China’s economy is slowing. The rest is being left up to imagination fed by data from a central controlling government in Beijing that tells lies.
When China’s stock markets fell sharply and President Xi Jinping was boarding a plane on a visit to Russia, he reportedly gave the order to “make it go back up.”
Government officials launched a mission using every means possible from literally arresting sellers, while shoveling-in massive amounts of government cash to shore them up.
They have gone to great lengths to manipulate their stock market.
This did two things. First, it destroyed the credibility of their market, and second, showed that they would do anything to cover up bad news.
A government that would do that will have every word and action discounted. They have an official target of 7 percent Gross Domestic Product for 2015.
The International Monetary Fund says that they will miss it.
Some who track electricity usage, railroad traffic and cargo movement argue that Chinese GDP growth is between 2 to 3 percent. Manufacturing is struggling which is one reason why they allowed the yuan to devalue.
The Economist magazine argues that use of just base data oversimplifies the Chinese economy missing some strengths understating growth which is more realistically near 5 percent.
They point out that after years of double digit compounding GDP that 5 percent growth in today’s China is the same as 14 percent growth in what was a smaller economy in 2007.
Peasants that earn disposable income spend it first buying food becoming consumers. They do not give up improved diets without social unrest developing, which Beijing abhors and defends against.
They will keep their people well fed. In fact, many of the problems that they are dealing with today are the result of efforts to increase food production.
They did such an amazing job boosting the size of their hog herd that they reportedly have been going through a liquidation Rabobank estimated was the equivalent in size to eliminating the entire North American hog herd.
I am skeptical of such estimates as there are still millions of backyard two- and three-sow herds in China that I don’t believe can be accurately counted.
Nevertheless, that is a lot of feed demand to lose.
China has boosted its corn production year over year using minimum price support to get farmers to shift acreage from other crops.
It worked, as some now believe China has a 150-million-metric-ton – mostly corn – reserve and fewer hogs.
That much stored corn is difficult to keep in condition. It is an overreach that has to be reduced.
China had been giving corn producers $9.70 for their corn. Needless to say, Chinese feed companies could buy and import U.S. corn much cheaper.
In fact, so much cheaper that imports would surge despite huge Chinese corn stocks. Alarmed, China discovered the MIR 162 unapproved GMO trait in U.S. corn shipments allowing them the means to block and ban all U.S. corn coming into China.
They are also importing corn from Ukraine, but can’t stop those shipments as they are tied to infrastructure investments that are being paid for in corn.
Banning U.S. corn didn’t improve the market differential between Chinese corn prices or in fact, it could be argued the damage to the U.S. corn market made it worse.
Other U.S. feedstuffs, U.S. sorghum and distiller’s dried grain imports, surged into China.
Attempts to auction Chinese reserves have failed even with transportation subsides. There is just too much price disparity between the minimum price and the world market with Chinese corn “priced out of the market.”
They are going to fix that. They reportedly will lower the minimum support price by as much as 20 percent ($1.80-$2).
They will likely give farmers larger cash subsidies on top of the minimum price, but the market could buy Chinese corn much cheaper than before.
If they use more domestic corn stocks, demand for imports including sorghum and DDGs will slow. They will take more control of imports finding ways to limit sorghum and DDG imports, too.
Fewer hogs mean less soymeal demand and cheaper corn in rations competes with soymeal, likely reducing soymeal demand as well.
It all rolls down the hill and some of it eventually finds its way to the U.S. If they reduce corn acres with lower support prices, those acres will grow other things.
While commodity economies were devaluing currencies before China did, they are devaluing them even more after.
U.S. ag export competitors such as Canada, Brazil, Australia, Russia, and Ukraine are either in recession or headed there.
The currency exchange gives them a distinct advantage over U.S. commodities priced in dollars. Strength in the dollar is likely to be sustained.
Beijing has been attempting to engineer a transition from an export-driven economy to a consumer-driven economy and the slowdown caught them in midstream.
This forced the yuan devaluation to try to get some support back for their exports.
When that works too well, Japan, Korea and other Asian export economies are hurt so they have less money to buy U.S. ag products.
The currency war can become a circular firing squad. So, China is going to use more of its own domestic production, import less overall, but more of that from our competitors while exporting more in competition with other Asian exporters so they buy less from us.
I think that you can see that this is not going well.
Throw in The Donald with 88 percent of his supporters saying his stance on trade is their top issue and reason why they support him.
Trump would be the bull in the China shop and the ag sector would be sure to get broke.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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