More on China's Economy, Food Production, and Food Demand

Over the next two decades the Panda may begin to feel peckish. A hard look at China's food production and resource availability suggests more difficult times ahead. And this is just one potential problem. Throughout my travels and reading over the past 5 years, I have noticed that people with lots of experience on the ground in China question whether the current pace of development is sustainable.

The upshot of all this may be that the easy gains have been made. In the years to come, China will be faced with extremely hard choices about how to simultaneously maintain economic growth, clean up its environment, and feed its population, particularly when it appears that most of the expected increase in food demand due to rising incomes has yet to be realized. So, following up on last week's post about The Future of China's Economy, here are a few more thoughts that frame future potential stumbling blocks.

Running Out of Cheap Labor, and Coming Home for L.A.'s "Clean" Air

John Pomfret, formerly the Beijing Bureau Chief for the Washington Post, definitely has a lot of experience in country. In "A Long Wait at the Gate to Greatness", he asks, "Is China really going to be another superpower?"

His short answer is, "I doubt it." In more depth:

It's not that I'm a China-basher, like those who predict its collapse because they despise its system and assume that it will go the way of the Soviet Union. I first went to China in 1980 as a student, and I've followed its remarkable transformation over the past 28 years. I met my wife there and call it a second home. I'm hardly expecting China to implode. But its dream of dominating the century isn't going to become a reality anytime soon.

Too many constraints are built into the country's social, economic and political systems. For four big reasons -- dire demographics, an overrated economy, an environment under siege and an ideology that doesn't travel well -- China is more likely to remain the muscle-bound adolescent of the international system than to become the master of the world.

Pomfret goes through the same sort of list of potential stumbles that I compiled for last week's post, and adds a few more. He notes that that population control policy has produced an inverted population pyramid, which requires a smaller, young population cohort to support a larger, older cohort as the latter leave the workforce. This while life expectancy has more than doubled in the last fifty years. Thus the expectation is that the workforce will shrink over the coming decades, labor costs will rise, and more of that labor will be put toward supporting non-working elders.

Pomfret also observes that:

One important nuance we keep forgetting is the sheer size of China's population: about 1.3 billion, more than four times that of the United States. China should have a big economy. But on a per capita basis, the country isn't a dragon; it's a medium-size lizard, sitting in 109th place on the International Monetary Fund's World Economic Outlook Database, squarely between Swaziland and Morocco. China's economy is large, but its average living standard is low, and it will stay that way for a very long time, even assuming that the economy continues to grow at impressive rates.

Unlike many observers, he doesn't discount the potential drag on economic growth from pollution, leading off with a personal anecdote:

When my family and I left China in 2004, we moved to Los Angeles, the smog capital of the United States. No sooner had we set foot in southern California than my son's asthma attacks and chronic chest infections -- so worryingly frequent in Beijing -- stopped. When people asked me why we'd moved to L.A., I started joking, "For the air."

Pomfret is perplexed about why Westerners seem to be ignoring pollution's ~10% hit to the Chinese GDP: "Somehow, though, the effect this calamity is having on China's rise doesn't quite register in the West." As I discussed in the earlier post, this shortsightedness confuses me, too, particularly when you combine the effects of pollution with the demands on domestic water and land to provide food for a hungry population.

Missing Food Demand

In a report last year from the Economic Research Service of the USDA, Fred Gale and Kuo Huang suggest that China may face increasing difficulties in meeting domestic food demand. I find their argument quite compelling and will later state it even more firmly than they do.

Gale and Huang observe that growth in food demand has, unexpectedly, not kept pace with overall economic growth. Here is the conundrum: "Given the responsiveness of food demand to income growth, China's rapid growth of 9-10 percent per year suggests that its demand for food is growing faster than its production capacity. ...How is it that China's surging income growth has not pushed its demand for food beyond its domestic production capacity?"

The main factor the authors identify is that while a small, wealthy fractionof the population now evidently has enough to eat, and thus spends additional income on quality rather than quantity, a large majority of consumers have yet to fill their bellies.

