Navigating the maize story

26 July 2012

It’s not so long since agricultural commodities markets were an area of specialist knowledge shared only by a few hundred experts across the world. Since the food price spike of 2008, however, interest has gone global and news stories continue to examine future forecasts.

It’s important to get one thing straight – as things stand we are not heading for a ‘new food crisis’ similar to that seen in 2008. For starters, as our recent food prices update shows, we are not seeing uncertainty across all cereal markets; the current kerfuffle is focused on what is happening in maize markets. Even in the maize markets the picture presented in the Financial Times somewhat overstates the severity of the situation.

What they miss is that the initial forecast harvest of maize in the US this year would have redefined the term ‘bumper’. Even with the significant impact of the droughts in the Midwest the harvest looks set to outstrip demand and potentially ease upward pressure on prices in the long term. In the short-term it is impossible to escape some effects as traders begin to hedge themselves in and this increase in prices will transmit over time, but so long as things get no worse we’re not at crisis point yet.

Two things have put exceptional pressure on the global maize market. By far the larger of the two has been the unprecedented and unexpected demand for maize to distil to ethanol in the US. In 2000, the US sent 16 million tonnes of maize to ethanol distilleries: in 2011 it was 128 million tonnes. To put this in context, in the past five years an average of 91 million tonnes of maize have been traded internationally, of which almost 50 million tonnes has come from the US as the dominant exporter.

The second is the small but significant increase in Chinese imports of maize, used mainly to feed animals. China has succeeded in becoming self-sufficient in cereal needs. With such an enormous population it makes sense to keep stocks high and avoid any exposure to the whims of what has become a much more volatile world market in recent years. But that may be changing: this year China was expected to import around 5 million tonnes of maize.

Here’s why. Meat consumption in China has been rising rapidly since economic reforms in the late 1970s. In 1978 the average consumption of meat was less than 12 kg a year a person: by 2007 it was more than 50 kg  more than four times the 1978 figure — reflecting a more than tenfold increase in average incomes in that period.

China’s policy-makers should be interested in the level at which meat consumption may peak. Diets rich in meat, especially if also high in fat and salt, may raise the probability of heart disease and some cancers. In addition to lost lives and disability, costs for health care would likely rise.

More pertinent to this blog, however, is the likely effect on world cereals markets. Increased meat consumption in China requires feed for domestic pigs and poultry. China has limited farm land likely to be used first and foremost to grow rice, wheat and high-value perishables such as vegetables, fruit and dairy. Additional maize and soybean for animals are thus most likely to be imported.

A few back-of-the-envelope calculations illustrate just how large these imports may be. By 2020 the population of China is expected to around 1,388 million, another 46 million above the 2010 estimate. Now, if meat consumption were to remain at current levels of 50 kg a head, then this would require — assuming that feed can be converted to meat at 2.5 to 1 — another 6 million tonnes of feed grain. But raise average consumption to 60 kg, and this rises to over 40 million tonnes extra: move to 80 kg a head and it balloons to over 109 million tonnes of extra feed grain — more than all the maize currently traded internationally.

On the other hand, moving back to Japanese levels of 46 kg meat a head would save China 8 million tonnes of feed, thereby probably removing any dependence on imports of maize.

The amount of meat in the typical Chinese diet thus has great implications for China’s dependence on the rest of world for cereals, as well as for world grains markets. Given the probable health benefits of a modest intake of meat, how long before policy-makers in Beijing take firm measures to encourage diets similar to those seen across the Yellow Sea?