China’s grain hoarding surge creating artificial scarcity in global food markets

The artificial scarcity that China has created in global agricultural commodity markets is going to become more extreme over the next ten years. This ‘hamster like’ behavior as the excellent Dim Sums blog describes it is distorting global agricultural markets, sending inaccurate pricing signals and undermining global food security.

China’s Academy of Agricultural Sciences (CAAS) has just released its first ten-year projections of Chinese commodity supply, demand and stock levels. CAAS projects that carry-in stocks of wheat, rice and corn will rise from 217 Mt in 2014 before plateauing at 300 Mt from 2019 to 2023. Note that although Chinese grain stocks have long been kept secret they are thought to be a good approximation.

2014-05-01_2020

CAAS expects wheat stocks to rise from an excessive 80% of consumption in 2014 to 97% in 2023. Rice stocks are expected to rise from a mere 46% of consumption in 2014 to 70% in 2023. Corn stocks-to-use is expected to rise from 30% to 40% between 2014 and 2018 before falling back to 30% in 2023. Finally cotton stocks are likely to close to 130% of consumption through to 2015 before gradually beginning to slide down to 70 percent by 2023 (the decline due to reform of the current cotton price support policy).

2014-05-01_2021

Why does China need to hoard so much? China views the financial support of its 700 million farmers as crucial for both its food supply and political stability, previously stating that poor logistics and environmental vulnerability necessitate stockpiling of agricultural commodities. Although as investment continues to go into building infrastructure (roads, railways etc), the less this argument carries weight.

Despite protestations by the Chinese leadership at the recent Plenum that they would let the market play a more “decisive” role in resource allocation it seems that the status-quo is set to continue, it is likely to be several years yet before Beijing risks deviating from its current support program for strategic food crops.

Related article: Chinese stockbuilding of strategic ags unlikely to end soon

Is food price volatility about to return with a vengeance?

Food manufacturers have got used to low food price volatility during 2013. That all changed in the first few months of 2014 as adverse weather, disease and geopolitical concerns has affected the outlook for food production from Brazil to Ukraine. Is food price volatility about to return with a vengeance?

To recap agricultural prices have risen sharply since the start of 2014. First, the weather. Drought in Brazil has raised fears that crop yields for coffee, sugar and soybean farmers will be severely reduced, while drought in West Africa has reduced the output of cocoa. Second, disease. The coffee leaf rust disease has affected output of coffee in Central America while the Porcine Epidemic Diarrhoea virus has decimated large amounts of pigs in the US. Finally, geopolitical concerns have returned. The on-going tension between Ukraine and Russia has heightened concerns that wheat and corn exports from the region will be affected.

Chart: Food price volatility
2014-04-25_2220
Source: FAO

Related article: Food price volatility lowest for seven years

To an extent all of these factors represent one off adverse events that have just happened to coincide. Putting the situation in Ukraine to one side the potential for disruption has focused attention on the power of climate change and its potential to disrupt supplies and ultimately lead to increased uncertainty and price volatility. Indeed all of the previous spikes in food price volatility seen since 2007 were at least partly caused by changing weather patterns and the appearance of drought in particular. This latest bout of volatility at least represents a continuation of this trend. The increasing likelihood of El Niño appearing later in 2014 is another factor likely to food price volatility more pronounced later in the year.

However, in comparison to previous spikes in 2007/08 and 2010/11 it has not been accompanied by volatile oil prices. Changes in the oil price before and after the financial crisis and the implementation of quantitative easing were transmitted through the food chain via the link between oil prices and biofuel demand for corn and the increased cost of transportation and fertiliser.

Another factor suggesting that the current spike in volatility will be more subdued than the past is the strong stocks position. According to the FAO global cereal stocks for 2013/14 are anticipated to increase by 15% to 582 million tonnes. The expansion in world cereal stocks would result in the global cereal stocks-to-use ratio reaching 23.9%, well above the historical low of 18.4% set in 2007/08.