The underlying cause for lagging food demand is not surprising once you think about it. Because economic benefits, in particular income gains, disproportionately go those with already high incomes, and because those with high incomes tend to spend on quality rather than quantity, the total volume of food consumed by the Chinese population has risen only slowly. The authors note that:

...Expenditures by the top tier of households--China's emerging class of professionals and entrepreneurs -- have grown at double-digit rates. Food expenditures were nearly stagnant for the bottom 20 percent of urban households. Food expenditures by rural households grew 2.6 percent annually.

...Income growth for low-income urban and rural households--the majority of China's households--was well below GDP growth. ...Average income for the lowest decile of urban households actually declined slightly between 2000 and 2003.

This suggests to Gale and Huang that, "Food consumption and income growth patterns may explain how China has been able to remain self-sufficient in most food items." The authors stop their argument here, but I think they could go further.

The Still-Hungry ~1 Billion

The lag between GDP growth and food consumption has important implications for future increases in food demand.

Based on the statistics compiled by Gale and Huang, it looks to me like more than 90% of the Chinese population has a per capita annual income below 10,000 Yuan. This is an interesting figure for considering future food demand because Gale and Huang also demonstrate that pork consumption in China continues to rise as a function of income until about 10,000 Yuan. Poultry and seafood consumption also rise strongly as a function of income, but notably don't saturate like pork at 10,000 Yuan. More meat consumption requires more grain and more water to raise the animals (see a previous post, "China and Future Resource Demands").

Here is where I think the argument could be made more forcefully.  As best I can make out, what all the above means is that most of the increase in food demand we might expect from rising incomes in China has yet to be realized; more than 80% of the population is, "Still at income levels where they demand increased quantities of many foods as their income rises."

So where is China going to get all this food? One answer is imports, another is to go offshore to buy or rent farmland (see the "China and Future Resource Demands" post), and yet another is to push domestic production. But the latter may be difficult.

"Who Will China Feed?"

This is the question asked by Fred Gale and Bryan Lohmar in an essay in Amber Waves, the USDA magazine. They elaborate their surprise at China's ability to feed its population: "While China has emerged as the world's leading importer of soybeans, vegetable oil, cotton, wool, rubber, and animal hides, it has been surprisingly successful at meeting the basic food needs of its population of more than 1.3 billion people, and it has stepped up as a major food exporter."  (They make no mention of the income inequality and consequent food spending gap explored above.)

Given the pace of growth and limited resources, they ask, "How long can China sustain this momentum?"

China imports only small amounts of premium-grade rice, minor amounts of wheat in most years, and no corn. China has maintained agricultural self-sufficiency in grains as it carries out the world's largest and fastest urbanization and industrialization. Economic development is increasing competition for scarce resources in China, but growing incomes are allowing most consumers to increase consumption of fruit, vegetables, and livestock products.

China has become a significant food exporter by ramping up production in many sectors and gaining world market share. Indeed, China has been a net food exporter for most of the last three decades. China dominates world markets in a variety of products areas, including garlic, apples, apple juice, mandarin oranges, farm-raised fish and shrimp, and vegetables. At times, it seems that China has suspended the law of scarcity by boosting production in many sectors and selling at low prices without having to sacrifice production in other sectors.

One way to look at this is that China is exporting high value "food products", not staples that the majority of Chinese themselves consume. This strategy contributes to the trade surplus, but the use of land to grow crops for export must clearly be balanced with domestic demand for staples. This balance also points to the fact there is some room for moving crop land now used for exports back into production to satisfy domestic demand.

Here are two key paragraphs on how China has increased its food production yields:

Investments in research and development raised the quality of inputs and the efficiency of their use over the past two decades. Research into improved varieties and quality of seeds surged after the late 1970s. By the turn of the century, China had more agricultural researchers than any other country, and a larger budget for public sector agricultural research than any developing country. Fertilizer quality in China also has improved over the past two decades, as farmers move away from applying pure nitrogen fertilizer to applying more nitrogen-phosphorous- potassium blends. China has been importing breeding animals--which are often crossed with domestic breeds--to improve efficiency of weight gain, improve disease resistance, and raise milk output. The government has offered subsidies to farmers for dairy herd improvement for several years.

