The world has watched in awe as China has become the economic giant of the 21st century. Its large and growing population needs massive and increasing amounts of food, while affluence is shifting consumption patterns to bring in more oilseeds and meat.

However, China’s role in the price spikes of recent years is often overestimated. As a result of long-term policy, China is largely self-sufficient in grains. Its stocks are unlikely to be exported, while it maintains stock levels designed to ensure that production shocks won’t mean food shortages.

In a presentation given to the National Farm Management Conference in Central England recently, Brendan Bayley, head of the agricultural branch, European Economic Reform at HM Treasury, the British Finance Ministry, played down the effect of China on the market and its role in triggering volatility.

“I think there is a case to be made that we are overplaying that a little bit,” he said. “It really matters where production takes place. If it’s in India and China, it might boost their stocks, but it is not going to be available for the world market.”

He also expressed a concern that market management measures have limited China’s production response in 2008 when producers elsewhere were ramping up output.

Interference by governments in trade flows had also played a role in pushing it up. “We got a 12% increase in international production in 2008,” he said.

However, that response had been limited in China and India because of action there to hold down price rises.

“Why would you come through with a supply response as a Chinese producer of wheat if you are faced with flat prices? Prices matter,” he said. “Price transmission matters.”

The International Grains Council (IGC) predicts total Chinese grain production for 2011-12 at 306.7 million tonnes, up from 300.3 in 2010-11.

Wheat production is put at 116 million tonnes, up from 115.2 million. Maize production is predicted at 183 million tonnes, up from 177.3 million.

The IGC forecast 2011-12 rice production in China slightly higher than in the previous month’s report, at a record 140.4 million tonnes, an increase of 3.3 million from the previous year.

“With yields improving only marginally, much of the increase will be due to larger plantings, including in the key provinces of Heilongjiang and Hunan,” the IGC said.

China’s total grain imports are predicted at 7.6 million tonnes, up from 4.7 million, while imports are put at an unchanged 600,000 tonnes.

In a report published in August, the USDA predicted wheat production for 2011-12 at 112 million tonnes, up from the drought-affected 110 million produced the year before, citing “expectations that damage from the recent drought will be minimal but will produce less than average yields.”

It put winter wheat area at 93% of China’s total wheat area, or 24.3 million hectares. “The majority of China’s winter wheat varieties are similar to U.S. soft red winter (SRW) and hard red winter (HRW) with protein levels between 12% and 15%,” it said. “However, overall domestic wheat quality is not as high as U.S. imported wheat.

“In the major spring wheat producing provinces, such as Heilongjiang, spring acreage is gradually being replaced with rice due to higher profit margins,” the report said. “Since October 2010, a drought has impacted some of China’s major winter wheat producing areas, such as the southwestern tip of Shandong. However, other provinces, such as Henan, have reported a limited effect.”

The attaché quoted the Chinese government as saying that eight provinces in China’s northern plain account for 80% of its total winter wheat area.

“Although weather patterns are very difficult to predict, these major wheat areas generally experience a period of little to no rainfall during the cold and dry winter months while the crop is dormant,” it said. “Water is more critical at later growth stages. If these areas do not experience enough rainfall during these later periods, irrigation will be necessary to prevent poor yields.

“According to National Anti-Flooding and Drought Office, irrigation facilities are available for 80% of China’s total winter wheat area. In some key wheat production counties, local governments have offered irrigation subsidies or fertilizer to farmers. In the northern China plain, wheat is usually double-cropped with corn. Farmers favor this planting pattern as it has historically proven to achieve higher yields in lieu of sorghum, barley, millet, or winter rapeseed. Double-cropping also allows farmers to maximize their land utility, which averages 0.3 to 0.4 hectares per farmer.”

POLICY AIMS FOR RURAL DEVELOPMENT

The attaché also explained that China’s latest five-year plan focuses on rural development.

“During the previous 11th five-year-plan (2006-2010), China established support programs for rural development and grain production, which included direct payments for grain farmers, seed subsidies, agricultural machinery subsidies, and a floor price for wheat and rice,” it said.

The attaché said it believes the 12th five-year-plan will further expand the current support programs and increase investment in the rural areas. Because arable land for grain production is limited, the plan is expected to focus on providing monies for research to improve yields and develop infrastructure (such as irrigation facilities).

The report also predicted that biotechnology would play an important role.

China has implemented a series of policies, including the elimination of taxes on agricultural land, direct payments to grain farmers, adjustments to price support programs, and a subsidy for the purchase of farm machinery since 2004.

The report said the government of China is expected to continue expanding these support programs.

MILLING OVERCAPACITY

According to a presentation given by Professor Li Dongsen, chairman of Golden Grain International, at a recent meeting of the International Association of Operative Millers, China’s flour mills have a total capacity of approximately 230 million tonnes, although capacity usage is 80 to 90 million tonnes, creating intense competition.

Even so, 100 new mills have been built each year over the last 10 years.

