China's Shrinking Grain Harvest

World grain production has declined for four years in a row--a result of droughts, encroaching deserts, expanding urban areas, falling water tables, and small farmers being driven out of business by heavily subsidized imports from the U.S. and Europe.

As with energy, China is shaping up to be the driving force behind the growing deficit between harvest yields and demand.

China's wheat harvest fell short of consumption last year by 19 million tons. When the country's wheat stocks are depleted within the next year or so, the entire shortfall will have to be covered from imports. In some ways, the rice deficit is even more serious. Trying to cover a rice shortfall of 20 million tons in a world where annual rice exports total only 26 million tons could create chaos in the world rice economy. And with a corn shortfall of 15 million tons and stocks already largely depleted, China may soon have to import corn as well.

The handwriting on the wall is clear. While grain production is dropping, demand is climbing, driven up by the addition of 11 million people per year and by fast-rising incomes. As people in China earn more, they are moving up the food chain, eating more grain-fed livestock products such as pork, poultry, eggs, and, to a lesser degree, beef and milk.

The fall in China's grain harvest is due largely to a shrinkage of the grain harvested area from 90 million hectares in 1998 to 76 million hectares in 2003. Several trends are converging to reduce the grain area, including the loss of irrigation water, desert expansion, the conversion of cropland to nonfarm uses, the shift to higher-value crops, and a decline in double-cropping due to the loss of farm labor in the more prosperous coastal provinces.

Water tables are falling throughout the northern half of China. As aquifers are depleted and irrigation wells go dry, farmers either revert to low-yield dryland farming or, in the more arid regions, abandon farming altogether. In the competition for scarce water, China's cities and industry invariably get first claim, leaving farmers with a shrinking share of a shrinking supply. Losing irrigation water may mean either abandoning land or less double cropping.

China's farmers are also losing land to expanding deserts, such as the Gobi, which is consuming an additional 4,000 square miles each year. Paying farmers in the north and west to plant their grainland to trees to halt these advancing deserts is further reducing the grain area.

Soon China's reserves will be exhausted and it will have to turn to the world market for imports that could run as high as 50 million tons per year. This comes at a time when world grain stocks are at their lowest level in 30 years.

China has a $120 billion trade surplus with the United States, enough to buy the entire U.S. grain harvest twice over. If their auto market continues to explode at it's present pace, they will also be entering the oil market in a big way. China's needs could begin to drive the world economy soon in some very unexpected ways.