China And Corn Imports: The Growing Inflation Threat

China posted its first trade deficit in seven years in the first quarter of 2011. The figure was a very modest $1 billion, which many economists saw as a sign of the growing economic strength of the country’s middle class.  Another cause was the surprisingly strong demand for Chinese manufactured goods overseas.  That may be a signal of economic recovery in the developed world.

Most experts pointed to the rise in prices of China’s commodities imports shown in the report. A simple look at a chart of oil prices confirms that. The People’s Republic is now the largest net importer of oil, replacing the U.S. on the top of the list last year.

Imports of agricultural commodities were also listed as a cause for the deficit. That is likely to continue and will probably grow. While economists expect China to have a trade surplus in the second quarter, the basis of that forecast is flawed because it fails to consider high commodities prices.

China is the world’s second largest producer of corn. It is telling that it will import more corn this year than in any of the last 15. It is also troubling for China’s attempts to cap inflation.

Corn is the largest crop in the US and more than 92 million acres of it will be planted this year. That will be up nearly 5% over 2010 as American farmers try to cash in on prices that have soared 122% in the last year. China has a similar problem with wheat prices. A drought in the most populous nation has cut its production although the effects are less than what had been previously forecast. The price of winter wheat is higher by 75% over the last year.

George Soros recently said that inflation in China is “somewhat out of control.”  The price of agricultural commodities is the foundation of that. America cannot produce enough corn to support China’s demand for it and neither can other producers like Canada.

The price of corn has been explained by demand for ethanol among other things. China’s appetite is the real pressure. That will not lessen, so neither will a critical part of the cause of what will be relentless inflation in the People’s Republic.

Douglas A. McIntyre