Professor Li Dongsen gave the number of mills as approximately 5,000 with a capacity of 50 to 100 tonnes per day, 500 to 600 with a capacity of 150 to 400 tonnes a day and approximately 200 flour mills with a large 400-to-16,000-tonne-per-day capacity.

At November’s Global Grain Conference in Geneva, Switzerland, Alain Butler, senior adviser, soft commodities, BNP Paribas, pointed out the importance of China as the world’s largest soy importer as changes to diet brought on by affluence mean demand for more protein and fat. He also explained that China is building up its crushing industry so as to be able to import soybeans, rather than soy meal.

Earlier in the year, the attaché forecast 2011-12 soybean imports at 58 million tonnes, 3.5 million higher than 2010-11 imports of 54.5 million tonnes. 2011-12 soybean production is forecast at 14.4 million tonnes, down from last year’s estimated 15.2 million. 2011-12 rapeseed production is forecast at an unchanged 12.8 million tonnes.

“Growth in consumer income and changing dietary trends will drive soybean imports to 58 (million tonnes) in marketing year 2011-12 to meet increasing demand for vegetable oils and animal products,” the report said.

China has a biotech-free soybean production policy.

“The government of China continues to claim it faces a consumer challenge to direct consumption of biotech crops (such as soybeans and rice) as food,” the attaché said. “In addition, many Chinese soybean experts believe that any yield gain from biotech soybeans could be limited due to the serious lack of crop rotation and poor agronomic practices of Chinese farmers.

“Domestic biotech-free soybean production is used primarily in food products for direct human consumption. Some domestic soybeans are exported, and due to their biotech-free status, are sold at a substantial premium to European and Asian markets. This policy de facto functions as an industry marketing strategy and a government market segregation tool.”

China’s soybean crushing capacity is estimated to have passed 100 million tonnes in 2011, having added 5 million tonnes in 2010 and another 15 million in 2011.

“Despite calls by the government since 2009 to restrict overexpansion of soybean crushing capacities, new facilities continue to be approved,” the attaché said. “Observers say the restriction has been applied more strictly to overseas and private investments than state-owned enterprises.”

Key Facts

Capital: Beijing

Population: 1,336,718,015 (July 2011 est.)

Religions: Daoist (Taoist), Buddhist, Christian 3%-4%, Muslim 1%-2% note: officially atheist (2002 est.).

Location: Eastern Asia, bordering the East China Sea, Korea Bay, Yellow Sea, and South China Sea, between North Korea and Vietnam.

Government: Communist state. Chief of State: President Hu Jintao (since March 15, 2003); head of government: Premier Wen Jiabao (since March 16, 2003).

Economy: Since the late 1970s, China has moved from a closed, centrally planned system to a more market-oriented one that plays a major global role — in 2010 China became the world’s largest exporter. Reforms began with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, creation of a diversified banking system, development of stock markets, rapid growth of the private sector, and opening to foreign trade and investment. China has implemented reforms in a gradualist fashion. In recent years, China has renewed its support for state-owned enterprises in sectors it considers important to “economic security,” explicitly looking to foster globally competitive national champions. After keeping its currency tightly linked to the U.S. dollar for years, in July 2005 China revalued its currency by 2.1% against the U.S. dollar and moved to an exchange rate system that references a basket of currencies. From mid 2005 to late 2008, cumulative appreciation of the renminbi against the U.S. dollar was more than 20%, but the exchange rate remained virtually pegged to the dollar from the onset of the global financial crisis until June 2010, when Beijing allowed resumption of a gradual appreciation. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2010 stood as the second-largest economy in the world after the U.S., having surpassed Japan in 2001. The dollar values of China’s agricultural and industrial output each exceed those of the U.S.; China is second to the U.S. in the value of services it produces. Still, per capita income is below the world average. The Chinese government faces numerous economic challenges, including: (a) reducing its high domestic savings rate and correspondingly low domestic demand; (b) sustaining adequate job growth for tens of millions of migrants and new entrants to the work force; (c) reducing corruption and other economic crimes; and (d) containing environmental damage and social strife related to the economy’s rapid transformation. China continues to lose arable land because of erosion and economic development.

GDP per capita: $7,600 (2010 est.); inflation: 3.2% (2010 est.); unemployment 6.1% (September 2009 est).

Currency: Renminbi yuan (RMB): 6.32 Renminbi yuan equals per 1 U.S. dollar (Dec. 27, 2011).

Exports: $1.581 trillion (2010 est.): electrical and other machinery, including data processing equipment, apparel, textiles, iron and steel, optical and medical equipment.

Imports: $1.327 trillion (2010 est.): electrical and other machinery, oil and mineral fuels, optical and medical equipment, metal ores, plastics, organic chemicals.

Major crops/agricultural products: Rice, wheat, potatoes, corn, peanuts, tea, millet, barley, cotton, oilseeds; pork, fish.

Agriculture: 10.2% of GDP and 38.1% of the labor force.

Internet: Code. .cn; 15.251 million (2010) hosts and 389 million (2009) users.

Source: CIA World Factbook