Finally the de-financialisation of commodity markets over the past year or so may be part of longer term trend that could see commodity volatility be more subdued. According to research from the UN the correlation between US equities and corn, cattle and wheat fell to less than 0.05 in January, compared with almost 0.3 in 2008 with the pullback of investment banks from commodity trading and the reduced level of interest from investors in commodities in general weakening the link between commodities and other financial markets.

Related article: Oil prices caught in a vice

Overall, volatility is likely to remain elevated during 2014 and beyond, certainly when compared with historical norms. However, unless the global stocks position deteriorates and the oil price breaks out of its vice then volatility is unlikely to return to the heady days of 2008 to 2012.

What are the 50 things you need to know about commodities?

I  am currently writing a book about commodity markets aiming to provide some insight into how commodity markets affect all out lives. Below is my list of what I think are the top 25 things that I think consumers, business owners and investors need to know about commodities.

I know, the title says 50 things. That’s why I would really be grateful for your feedback and suggestions. Please vote on the ideas below and if you have a suggestion please add it in for other readers to vote on or drop me a line on the contact page.

All subscribers to Materials Risk will be able to get a 50% discount.

Thanks for your help

Peter Sainsbury, Founder of Materials Risk

50 things you need to know about commodities

Materials Risk 50 things you need to know about commodities

Materials Risk | 25 items | 149 views

I am currently writing a book about commodity markets. Here is my list of 25 things I think consumers, business people and investors need to know about commodities. Please vote and add your suggestions for 25 other important things. Register for email updates at www.materials-risk.com to get 50% off the book once its published.

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  1. 1. What is a commodity?

    What is a commodity?

    The intrinsic properties of a commodity introducing agricultural, industrial and energy commodities.

  2. 2. What determines the price of a commodity?

    What determines the price of a commodity?

    Supply, demand and costs in an opaque market

  3. 3. The commodity super-cycle

    The commodity super-cycle

    Commodity prices don't just go up.

  4. 4. The resource curse

    The resource curse

    Too much of one thing can be bad for economies.

  5. 5. What is the impact of volatile commodity prices?

    What is the impact of volatile commodity prices?
  6. 6. How can you protect yourself from volatile commodity prices?

    How can you protect yourself from volatile commodity prices?

    Hedging, substitution and adding value

  7. 7. The weather and commodity prices

    The weather and commodity prices
  8. 8. Climate change and commodities

    Climate change and commodities
  9. 9. Resource nationalism

    Resource nationalism
  10. 10. The future of mining: planets, seabeds and landfills

    The future of mining: planets, seabeds and landfills
  11. 11. Malthus

    Malthus

    Why he was wrong and why he might still be proved right

  12. 12. Recycling and the circular economy

    Recycling and the circular economy

    Is there a better way?

  13. 13. The financiailisation of commodities

    The financiailisation of commodities

    Commodity markets and your portfoliio

  14. 14. Cartels and commodity markets

    Cartels and commodity markets

    Why are commodity markets prone to cartels and oligopolistic behaviour

  15. 15. Commodity prices, innovation and investment

    Commodity prices, innovation and investment

    Shale gas and the incentive that high prices brings

  16. 16. Food vs fuel

    Food vs fuel

    Biofuel demand and food prices

  17. 17. How are commodities moved?

    How are commodities moved?

    Pipelines, ships

  18. 18. Emerging markets and commodities

    Emerging markets and commodities

    Urbanisation, population growth and changes in diets

  19. 19. Commodities of the future

    Commodities of the future
  20. 20. Commodity prices, interest rates and the dollar

    Commodity prices, interest rates and the dollar
  21. 21. The allure of gold

    The allure of gold
  22. 22. Commodity production and the its impact on the environment

    Commodity production and the its impact on the environment
  23. 23. What is the impact of high commodity prices?

    What is the impact of high commodity prices?
  24. 24. Commodity substitution

    Commodity substitution
  25. 25. Are we facing a resource crunch?

    Are we facing a resource crunch?

    Or why the stone age didn't end because we ran out of stone.

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