Why fighting inflation means buying more corn – and land

One might have thought that 600 million pigs were enough for any country. But not when it comes to China where that total works out at half a pig per inhabitant. The failure of supply to keep up with demand for the nation’s favourite meat has been the main driver of food inflation this year, taking over from vegetables and fruit. The latest data show a 38 per cent increase in pork prices this year.

So the government has been releasing pork from its 200,000-tonne strategic reserves on to the market in 12 provinces to try to curb prices. Support measures announced this week include investment of Rmb2.5 billion (US$385 million) in large-scale pig farms to reduce dependence on small breeders with two or three pigs in the back yard who account for 80-90 per cent of supply at present. Subsidies for raising pigs will also be increased to encourage farmers to switch back from vegetables, fruit and cotton.

That is all very fine as far as short-term fire-fighting goes. But it will takethe best part of a year for newly bred pigs to become big enough to be slaughtered, meaning that the government is likely to have to go on supplying the market from the reserve. Then its stocks will need to be replenished in due course which will mean fresh buying by the government. A yearly pig cycle seems to have set in which will add to the structural causes of food inflation we set out in a report at the end of 2010.

China’s consumption of feedstock, mainly for pigs, amounted to 74.5 million tonnes last year, according to the Agriculture Ministry. Domestic production of corn cannot keep up, so China will have to import more, as we argued in our December report, in addition to soya from the US and Brazil which will also rise significantly − Chongqing Grains has a US$2.5 billion deal to produce soybeans in Brazil.

Following the purchase in March of 1 million tonnes of corn by Sinograin, which holds the central grain reserve, the US Department of Agriculture (USDA) says the PRC bought 540,000 tonnes of corn last week for delivery after August, more than its full-year estimate of purchases, with 70 per cent of it destined for feed stock. The USDA thinks China will buy 2 million tonnes of US corn in the marketing year starting on 1 September, four times the previous estimate.

As well as buying corn, China is intent on purchasing farmland abroad. That story first hit headlines with some early and not particularly successful deals in Africa and the Philippines. The trail then seemed to go quiet, but the focus is now on Latin America. Small but low-population countries such as Belize have attracted purchasers from China while Heilongjiang Beidahuang Nongken, the PRC’s biggest farm group, is developing 500,000 acres of farmland in Argentina, to be followed by another 200,000 hectares. China wants to buy into development of farmland in Brazil, arousing concerns there.

The pressure to import more corn and buy land abroad is now built into the China growth story. On top of middle-class demand for meat, rising wages of blue-collar workers will add to pressure as land is eaten into by urbanization, desertification and pollution while state ownership hampers development of more efficient large-scale farms. The water shortage in northern China, including the main wheat areas, is getting steadily worse; all nine members of the Standing Committee of the Politburo attended a conference on the subject in Beijing last week at which Hu Jintao outlined plans to safeguard supplies, but implementation of water policies has been slow and hampered by low prices that encourage wasteful use.

So far, a succession of good harvests has enabled the government to juggle the different balls in agricultural policy while maintaining its 95 per cent food self-sufficiency policy (except for soya). If the weather turns bad, China will be caught in a tight corner. As it is, breeding more pigs is necessary to curb inflation but they have to be fed. Another case of Chinese policies that run in opposite directions and a government that is trying to have the best of all worlds.