Click here to watch the video direct from Bloomberg

Underlying the FAO’s warning is the central message that should China lose its winter wheat crop, it will go to the international grain market to make up any shortfall. The sudden entry of such a huge buyer could certainly rock the international food markets.

However, the FAO’s warning is a false alarm. First, because for the past six to seven years, China has lost around 7 percent of its annual grain output to various forms of natural disasters, and yet its annual grain production has been on the rise. In 2010 China’s total grain production was a historical record of 546 million tons. Second, successive years of bumper grain harvests have enabled China to build up a large grain reserve of more than 40 percent of its annual consumption – much higher than the world average of around 17-18 percent. The growth in grain productivity for the past three decades has been very impressive, particularly since 2004.

China’s population accounts for 21 percent of the world’s total population, but the country is endowed with only about 9 percent of the world’s arable land. Feeding such a vast nation, with such an unfavorable man-land ratio, has always been a great challenge for China’s rulers, past and present. Hence the old Chinese adage: “An economy without strong agriculture is fragile, and a country without sufficient grain will be chaotic”.
Even in modern times it remains an enormous task for the Chinese government to ensure food security. China’s serious food crisis between 1959-1962 is still fresh in the collective memory of the present generation of Chinese leadership. Therefore, China has always taken food security very seriously, much more so than many other countries. Food security in China basically means “food self-sufficiency”, with the bottom line set at 95 percent of domestic grain supply.

Such a stringent definition of food security naturally puts an additional burden on the government. The problem is aggravated by the fact that for the past three decades, China’s total population increased from 960 million in 1978 to 1.3 billion in 2009, while arable land, the total sown area, increased only marginally by 5.4 percent.

Worse still, the total sown area devoted to food crops declined substantially from 80 percent in 1978 to just 64 percent in 2009, mainly because, with economic prosperity and rising incomes, farmers were growing more lucrative non-grain commercial crops.

Accordingly, China has come to depend heavily on increasing the output per unit of land area to maintain its food security. This, in turn, needs continual technological progress, such as using hybrids or other high-yielding varieties, and increasing intensification of cultivation with greater use of modern inputs like chemical fertilizers and pesticide.

The trouble is that barring the use of genetically modified (GM) crops, the productivity growth potential of traditional technological progress based on modern seeds and modern inputs has started to slow down everywhere in the world. Widespread use of modern inputs of industrial origins also inflicts long-term ecological damage.

Rapid economic and social changes have further worked against food production. Industrialization and urbanization in China as elsewhere inevitably spell agricultural decline. Farming is also becoming economically and socially unattractive to young people. As in other densely populated East Asian economies with severe land constraints, food production in China has also become an increasingly high-cost business.

With China having achieved successful industrial take-off, economic theory suggests that it should have a stronger comparative advantage to export labor-intensive manufactured products to the United States in exchange for its cheaper food produced by land-extensive farming. In other words, China should scale down its existing high level of food self-sufficiency and let international trade take care of any shortfalls, much as Japan has done.

However, the world has a stake in China’s strong food security. If China followed the economic theory of comparative advantage by relying on international trade to achieve its food security, its import requirement would seriously destabilize the international grain market and drive up world inflation.

It is therefore in the favor of the whole world for China to rigidly adhere to its basic tenet of maintaining strong food self-sufficiency.

The author is director of the East Asian Institute, Singapore.

(Oct 26-30, 2009)

*metals commodity prices obtained via Kitco Metals
*energy commodity prices obtained via Yahoo Finance
*agriculture commodity prices obtained via Yahoo Finance
*wheat futures via Bloomberg

June 29 (Bloomberg) — Commodities, heading for the first quarterly advance in a year, may struggle to repeat their gains in the next three months as supply expands and speculators sell.

Nickel may average 29 percent less in the third quarter than now, crude oil 16 percent, copper 14 percent and gasoline 10 percent, analyst estimates compiled by Bloomberg show. Hedge funds and speculators cut their bets on higher prices by 23 percent in the two weeks ended June 23, the first back-to-back drop since March, based on an index using U.S. Commodity Futures Trading Commission data. The World Bank said June 22 the global recession will be deeper than it expected three months ago.

“Commodities have gotten a little ahead of themselves,” said Walter “Bucky” Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. “As long as there’s uncertainty about growth, that’s going to be headwind commodities won’t be able to overcome.”

Commodities rose 14 percent this quarter, led by nickel, oil and sugar, after three consecutive declines, according to the Reuters/Jefferies CRB Index of 19 raw materials. This year’s 57 percent advance in oil costs, combined with widening budget deficits, may cause another global slump, said Nouriel Roubini, the New York University economics professor who predicted the financial crisis.

