The soya bean trade shows how politics distorts markets and harms the environment

Nobody knows exactly how many pigs there are in China, but the UN Food and Agriculture Organization estimates roughly half a billion, or one in two of the world's pigs. Pork is a favourite among increasingly wealthy Chinese consumers and production has increased steadily to more than 50 million tonnes of pork each year, up 25 per cent from just ten years ago.

Producing feed for 500 million pigs is no mean feat -- they eat like pigs, after all -- and China's agricultural sector is already operating at its limits. Chinese farmers are in competition with fast-growing cities and industries for water and land resources, which are at the same time under mounting pressure from pollution, erosion and climate change.

As a result China has been forced to look abroad for its animal feed, in particular for soya beans -- a rich source of protein. Soya beans have been consumed as tofu or soya-milk in China since ancient times, but today 90 per cent are being fed to pigs and other livestock. Imports have rocketed from 2 million tonnes in 1990 to 60 million today. The US Department of Agriculture forecasts that by 2020, the number could stand at 90 million tonnes a year. With soya bean prices at more than $500 a tonne, helping to feed Chinese pigs has become a $30 billion business.

Most of these soya beans come from the United States, the world's largest producer, which has tripled its exports to China over the past decade. Nevertheless, the US has been steadily losing ground to fast-growing producers Brazil and Argentina. At the start of the millennium, 60 per cent of Chinese soya bean imports came from the US, today it is only one third.

At first glance, this appears surprising. Shorter transport routes actually give US farmers an advantage over their South American rivals, so why has the US not made more of the new export opportunity?

The answer is that government regulations to incentivize the production of maize-based ethanol have pushed US farmers to plant maize rather than soya beans. Over the past decade, US soya bean acreage has remained flat while cultivation of maize has increased by 20 per cent.

Hungry hogs in China have been a boon for US farmers, but corn ethanol was the jackpot. For every tonne of soya beans US farmers export to China, there are five tons of maize being gobbled up by the biofuels industry. Some 128 million tonnes of maize -- 40 per cent of US production and 15 per cent of all the maize consumed worldwide -- are now being used for US ethanol; in 2000 it was just 16 million tonnes.

With US farmers filling American petrol tanks, the business of feeding Chinese pigs has been ceded to South America's burgeoning agro-industries. In ten years, the acreage for soya beans in Brazil and Argentina nearly doubled from 22 million hectares to 41 million hectares, an area the size of Switzerland, with half the output being shipped to China. Another 10 million hectares could be added by 2020 and soya bean plantations are now pushing into neighbouring Paraguay and Uruguay. Within a decade, international soya bean trade has reoriented itself.

This change has had unintended consequences. Concerns have grown as soya bean cultivation has pushed agriculture deeper into the Amazon. Under pressure from environmental groups and the government, producers in Brazil have agreed on a moratorium over the use of recently deforested land for soya bean cultivation.

Meanwhile Chinese attempts to invest directly in South American soya bean production have raised political hackles in Brazil and Argentina, prompting governments to implement new laws limiting foreign investment in farmland. While large areas of arable land in Brazil and

Argentina could benefit from such investment, resource nationalism and a hostile media mean that politicians often have more to gain from preventing rather than attracting such deals.

Where resources are concerned, bad economics often makes for good politics, and the soya bean-ethanol nexus is no exception. US ethanol policy has not only displaced soya bean cultivation to environmentally sensitive areas in South America, it has done so at considerable cost to US taxpayers and motorists. More troublingly, it has contributed to volatility in international food prices. But it has allowed successive US governments to prop-up farm-gate prices and effect significant transfers to the politically powerful corn states.

In China, the question is at what level meat consumption will level off, and whether the government, in response to rising obesity and health costs, may intervene to hasten this process.

In the meantime, however, China's pigs need to be fed and it has not escaped Beijing's attention that rising food prices can be a powerful catalyst for social disc-ontent. The typical urban household in China spends 35 per cent of its income on food and more than 10 per cent of that goes on pork.

Shackling the price of pork to volatile international feed markets is a gamble China's rulers are unwilling to take. Beijing is not only seeking to invest in land deals abroad to secure soya bean supplies, but has created strategic reserves for both pork and soya beans and regularly imposes price controls. How much these measures would help in the case of a serious supply disruption remains to be seen.

Soya bean trade will continue to be shaped by remote political, economic and environmental factors, although precisely how remains unclear. Climate change, biofuels politics, trade rules, and consumer behaviour will all play a role. In another two decades, global soya bean trade may have been redrawn again.

Jaakko Kooroshy is a Research Fellow at the Chatham House Energy, Environment and Resources Programme. The Chatham House report, 'Resources Futures', is available online at resourcesfutures.org

 

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