What is in this article?:
- The new norm for farmers worldwide is high commodity prices, high volatility of production costs and little or no safety net for crop failures.
Two primary factors
“So, two primary factors, ethanol and China, have moved corn prices from a norm of around $3 a bushel to a norm of over $5 a bushel. Ethanol, most experts agree raised the value of corn by$1 to $1.50 and demand from China increased the remaining amount,” Liddell says.
“In the early 2000s stocks to use ratios for corn, cotton, soybeans and wheat began to decline dramatically. If you take China out of the equation, stocks to use ratio remains about flat — with little change through the early to late 2000s,” Liddell says.
“China became a huge consumer of commodities, and this has really manifested itself over the past 5-6 years. What it does is close down stocks to use ratio and allows tiny movements in demand to create huge volatility in the market,” he adds.
Cotton is a good example. Stocks to use ratio of cotton in China was 140 percent a couple of years ago and now it’s down to 40 percent.
China has policies in place requiring self sufficiency in grains, and they are 95 percent self-sufficient. To reach this goal, they had to give up acreage in other crops and cotton has been the ‘give up’ crop over the past few years.
In addition to cotton, the grain crop the Chinese gave up is soybeans. China now imports enough soybeans to make up about a third of the U.S. soybean crop. In the past few years, China has become a major importer of U.S. soybeans and prices continue to reflect this demand, Liddell says.
Cotton stocks remain tight in part because the other Asian economic juggernaut, India, is sitting on a huge supply of cotton that it’s holding for use in Indian textile mills. While this has kept demand high among other cotton importing countries, it has also kept risk and volatility high, since no one can be sure when or if India will release any of the cotton it currently holds, to the world market.
There are a number of factors analysts are watching carefully in China, Liddell says.
One of those is the Chinese pork industry. By 2013, the Chinese will have converted in less than 10 years from having a swine industry that is 70 percent raised in backyard pens and free ranges to more than 70 percent raised in 1,000 unit or higher commercial operations.
“When feeding backyard animals the primary diet was whatever was available, mostly table scraps. In a modern confinement production system, the primary feed will be grain. They will either have to plant more grain for livestock feed or import more grain for livestock feed. At this point, it appears China has made a commitment to import the additional grain it needs to feed hogs in a modern production system,” Liddell says.