The Cassava Conundrum: China’s Food Price Spiral

High food prices are a symptom not source of China’s inflation. Excess liquidity still slopping about the system is the main underlying cause. But food prices are politically sensitive. Hence plans to control prices put in place last month. Beijing has to be seen to be in control, even though price controls rarely have a happy history.

High world food prices complicate the picture. China is a leading food grower, but as its population and their incomes grow, it is becoming an ever larger food importer. Its demand has helped drive up world food prices. The U.N.’s Food and Agriculture Organization’s Food Price Index is close to its 2008 peak, having risen unrelentingly since June (pulling fertilizer prices in its wake). China’s imports are not the sole cause; poor harvests and the falling U.S. dollar play their part. But there are echoes of the surge in prices of 2008, which caused food riots in several countries.

The world is better placed now than then. Rice, wheat and maize, three of the most important staples, are in more adequate supply than they were in 2008. Yet still prices are high. Governments, including China’s, will be running down stock piles so the next harvest is important, particularly of cereals, soybeans and sugar. The FAO worries that the increase in supply globally may not be sufficient to match the growing demand. In which case, high global food prices will continue into next year, making Beijing’s instruction to local governments to secure supplies at steady prices more difficult to carry out.

Next year’s cereal crop, particularly wheat and the coarse grains used in feedstock, may be the most critical. This year’s crop has been hit by drought and flood around the world. Although it is the third largest on record, it has come in less than expected. The wheat crop worldwide is 5% less than in 2009. Some growing countries have imposed export restrictions. Stocks have covered this year, but these will need to be replenished on top of the continuing growth in demand. The FAO says that, absent more bad weather, winter wheat plantings should raise wheat production next year to meet the increase in demand, but no more. It is a similar story with coarse grains.

China is the second largest grower of both wheat and maize so its weather and yields will be critical. That makes reports of a two-month drought in Henan, Anhui, Shandong and Hebei on the North China Plain and which produce over half the country’s summer grain, concerning. The drought-affected area accounts for a fifth of the country’s winter wheat planting area. Prices will remain high and volatile.

The global balance between supply and demand for rice is much better. However, the continuing weakness of the dollar and buyers switching from expensive cereals could force up rice prices over the coming months. Domestic prices will be insulated from this to some extent as rice prices, like those of wheat, are controlled.

Corn and soybean prices do track international prices fairly closely, and higher prices for these feed through to meat and egg prices. Oilseeds, sugar, dairy, meat and fish prices are also at or around 2-year highs on world markets.

Cassava may be the interesting story, especially in China where a moratorium on new grain ethanol plants and domestic price supports for maize has boosted the demand for cassava chips as feedstock for fuel production. Roughly half of China’s fuel ethanol and alcohol output are now derived from root crops, namely cassava and sweet potato, and domestic cassava production has doubled over the past five years while Chinese farmers have also invested in overseas production in countries from Cambodia to Liberia. Cassava is now trading at record levels on international commodity markets, and encapsulates the chicken and egg situation, so to speak, that China finds itself in with respect to food of being a big driver of world prices that it is also trying to control.

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