Market Matters Blog

China: Contrarian Viewpoints, Changing Domestic Support Programs

It's hard to talk about commodities today without mentioning China. They're our biggest soybean customer; it appears they've regained their appetite for U.S. corn. Its absence during the dismal 2012-13 crop year was felt keenly. Not to mention how it's stockpiling program rocked global cotton markets.

I've read a few interesting things about China in the past few days. The first is a bit of a contrarian view of China's role in increasing commodity prices over the past decade. The report, issued by cooperative GROWMARK, argues China's not responsible for higher prices and increased volatility; Wall Street is.

"There is a common assumption that China's rapid economic growth has resulted in its having an increased demand for and consumption of world commodities, and that China's increased consumption has driven up global commodity prices," according to Kel Kelly, GROWMARK economic and market research manager, and author of the report. "Our analysis shows the inverse is true."

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The report, called "Demand from China: Fact or Fiction? Why China is not the real driver of commodity prices" attempts to show China's lack of influence on commodity prices. But DTN analyst Todd Hultman said, "If they just wrote one sentence and said: noncommercial investment has the single most important influence on markets, I would probably agree.

"I think they are saying that noncommercial investment has a much bigger and more obvious impact on commodity prices than the China factor. I can agree with the noncommercial impact, but can't totally write off China's influence like they seem to want to. Sometimes economic balances tip on slim margins and China's participation or absence definitely has an influence on markets," Hultman said.

As the daughter of a devout contrarian (just ask my dad about gold sometime), I've grown to respect alternative viewpoints. While Hultman and others think it may have taken a while for GROWMARK to make its point, it's a worthy piece of reading. You can find the report here:…

Another worthy piece of reading came out of USDA's Economic Research Service today about China's expanding agricultural support programs. As the largest producer, consumer and trader of many different agriculture products, China's expansion of farm supports makes it an important piece of the China demand picture. The ERS report concludes that China's current policy direction improves the prospects for exports to China, a good think for U.S. growers.

"China's policies tend to reinforce a pattern of escalating prices and costs that erodes China's international competitiveness in agricultural commodities. The report shows how WTO commitments shaped the mix of policies to keep China within WTO-imposed limits. China's policies continue to evolve, and its relatively low barriers to trade constrain continued expansion of domestic support. The weak incentives provided by subsidy payments prompted a reliance on raising price supports that may cause Chinese prices to diverge from world prices, a phenomenon that improves the prospects for exports to China. Domestic policies are evolving further to strengthen links to production, become more commodity-specific, and promote the commercialization of China's agricultural sector," the report states.

We're already seeing a divergence between China's prices and global price in the wheat markets. Historically, China's relied on its domestic supplies, but this year's crop was heavily damaged by rain at harvest time. China has imported 131.6 million bushels of U.S. wheat to date for the 2013/14 marketing year, according to U.S. Wheat Associates. That compares to last year's total wheat sales of 12.6 million bushels and the five-year average of 14.3 million bushels.

Here's a link to the ERS report:…

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