By Robert Fox, Agribusiness Consultant
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Rapidly increasing meat consumption in China combined with the U.S. ethanol boom have been the fundamental drivers in the escalation of global grain prices over the past five years. Since 2007, those high prices have resulted in record farm profitability, which has, in turn, pushed farmland prices steeply higher.
Global corn consumption and price/bushel
Not surprisingly, the higher prices have lured an additional 180 million global acres into grain production since 2003 — more acreage than the entire state of Texas! Given the investment involved in bringing virgin and fallow acreage into grain production, this acreage is likely to remain in grain production for the long term.
Global grain acreage and South America grain acreage
The corn ethanol boom has come to an end with refiners now facing the 10% blending restriction combined with shrinking gasoline demand (currently 8% below 2007 levels). This is referred to as the "blend wall" and is unlikely to change in the coming few years. However, what most market participants have not considered is the potential for China's appetite for meat and feed grains to slow down significantly in the coming few years.
The slowing of the Chinese economy and downward GDP revisions garner weekly headlines. The Wall Street Journal (July 16, 2013) recently reported that urban disposable income growth fell to 6.5% in the first half of 2013, compared to 9.7% a year earlier.
U.S. corn for ethanol and China GDP growth
Although the weakening economic situation in China is raising eyebrows, longer-term demographic and consumption data suggest that China's rapid growth in meat consumption may be poised for a slowdown. The chart below shows that since 2005, the rate of growth in Chinese per capita meat consumption has already slowed significantly, both in urban and rural areas (China National Bureau of Statistics). Moreover, per capita Chinese meat is already quite high relative to its higher-income Asian neighbors Japan and Korea. USDA economists have reported that:
"The demand for quantity diminishes as income rises, and the top tier of Chinese households appear to have reached a saturation point in quantity consumed of most food items. Most additional food spending of high income consumers is spent on higher quality or processed foods and meals in restaurants." (Gale and Huang, 2007)
China per capita meat consumption
China's urban dwellers still consume more meat than those in rural areas, and the rural-urban migration has kept overall meat consumption increasing in recent years. However, with the economy currently slowing, that migration will certainly slow as well. Additionally, after 25 years of rapid urbanization and with the majority of people already living in cities, the trend was likely set to slow.
China population urban vs. rural
The same weak global economy that is limiting Chinese manufacturing exports will also dampen meat and grain consumption demands from other developing countries. And global population growth, which has supported grain markets for decades, is now leveling off.
In summary, price boom in grain markets over the past five years, caused primarily by rapid Chinese demand growth and U.S. ethanol policy, may be coming to an end. With weaker global demand growth and ample supply prospects for years to come, grain prices may be poised to return to a lower price plateau. If this happens, farm profitability will also decline, and eventually with it, farmland prices.

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Demand for Food Quantity and Quality in China, Fred Gale and Kuo Huang, USDA-ERS Report number 32, January 2007.
Wells Fargo Agricultural Industries presents this analysis as a complimentary service to its employees and customers. It cannot guarantee the accuracy of all the sources of data. And, commodity prices are extremely volatile based on unforeseeable changes. These estimates will change with all new market changes.