Is Food Inflation Secular Or Cyclical? Part 1

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by Tyler Durden
Tuesday, Apr 19, 2022 - 05:30 PM

By Russell Clark, of the Capital Flows and Asset Markets substack

The Chinese Communist Party took power in 1949. In 1955, the collectivisation of farming land, and forced industrialisation of China caused a huge famine that is estimated to have led to 20 to 50 million deaths. In 1970s a virtual civil war was also marked by severe famine in death. That the Great Leap Forward and the Cultural Revolution caused huge amounts of death and famine is widely known. I had assumed that when I began to look at Chinese food supply, I would see a marked convergence in Chinese farming yields to Western farming yields beginning in the 1980s.

However, when we look at Chinese grain production statistics from the US department of agriculture, you are hard pressed to see any particular revolution in Chinese grain production beginning in the 1980s. The most notable change has been the extraordinary growth in corn production since 2000.

Again looking at USDA data, we can look at yield on Chinese corn production. China and the US are the two largest corn producers in the world. Looking at yields, again its hard to see any particular grain yield revolution as China transitioned from Stalinistic grain policies to free markets from the 1980s onwards.

Rather than looking at production, if we look at area harvested, then we can see the real revolution in Chinese agriculture. From 1980 onwards, the total area harvested for the main grains fall, even as production grew. It has only been since 2005 that total grain area harvested grew again, mainly driven by corn. When studying the Great Leap Forward, a recurring theme was that all famines are driven by political reasons. Chinese food insecurity of the 1950 and 1970s was driven by the state dictating what should be grown and where. Chinese food security since 1980s has been driven by allowing farmers the freedom to grow what they choose and where.

Chinese corn production is closely related to the other big change in agricultural markets over the last 20 years, which is China has become by far the biggest importer of soybeans.

To give an idea of the scale of China’s imports, I have taken a screenshot of the USDA World Oilseed Supply and Distribution report, which includes all oilseeds. China is the 3rd largest producer, but is by far the biggest importer, taking well over half of all exports. In fact, demand is so large, even if China took all of Brazilian exports, it would still need to rely on the US for soybeans.

My view is that China has been very wary of becoming overly reliant on the US for food supply, which is why suddenly in 2010, China became the biggest provider of agricultural subsidies, and also why we suddenly saw a huge increase in Chinese corn area been harvested.

And so here is the problem. China solved its food problems of the 1950 and 1970s by embracing free markets. And when we look at food inflation, it virtually disappeared from 1980 onwards. But now free markets is pushing China to become ever more reliant on the US for food supply, which is a “political problem”. China has tried to solve it by first subsidies, and now tariffs, but neither has worked.

Using history as a guide, with all the caveats that this entails, if food supply is political, then food inflation is a secular story, not cyclical. There is a second, also political way of thinking about food inflation, which I will look at in Part II.