A soy Taiping point?

by Michael Feller

Like a pensioner on his birthday, the Australian financial media yesterday enjoyed an annual spasm of exuberance with the release of the 2012-2012 Federal Budget.

Yet amid the dense pages of analysis over every minutiae of detail,  few dared ask whether the prospects for the Chinese economy are a realistic backdrop for Treasury’s estimate of 3.25% GDP growth which will return Australia’s public finances back to a wafer-thin surplus.

As many will know, China spent much of 2011 fighting a combined overheating in its fixed asset investment and inflation levels. Together these two were a part of a larger commodities driven inflation that seized the globe in part as well because of the oil shocks of the Arab Spring and the effects of La Nina on crop production.

The consensus in more recent times is that China has licked its inflation problem, which was especially centred on food prices. That’s true to an extent, with the CPI have fallen to 3.6% in March:

And food having fallen too, though not so far:

And this is what keeps me up at night. There is one foodstuff that has not fallen at all in China. Indeed, it has tracked the opposite way. That may not matter much except that that foodstuff is soy, which is a key ingredient in the Chinese food production chain, the vast majority consumed in animal feed, and is one of the most important imported components of China’s food CPI basket:

China soy imports from the US have grown 17% per annum for ten years and while spot prices may be looking toppy in Chicago, the underlying macro fundamentals are solid.

Latin America accounts for 55% of global soybean exports with the United States forming 40%. In terms of production, in 2009, the US produced 91.4 million tons of soy, Brazil 57.3M tons, Argentina 31M tons and China just 15M tons. The following chart is of China’s growth in soy consumption and imports:

With dry weather being experienced in both growing regions, the US Department of Agriculture recently estimated that world production for the year ending June 30 will experience its sharpest drop since 1965.

With the importance of soy to both reported CPI and the real price inflation in poorer, rural households, the dangers this poses to China’s economic stability in the year ahead—a year that is almost guaranteed to see dramatic political events with the changeover in the Politburo—should not be underestimated.

Should it be found that China’s transition from an investment-led to a consumption-led economic model involve a hard landing or a crisis in the shadow banking sector, which in addition to local and provincial government taxes and the captive savings of Chinese consumers has funded much of the country’s fixed capital overhang, China could literally be stuck between the Scylla of inflation and the Charybdis of a collapse in its fixed-asset bubble.

I have no idea if this is a tipping point insofar as the China boom is concerned, but it can be added to my growing list of concerns and it also adds to my long/short NZD/AUD idea of  an soft vs hard commodities trade.

Rather than be described as a black swan, the increasing price of soy could more accurately be described as a Taiping point, with the eponymous rebellion in the 1850s being partially caused by rising food prices, rural poverty and—it should be added—a charismatic and populist leader from a southern metropolis who promised a more egalitarian society.

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  1. I think pressure on oil prices will remain so long as the Iranian nuclear issue is unresolved. It is naive to think that the current talks will achieve much other than delays.

    I think that while La Nina has finished, we don’t yet have an El Nino event. Not sure quite how this plays out globally, but it should mean Australia is drier and South America wetter.

    But yes, Government growth forecasts are optimistic.

  2. An interesting and little observed element with a nice historical flourish.

    The Flashman of yore returns?