China today is the world's largest agricultural producer and consumer. With an estimated 10 percent of world land resources and 6 percent of world water resources, China produces 30 percent of the world's rice, 20 percent of the world's corn, a fourth of the world's cotton, an estimated 37 percent of the world's fruit and vegetables, and half of the world's pork. For most products, China's world share of production is close to or exceeds its 20-percent share of world population. China, however, has exploited the means of coaxing food and fiber out of a limited natural resource base to the extent that additional gains will be more difficult than in the past.

Gale and Lohmar go on to discuss water and soil quality issues, fertilizer and pesticide use, and industrial pollution, while briefly addressing labor costs:

China has been able to maintain low-cost production in international agricultural markets largely because of low labor costs. Historically, Chinese farms have raised large amounts of output from small plots by using labor-intensive production strategies, such as growing multiple crops per year, intercropping, and growing vegetables in courtyards. But hundreds of millions of rural workers have found nonfarm employment over the last two decades. The flow of labor from rural areas enabled China's industry and cities to boom, while wage growth was relatively stagnant for much of the last two decades.

China's rapid economic expansion appears to have finally exhausted the pool of under-employed workers. Since 2003, wages have been rising at a double-digit pace. The dwindling pool of available rural workers is resulting in increased mechanization of harvesting and planting. Anecdotal evidence also suggests that intensive agricultural practices, like double-cropping, transplanting seedlings by hand, and small-scale hog production, have decreased due to labor shortages and high wages.

So, as John Pomfret suggested in his piece in the Washington Times Post (!), labor costs are already affecting food production. But the bigger issue is in trying to identify where, exactly, future gains in production are going to come from.  Rough estimates of the probable increase in demand give some context for the magnitude of the problem.

Returning to the correlation of meat consumption and income: It appears from FAO and USDA data that China is bound to eat more meat, especially pork, as incomes continue to rise.  Growing meat for human consumption creates a big lever in water and grain markets.  Producing a kilo of pork requires approximately three kilos of grain, and producing a kilo of beef requires about eight kilos of grain.  Based on the data in Gale and Huang, in appears that as income rises from 3000 to 10,000 Yuan, pork consumption increases by about 50%, to ~23 kg, which will require about 70 kg of grain.  This in addition to the ~30% increase in grain products (~6 kg) directly purchased by households as incomes rise over that range.  Fish and poultry demand about doubles, too, from ~8 to ~16 kg per capita, but estimating the additional grain consumption here is hard.  I'll hand wave and make a low-ball estimate that it will take only another 16 kg of grain to feed the the fish and poultry.

Adding this all together, that is an additional per capita  increase in grain demand of more than 90 kg.  Here is the kicker: that number appears to hold for at least 500 million people, perhaps as many as a billion.  That amounts to at least 45 million tonnes (metric!) of grain, perhaps as much as 90 million tonnes.  The Chinese population would then still be consuming only about 80% as much animal protein per capita as Europeans, and only a little over half as much as us gluttons in the U.S.

China produces about 500 million tonnes of grain per year (see the USDA ERS China Ag and Economic data page), so supplying increased meat demand with domestic grain supplies would require a (very rough) increase of between 10 and 20% in total yield.  That doesn't necessarily sound like much -- I actually expected the increase to be a larger percentage of current harvests -- and might be accomplished by breeding, genetic modification, and better farming practices.  But as detailed in my earlier posts, China is losing both arable land and usable water.  With only 7% of the globe's arable land to work with (ignoring losses to due climate change and prior poor farming practices), the country is going to have to work very hard indeed to squeeze more grain out of those limited resources.

That leaves imports, which means competing on the world commodity markets for food.  In combination with rising labor costs at home, all this points to rising domestic prices and rougher going for the Chinese economy.