You’ve no doubt heard the ethanol policy slogan, “Food or Fuel” to describe the tradeoff between using traditional feedstuffs for energy production vs. feed for livestock and the hundreds of other food products made from corn. In China, we now have the first major world economy deciding that containing food prices is more important than creating fuel from corn. The restriction recently put in place prohibits additional expansion of ethanol production from corn but allows it from grasses, corn stalks and other agricultural products which would not affect the price of food. Existing plants using corn are currently grandfathered in.
Recent rumors suggest that China has experienced a sharp decline in pig meat production and pork prices have reportedly risen over 25%. Anything which raises the cost of producing pigs will only exacerbate the rumored mortality problem and is a big part of the rationale to stop corn-based ethanol expansion.
China has a bloated trade surplus as it pumps billions of dollars of exports out to the world. This huge influx in cash has fueled further expansion and investment while keeping interest rates, though gradually rising moderated. Growth rates for the economy have been over 10% per year for the last couple of years and were just under that for the preceding five years.
China is commodity hungry as it expands and its demand for building materials, oil, metals and such have helped fuel the big run up in construction costs in this country, a factor which is restraining growth in the U.S. pork industry even in the face of a record run of profitability. As the Chinese people gain higher incomes working in the export focused industries, their demand for everything from MP3 players to housing is growing rapidly.
Worries about a crackdown on the expanding bubble in the Chinese stock markets and the possible escalation of interest rates and bank reserve rates to contain the rapid growth of the money supply once again sent most major global stock exchanges into a short but hefty turn down in the last few days. Income disparity between the rural and urban areas is quite large. When the common man can’t afford the meat of choice, change is on the way.
