By Ed Clark and Jeanne Bernick
China and ethanol are said to be the two factors driving grain and oilseed prices higher. However, when it comes to China, the inverse is true, says Kel Kelly, GROWMARK economist.
"Overall, China is a net contributor to world commodity supplies, not a net taker," Kelly says. "It has contributed to lower, not higher world commodity prices."
Kelly acknowledges that this runs counter to most views, but he says his research shows that China doesn’t buy enough world commodities to affect prices very much. Also, the demand-from-China theory fails to explain how all commodities collapsed during the 2008 financial
crisis, while Chinese purchases did not, and why most commodity prices tend to move in sync.
Furthermore, he says if China’s economy continues to soften, it would only have a minor effect on U.S. soybean prices, even though it purchases about 60% of U.S. exports.
Until 2002, soybean prices moved in the opposite direction of exports. Since then, prices and exports have been moving in the same direction. "But even here, soybean prices fell about 50% in 2008, while Chinese imports continued to rise," Kelly says. Additionally, soybean prices actually rose sooner and at a much faster rate than Chinese purchases during 2005-07’s strong price gains.
China is the largest importer of U.S. soybeans. "We will always be a little concerned about China’s role in the markets," says Terry Barr, CoBank senior director. "It’s important to watch how they adjust their buying patterns. They have a gigantic inventory and still have 70% of the world’s buying power."
Watch Wall Street. If China has not been the top market price driver, what has? "Wall Street investors who, cumulatively, far outspend China," Kelly believes. His research shows that speculators sent prices lower in 2008 and have been driving prices lower as of late. Speculators cause all commodities to move more or less in sync with each other, and loosely in line with other asset classes, he says.
Many economists disagree and say no correlation exists between fund activity and farm prices. "Many think merely using the product affects the price," Kelly says. "But it’s the money spent that affects the price."
- September 2013