April 19, 2011

 

China's farmland decreases amid competing usage

 

 

After being consumed by apartments, factories, desertification and a forestation campaign, land for crop cultivation in China has fallen almost to the government's 120 million-hectare limit.

 

China's farmland shrank by 8.33 million hectares (20.6 million acres) in the past 12 years, according to Premier Wen Jiabao's top agriculture adviser Chen Xiwen. Drought has also hit the country's main wheat-growing region.

 

"China's increased demand for agricultural commodities will mean an increase in prices for the entire world market," said David Stroud, chief executive officer of New York-based hedge fund TS Capital Partners. "China can outlast any other bidders for the commodities it desires."

 

Investors should bet on crops in shortest supply in China, with wheat and corn now offering the best opportunities, he said.

 

Wheat futures in Chicago may average US$8.05 a bushel this quarter, 89% higher than the past year's low, as farmers struggle to rebuild global stockpiles, according to Rabobank International's Agri Commodities Monthly. Corn futures may reach a record, jumping to as high as US$10 a bushel, Alex Bos, an analyst at Macquarie Group Ltd. said April 6.

 

"As China continues to grow, demand and supply will struggle to keep up," said Abah Ofon, a Singapore-based commodities analyst at Standard Chartered Plc. "This would be a problem for any country. For China, the world's biggest consumer and producer, a small deficit can result in huge demand for imports."

 

A 5% shortfall in China's overall grain harvest would potentially require 20% of current global grain exports to meet the country's annual needs, Ofon said. Wheat in Chicago reached its highest level since 2008 in February on concern drought was damaging China's crop, raising the risk the country would drain the world market.

 

Rising food prices cause riots and civil conflict, and widen the gap between rich and poor, according to an International Monetary Fund working paper by economists Rabah Arezki and Markus Brueckner published last month on the organisation's website. World Bank President Robert Zoellick said in February that the price surge was "an aggravating factor" in uprisings sweeping the Middle East.

 

Wen has pledged to rein in food costs and has said that inflation, which threatens social stability, was the government's top priority.

 

Scope for raising yields may be limited as wheat farmers in China are already 51% more productive than their American counterparts per land area, according to data from the Department of Agriculture in Washington.

 

While investment in irrigation and technology such as genetically modified crops may boost that, land and water shortages and migration of labor to cities is putting grain production on a shaky base, said Qian Keming, head of the Agriculture Ministry's market and economic information division.

 

"With rising living standards, and more consumption of meat, eggs and dairy produce, grain consumption is inevitably on the rise," Qian said.