China's grain wave

Graph for China's grain wave

Farmers at work during the wheat harvest in rural Jiaozhou, eastern China's Shandong province, 15 June 2013. EPA/WU HONG

With just 10 per cent of the world’s arable land and 6 per cent of its water resources, China’s ruling Communist Party has done remarkably well over recent decades in feeding 20 per cent of the world’s population. But with a rapidly advancing urbanisation project that is squeezing out the remaining arable land and a booming middle-class with increasingly Western appetites, something has to give. China is fast approaching a food supply tipping point.

The cracks are already beginning to show. New guidelines released by China’s state council suggest the country is no longer confident it can produce enough grain to feed its own population. This is a significant admission from a government in which food security in commodities such as wheat and rice grain has long been a sacredly held principle.

Now the party’s old-school autarkic ideology is on a collision course with reality. The Chinese government expects there to be a reduction in grain production from 602 million tonnes in 2014 to 550 million tonnes in 2020. In effect that means it will have to find an extra 50 million tonnes – or 15 per cent of global exports - on the world market. According to Andrew Horden, Regional Economist at IMA Asia, that could mean a $1.5 billion to $2 billion windfall for Australian farmers.

Shefali Sharma, Director of Agricultural Commodities and Globalisation at the US Institute for Agriculture and Trade Policy, said China's decision to relinquish its grain self-sufficiency policy signals a clear intent by the Chinese government to facilitate more and cheaper imports of corn, wheat and other grains for its meat industry.

China isn’t about to jettison its food security policy completely. To do so would cause enormous pain to its farmers as well as radically disrupt global markets. But whereas in the past the emphasis was on ensuring a certain quantity, now food security has come to include a consideration of quality. That shift in emphasis was inevitable after years of food scandals have dominated headlines at home and abroad.

China is now looking beyond its borders to buy up food and agricultural companies that will help to develop its supply chains. Between 2010 and 2013, Chinese food and beverage companies made overseas purchases worth up to $US9 billion, according to National Australia Bank. That has included major deals like Shanghui International’s purchase of pork producer Smithfield Foods in the United States for $US4.7 and state-owned food giant Bright Foods’ buyout of Britain’s Weetabix for $US1.9 billion.

Australia is seeing some of the action too. In December last year, the privately owned agribusiness company New Hope Group took a majority stake in Kilcoy Pastoral, a Queensland based beef producer and wholesaler (Prepare for a wave of Chinese private investment, 6 December 2013). Last month Bright Foods purchased West Australian dairy company Mundella Foods (China's Bright Food buys Aust dairy co 14 January 2014).

Trade Minister Andrew Robb has been encouraging the Chinese to invest in Australian farms during his trade missions (Robb welcomes China ag investment 22 November 2013) and according to a PwC report released today, the Chinese are likely to take him up on the offer. Alongside real-estate, the agricultural sector is set to see an increase in interest from the Chinese private sector.

But while China is busy buying up food businesses here, Australia is still lagging behind when it comes to accessing the Chinese market. Worries remain in China that if self-sufficiency is abandoned, a flood of agricultural imports will make life difficult for its farmers and make the country vulnerable to food inflation. Up until the mid 90s China was one the world’s largest soybean producers. Since then, local production has flatlined and countries like the US and Brazil have stepped in to dominate production.

The latest signs out of China suggest that an Australian FTA is likely to be put on the back-burner while its leaders focus on deals with neighbouring countries like South Korea and Japan (Aust-China FTA stalls: report 19 February 2014). If this is the case, Australia will be put at a severe disadvantage as those countries join New Zealand in divvying up market share before we get a real chance to compete.

Damien Ma, co-author of the recently released book In Line Behind a Billion People: How Scarcity Will Define China's Ascent in the Next Decade, says that while Australia has been a big winner off the back of China’s industrialisation, New Zealand could be the winner riding Chinese consumption.

“You can see a lot of soft commodities exporters benefiting just as in the previous decade of industrialisation many hard commodities exporters benefited from China's boom”.

Prime Minister Abbott may have been right when he said of the hard commodity trade that "China trades with us because it is in China's interest to trade with us", but it may be a different story when it comes to soft commodities. We should not forget that China is the largest trading partner for 123 other countries. Australia is going to have to lift its game.