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Sunday, December 5, 2004

Grainy Problems

Have you checked the manhole covers in your street lately? Maybe it would be a good idea to take a quick look: just in case. The reason this might be an advisable course of action is that hot on the heels of those other two Asian scare stories ? Sars, and chicken flu ? comes a new one: manhole-cover theft. The latest to be hit was the UK city of Gloucester, where a sudden wave of "heavy-metal crime" left the city's streets with 40 top-less manholes. But this unusual craze has in fact had a global reach, with cases stretching from Milwaukee, to Taegu in South Korea to Shanghai, China. And the cause of it all: rising metal prices as the needs of Chinese industrialisation and development hit the realities of a supply constrained world.

In fact while China previously exported much of its steel to the US, it is now buying up US scrap metal for its own steel consumption. As a result worldwide scrap metal prices have almost doubled in the last 6 months, and it is this price explosion which has produced the sudden surge in activity on the manhole front. The reach of the China phenomenon is not, of course, confined to such bizarre activity, nor is it even restricted to the domain of metal. Currently the whole of Latin America could be said to be riding on the back of a China driven commodities boom which extends from soya in Brazil and Argentina, to copper in Chile to zinc and tin in Peru.

The Brazil soya case is an interesting and important one. Brazil will surpass the US this year as the No. 1 exporter of soybeans. The growth in soybean production in Brazil, where farmers this year increased plantings by an area the size of Israel, means that agriculture and related activities now account for 29 percent of gross domestic product, 46 percent of exports and more than a third of all employment, with the consequence that China?s expansion has given a big boost Brazil’s trade surplus and pushed the Real ever onwards and upwards against the dollar. Recent estimates suggest that foreign sales of soybeans last year reached $8 billion, or 13 percent of all exports, and this year they are set to rise still higher. The scale of this impact was graphically brought home to me recently in a mail from a friend living in Curitiba, Brasil who said that the 100 Km truck queue to the port at Paranagu was backed-up right outside his house.

The reason this is happening: the Chinese are getting richer, and eating more and better quality food. According to Lester Brown, president and founder of Washington- based Earth Policy Institute. “As Chinese become richer they are moving up the food chain and consuming higher protein food, especially more animal protein, that requires ever-expanding imports of soybeans to produce soybean meal to supplement grain in livestock and poultry rations.”

Now all of this has it’s good side and it’s bad side. It is one clear example of how global trade is beneficial, with foreign direct investment in China creating factories which then export products via ‘Big Box’ US sites like WalMart to help keep down the cost of living for American workers. In their turn the Chinese spend part of the money received on soya and provide, in so doing, work for Brazilian farmers.

But there is another side to this impact, and that is the global chase for what are, at least in the short term, restricted resource supplies. And one immediate consequence of this chase is that global commodity prices are on the rise. This is not good news for a Europe which is heavily dependent on raw material imports: in fact it effectively means that the terms of trade just changed against us.

After a remarkable expansion of grain output from 90 million tons in 1950 to 392 million tons in 1998, China’s grain harvest has fallen in four of the last five years?dropping to 322 million tons in 2003. Putting this in some perspective, the drop of 70 million tons exceeds the entire grain harvest of Canada. However, again according to Earth Watch, the recent price rises may be only the early tremors before the big quake. China’s most recent harvest shortfalls have been covered by drawing down its formerly massive stocks of grain. But these will soon be depleted, and the government forced to cover the shortfall with imports.

The fall in China’s grain harvest is due largely to a shrinkage in the grain harvested area from 90 million hectares in 1998 to 76 million hectares in 2003. This fall is the result of a number of converging factors including: the loss of irrigation water, desert expansion, the conversion of cropland to non-farm uses, the shift to higher-value crops, and a decline in double-cropping due to the loss of farm labour in the more prosperous coastal provinces.

When China finally turns to the world market, it will inevitably turn to the United States, which controls nearly half of world grain exports.

This presents an unprecedented geopolitical situation which will see 1.3 billion Chinese consumers who collectively currently enjoy a $120-billion trade surplus with the United States ? a quantity large enough to buy the entire U.S. grain harvest twice over ? competing with their American equivalents for the right to eat U.S. produced food. The probable consequence of all this: a food price explosion both within the United States and across global markets. Of course the impact of this in the poorest countries may be very serious indeed.

Here in Europe there seem to be two immediate implications. In the first place the Common Agricultural Policy, whose funds have long been directed to supporting farmers from prices which were considered to be too low, may find them increasingly committed towards protecting urban consumers from the consequences of world foodstuff prices which are considered to be too high. In the process the whole debate about farm subsidies may take a new and unexpected turn.

Secondly the impact is also surely going to be felt in the area of community policy towards GM foods. The pressure to improve agricultural productivity, and to keep down the relative price of key items on the household diet, will doubtless be considerable. Already the signs are there. Gerhard Schroder, recently insisted that his agriculture minister, Renate Kunast — a member of the Green party, and a resolute opponent of GM crops to boot — announce that Germany will proceed with trials of GM crops later this year. Soon after this, the Commission announced its willingness to support a proposal to allow imports of at least one type of pest-resistant GM maize — the Bt-11 variety developed by the Swiss agrochemical giant Syngenta. Further evidence may be garnered from recent discussions surrounding biotech labelling. All in all, it is clear the agenda is changing. Could it be that once more the need for a cheap food policy will be back on the European agenda, and that high on the list of those responsible for this will be none other than those newly affluent Chinese consumers we seem to see so much of in the TV news these days?

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