For China’s leaders, there was one problem in an otherwise benign inflation report for April. First, the good news: The consumer price index rose 2.4 percent, about in line with economists’ expectations. While inflation accelerated from 2.1 percent in March, the April figure is still well below the government’s target of 3.5 percent for the year.
So what’s the catch? Food prices. With vegetables getting more expensive, the cost of eating jumped 4 percent last month, compared with an increase of 2.7 percent in March. The rising cost of food could create more difficulties in the coming months, the People’s Bank of China warned yesterday.
The Chinese government is well aware of the political sensitivity of food, which is one reason the country is sticking to a policy that promotes self-sufficiency. The country’s farmers met about 98 percent of China’s demand for grain last year, Vice Minister of Agriculture Chen Xiaohua said at a news conference in March.
If the country wants to ensure lower prices, though, China should rethink that self-sufficiency policy, argues Paul Conway, the vice chairman of Cargill. “As they become richer and more urbanized, they will have to become less self-sufficient in grain,” he says. The Minnesota-based agribusiness giant is a major player in exporting wheat, corn, and soybeans from the U.S. and other countries in the Western Hemisphere to Asia, so he certainly has a good business reason for wanting China to buy more food from abroad.
But, Conway says, China and other Asian countries with huge populations, such as India and Indonesia, stand to benefit from reducing their reliance on local farmers. “There is still a tendency in some parts of Asia to food security through food self-sufficiency,” he says from Singapore, where he gave a speech on May 8 about food security. Giving up on that idea and instead importing food from low-cost producers in the U.S., Canada, Brazil, and Argentina would be “the best guarantee of Asian food security,” he says. “For grains and oilseeds, Asia’s self-interest is to have access to the surpluses from the Western Hemisphere.”
In order to bolster its food security, China also should be investing in agricultural infrastructure in other countries, Conway says. Just as Chinese investors are helping to fund transportation projects in African countries that supply minerals to China’s factories, the country should also be putting money into projects that could make it easier for farmers in places like Brazil to get their crops to seaports. That, he argues, makes more sense than just buying farms overseas. “From a food security standpoint, the fact that you own land in another country doesn’t guarantee you anything. Borders can always be closed. If China wants to improve the flow of grains, instead of investing in land, invest in infrastructure.”
It’s unclear how much China and other Asian countries will be able to buy from the West this year, following the severe drought in 2012 that had a major impact on harvests in the U.S. “We lost 100 million tons of crops because of drought,” Conway says. That contributed to a drop in Cargill earnings: The private company reported last month that quarterly profit for the three months ended in February fell 42 percent to $445 million, even as sales increased 1 percent to $32.2 billion.
Conway says more bad weather could lead to a new round of price spikes: “The world needs to have two good crops in order to start repairing stocks. If we get that, things will be relatively calm. If there is a problem in the next Northern Hemisphere crop or Southern Hemisphere crop, you could see extreme volatility.”