China storms fuelling debate on grain import policy

Business Times 11 Feb 08;

Will Beijing finally soften its resistance to imports?

(BEIJING) As China begins to thaw from its worst winter weather in a century, grain traders face a vexing question that may determine the course of prices this year: Will Beijing finally soften its long-standing resistance to imports?

Some say yes, the world's fastest-growing major economy will be forced to tap global markets for corn and wheat, driving already record prices to higher highs and spurring further food inflation.

Others say no. Quite apart from Beijing's commitment to a high degree of 'grain security' to protect itself in the event of an international crisis, the melting snows could well boost grain production this year in water-short China, they say.

At the very least, uncertainty over the impact of the blizzards is fuelling debate on the merits of a self-sufficiency policy that is in any case contentious given that rising incomes are stoking demand for meat and dairy products.

'In the near term, unless you can drastically increase agricultural yields, I think China will probably have to import more grain, especially feedgrain,' said Jing Ulrich, China equities chairman of JP Morgan.

The economics of food has already caused a big policy shift.

China was a net exporter of corn, rice and wheat in 2007, but worries over surging food inflation spurred the government to remove import taxes, raise export taxes and impose export quotas on grains and flour in late December.

China is the world's biggest importer of soybeans, which it uses mainly for animal feed, and Ms Ulrich said it could become a net importer of corn as early as 2008 as demand for meat grows.

But she added: 'We don't need to be alarmist about China buying a huge amount. This will be incremental, a story that is played out over the next 10-15 years.'

According to forecasts by the Organisation for Economic Cooperation and Development in Paris and the Food and Agriculture Organisation in Rome, China is likely to import a bit more than 12 million tonnes of grain in 2016, just over 4 per cent of total world imports of around 284 million tonnes.

'In general, I would definitely not agree that China will starve the world through significant increases in grain imports,' said Andrzej Kwiecinski, an agriculture expert at the OECD.

Dong Tao with Credit Suisse in Hong Kong, though, said the short-term impact from an increase in marginal demand from a country with 1.3 billion people could be substantial. Food accounts now for about only one per cent of China's total imports.

'We ... believe that the storms will force China into the global soft commodities markets in 2008, potentially having a major impact on soft commodity prices and global inflation,' he said in a report.

Benchmark Chicago Board of Trade wheat prices have been soaring to record highs after doubling over the past eight months as investors bet global demand for US shipments will remain strong this year, regardless of the economic outlook.

Corn prices have surged past US$5 a bushel, two and a half times the price in early 2006, as agricultural goods took over pole position in the commodity market's multi-year bull run\. \-- Reuters