for its own needs.

The effect of China’s problems will lead to higher food prices. It is unavoidable given the rising demand for basic agricultural goods in the world’s most populous nation. China, many economists believe, is already troubled by food price inflation of 10%. The country’s economy is likely to be crippled if that figure goes higher. Consumer spending within its borders for items other than food could collapse.

China’s food problem will also become a chess piece in the competition between it and the US. China holds hundreds of billions of dollars of US paper. It has resisted calls for changes in the value of the yuan. America has not had much leverage to right what is wrong in its opinion or to offset the power China holds because of its investment in US sovereign paper.

The playing field between China and America is about to be leveled.

Douglas A. McIntyre