China's Demand for Commodities Outpacing Supply

China has long sought to maintain self-sufficiency in the production of basic foods, but with its large population and rising living standards, China’s demand for grains and oilseeds is outpacing its ability to produce them. China has already become the world’s largest soybean importer and is expected to become a significant grain importer as well, with profound impacts on global commodity prices.

In recent years, China’s grain production has lagged behind domestic demand, the result of unfavorable weather, loss of grain area to more profitable crops and urbanization, removal of price supports for low-quality grain, and retirement of environmentally fragile land. Huge grain stockpiles accumulated during the late 1990s allowed China to avoid imports and to even export grains, but those reserves now appear to have been drawn down to critical levels. Sharply rising prices in late 2003 signaled tighter supplies in China at the same time that markets in the United States and other countries were also tightening. Chinese officials responded by restricting corn exports in 2004, purchasing wheat to replenish government reserves, and introducing direct subsidies for grain producers.

China has quietly become the world’s largest importer of soybeans. Although soy-based foods, such as tofu, have long been mainstays in the Chinese diet, it was only during the 1990s that demand for soybeans took off. Livestock producers began including more high-protein soy meal in animal feed rations, and Chinese consumers developed a taste for soy-based cooking oil. Demand outstripped China’s production capacity, and China now relies on imports for more than half of its soybean use. China’s demand has become a key factor in the world soybean market.

Chinese officials would prefer the country to rely less on imported grain and soybeans, but China cannot be self-sufficient in all food products. Boosting soybean production would entail a reduction of corn output since the two crops compete for the same land area. In 2004, officials sought to boost production of grains. Production did rise in response to higher prices, subsidies, and good weather, but low profitability, dwindling water supplies, and loss of farmland to urbanization will prevent China from attaining grain self-sufficiency. Chinese farmers could produce enough grain and soybeans to meet all of China’s needs, but they would have to divert land from production of horticultural crops, orchards, livestock, and aquaculture, which earn much higher returns per hectare.