Higher incomes in China mean quality, not quantity

by Morton Sosland
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While the fast and impressive growth of the modern Chinese economy has posed numerous conundrums that have puzzled the global grain industry, hardly any is more confounding than the way China’s rising personal incomes have not prompted anywhere like a parallel surge in demand for food. As the current economic boom was starting more than a decade ago due to new political and economic policies, forecasts were often heard that this sudden prosperity would severely tax the country’s already stretched capacity to grow food and that China’s potential as an importer would dramatically spur world trade in grain and other foodstuffs. Thus far, at least, it is only in soybeans and edible oils that China’s accelerated income growth has caused any significant import increase. For most other food products, including grains, China has remained largely self-sufficient.

It should be quickly noted that this unanticipated situation does not reflect sudden expansion in domestic production. China’s current wheat production, at 103 million tonnes, is actually a few million tonnes ahead of estimated domestic disappearance of 101 million. In the face of income increases estimated at a phenomenal 9% to 10% annually, current annual wheat consumption is 5 million tonnes less than it was in the mid-1990s. Yes, the country’s flour milling and baking industries are being improved through investment in new plants and equipment, but the aggregate output has held nearly steady.

The result is great advances in quality.

The situation in feed grains, driven primarily by rising demand for making ethanol as well as for keeping pace with livestock and poultry production, is a trifle different from wheat. In the same 12 years that wheat consumption decreased, coarse grain posted a 31% increase, with the annual crop keeping in step with that demand rise. But even this increase reveals that domestic food demand lags what might be expected from a country experiencing the income growth occurring in China.

Seeking an explanation for this anomaly has led to the main conclusion that income growth in China is not broad-based, that it primarily is reflected in the emergence of a new class of higher-income consumers. For the vast majority of the billion-plus population, income increases have been slight. Of considerable importance is the way that higher incomes in China have not meant significant gains in the quantity of food consumed, but have led primarily to purchases of foods with greater added value, including more shopping in new western-style supermarkets as well as to great growth in eating outside the home, in restaurants and at fast-food chains.

These studies indicate China thus far has skipped over the phase of modernization that would include people with more money simply eating more to a period when higher incomes relate to increased focus on food quality. Such demand has been driven in China’s case by a search for food safety, seeking to avoid some of the sanitary and related problems that have characterized the country’s food system. In light of recent adulteration of ingredients imported into the United States (U.S.) from China for pet food manufacturing, it is easy to understand why safety is sought by consumers with first-time discretionary income.

Even though recent studies indicate that the top tier of Chinese consumers has reached saturation in the quantity of food being bought, a further look prompts surprise in light of the fact that the top tier of Chinese households has average incomes of hardly U.S.$7,000. That is well below the poverty level in most developed countries. Even among low-income Chinese, slight income gains have not been matched by the sort of food spending expansion that might be expected.

As the country’s phenomenal income growth spreads to more people, as is forecast, the question continues as to how this will affect food demand, domestically and internationally. Thus far, higher incomes in China have meant demand for higher quality foods, often for food eaten in restaurants, or for food sold with the imprimatur of western food safety practices. This quality focus might finally encourage an import increase, but only if food manufacturers in China are unable to keep pace with this startling shift in food consumption.