Click here to access the full article from Bloomberg

Brazil, speaking on behalf of 23 developing countries, told a WTO meeting that Washington was promoting a “murky protectionism” that weakens the global trading system at a time when global commerce is already shrinking at a record pace.

Australia, on behalf of agricultural exporting countries, said the announcement Saturday by US Agriculture Secretary Tom Vilsack of subsidies for 91.000 tonnes of mainly powdered milk, butter and cheese was unfair to countries trading fairly, and potentially damaging to global economy’s recovery.

The subsidy decision under the US Dairy Export Incentive Program follows a similar move by the European Union in January.

[Source] — MercoPress

I would like to take a moment to reflect on a old post I wrote a little under a year ago, on June 19, 2008. It is one third about Southern Copper Peru (PCU), one third about sky rocketing commodity prices, and one third about a intense protest I witnessed in Tarapoto, Peru in 2002. I was in Tarapoto during a family trip to the region to visit my maternal grandfathers home town of Rioja. I may be a bit biased but the province of San Martín is a beautiful region of Peru I highly recommend people visiting Peru check out.

I’m going to reflect specifically on the third topic—the protest. If would like you can click here to read my entire post from 6/19/2008.

In 2002 I was visiting Tarapoto, Peru. The city is located in the Peruvian province of San Martin, Peru. Rice workers had paralyzed the region because US subsidies had made locally produced rice more expensive than imported rice from the US–which ironically was also widely available in this region of Peru which a large amount of rice.

Tarapoto, Peru

By my fourth day in the city protesters had taken over the town square and blocked the roads to my grandpas home town of Rioja. As a tourist who was fortunate to have family in the city I was able to to get back to Lima before the city was forced to shut down. My family and I were woken up at 6am one morning and quickly informed by my grandpa’s brothers we needed rush through the back roads of the jungle and get to the airport as soon as possible. Once we arrived at the airport we were rushing into a back office with other tourists holding US, Canadian and European passports, until a flight could take us all to Lima… all the while protesters attempted to rush the airport gates.

It is ironic food prices are now so high, Tarapoto’s Rice industry is now growing rice and actually making a profit, although US subsidies still aren’t help the overall market. The fact and main point I am attempting to get across is that all it took for protesters to paralyze the region was to create a blockade one highway–leaving the city isolated.

Click here to view a excerpt from the only link to an English language article I was able to find that still had an active link.

If you can read Spanish, I have found two articles. The first article describes how the situation unfolded. The second article explains the accord which was eventually reached by the protesters and the government.

Benito’s conclusion… The United States needs to re-think their protectionist policies, especially when it comes to such goods as cotton, food and other agricultural commodities. Easier said than done, but no less a necessary change that needs to happen sooner than later.

Lula da Silva & Hu Jintao

Chinese President Hu Jintao and his Brazilian counterpart, Lula da Silva, finished writing the latest chapter in Sino-Brazilian Cooperation earlier today in Beijing.

ChinaSouthAmerica has been following this story for a few months now, and I must say, it is nice to see a classic example of South-South Cooperation / Emerging Market Cooperation (whatever you want to call it) develop and eventually get finalized.

Here are a few excerpts from a WSJ article that a great job of summing up the details.

State-owned Brazilian oil giant Petroleo Brasileiro SA said it finalized a $10 billion loan agreement from China in return for a long-term supply of oil, another victory for China’s new strategy of using its cash-rich banks to help secure the natural resources the country needs to keep its economy growing.
…

Petroleo Brasileiro, known as Petrobras, said under the terms of the 10-year loan from China Development Bank, which has been at the center of China’s resources policy, Brazil would supply China Petrochemical Corp., known as Sinopec, 150,000 barrels of oil a day for the first year, rising to 200,000 barrels a day for another nine years.

…

Mr. Gabrielli said the loan’s interest rate was under 6.5%, and the loan used oil revenue as collateral but would be repaid in cash — not oil. Although the deal didn’t include guarantees to buy Chinese products or services, other deals will work on exploring closer cooperation, such as moving Chinese equipment factories to Brazil.

…

China’s mission to secure commodities does not stop with Brazil–as you are well aware if your a frequent reader at this site.

Beijing has struck similar agreements with energy producers world-wide in recent months, including a $10 billion deal with Kazakhstan and a $25 billion deal with Russian oil and pipeline companies.

…

Stay tuned for further developments and ChinaSouthAmerica’s analysis this deal and growth of Sino-Brazilian Cooperation.

As usual, Jim Rogers is sticking to what he knows best-raw materials. If you’re a new reader, or have not heard of Jim Rogers definitely run a search on the right of his name to bring up past posts and videos including him.

Part 1 /3

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Part 2 / 3

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Part 3 / 3

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