Effects of Trends in Chinese Production, Consumption, and Price - PowerPoint PPT Presentation

China and World Grain Price Volatility Effects of Trends in Chinese Production, Consumption, and Price Support Policies on World Grain Price Volatility and Food Security Mario J. Miranda Joseph W. Glauber Randall Romero-Aguilar 1 / 21

China and World Grain Price Volatility Objectives Objectives Explore how global commodity price volatility and food security will be affected by changes in Chinese commodity trade and price support policies and trends in Chinese agricultural production and consumption. 2 / 21

China and World Grain Price Volatility Approach Approach Solve and simulate a stochastic spatial-temporal equilibrium model of the world market for a generic storable food commodity with China as the centerpiece, apply it to corn and wheat. 3 / 21

China and World Grain Price Volatility Background Background ◮ World Food Price Crisis in 2007-8 caught many unprepared ◮ Price of wheat reached a peak of ✩ 440/ton in March 2008 ◮ Price of corn reached ✩ 287/ton in June 2008 ◮ FAO estimates chronically hungry rose by 75 million in 2007 4 / 21

China and World Grain Price Volatility Background ◮ China, however, maintained relatively stable domestic prices ◮ Historically, China has been self-sufficient in grains ◮ Achieved through buffer stocks and trade restrictions ◮ Stocks proportionately much larger than rest of the world ◮ Imports and exports a small proportion of China’s production ◮ Pre-2009, wheat-corn imports less than 1% of production 5 / 21

China and World Grain Price Volatility Background ◮ However, Chinese grain production and consumption have been undergoing major changes in recent years ◮ Rising living standards, increased urbanization have led to increasing per capita meat consumption ◮ This has led to increased demand for grains and oilseeds ◮ China may account for 40% of global trade over coming decade 6 / 21

China and World Grain Price Volatility Background 70 60 Projections 50 Kilograms per person 40 30 20 10 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 Pork Poultry Beef Source: USDA-ERS China in the Next Decade: Rising Meat Demand and Growing Imports of Feed Figure : China Per Capita Meat Consumption 7 / 21

China and World Grain Price Volatility Background million tonnes Sorghum 20 Corn 15 DDGS 10 Barley 5 Wheat Rice 0 -5 -10 -15 -20 Net exporter Net importer -25 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: USDA-ERS China in the Next Decade: Rising Meat Demand and Growing Imports of Feed Figure : China’s Net Imports of Grains 8 / 21

China and World Grain Price Volatility Background 25 China Projections 20 Japan Million metric tons 15 Mexico 10 South Korea 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: USDA Figure : Chinese Corn Imports 9 / 21

China and World Grain Price Volatility Background ◮ Chinese agricultural support policies have also undergone major changes in recent years ◮ Starting in 2004, after decades of taxing agricultural production, China began to subsidize agriculture production ◮ Subsidies reached 9% of value of agricultural output in 2012 ◮ Between 2008-2013, corn-wheat price supports rose 60-70% ◮ Increases have not kept pace with rising production costs ◮ Placed pressure to raise price supports further 10 / 21

China and World Grain Price Volatility Background ◮ Chinese government’s 5-year plan for 2011-15 called for continued increases in support prices ◮ Support levels approaching those of developed countries ◮ Inviting increased WTO scrutiny of Chinese ag policies ◮ China’s domestic prices rising above world levels ◮ This has attracted a surge in imports ◮ U.S. major beneficiary, exports to China tripled 2007-12 11 / 21

China and World Grain Price Volatility Background Dollar per metric Ton 400 China support price 350 300 250 China farm 200 Projected U.S. price price 150 U.S. farm price 100 50 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 Figure : China Corn Prices and Price Supports 12 / 21

China and World Grain Price Volatility Background Dollars per bushel 12 10 Support price 8 Market Price (Shandong Provice) 6 4 U.S. farm price 2 (Winter Wheat) 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Figure : China Wheat Prices and Price Supports 13 / 21

China and World Grain Price Volatility China - Questions of Interest China - Questions of Interest ◮ What will be in impact of ◮ Chinese rising demand for grain ◮ Chinese price support programs ◮ Chinese global market integration on ◮ Chinese imports and exports ◮ Variability of world prices ◮ Is China’s buffer stock policy sustainable? ◮ If not, what happens in the long run? 14 / 21

China and World Grain Price Volatility World Grain Market Model World Grain Market Model ◮ At OSU, developing a 4-region, 2-commodity stochastic spatial-temporal equilibrium model of world grain markets ◮ Used to explore impact of trade and price support policies on global trade and price stability ◮ Model lacks closed-form solution, solved using Chebychev polynomial projection methods ◮ Experimenting with incomplete polynomial bases, Lobatto nodal structures, ergodic set methods 15 / 21

China and World Grain Price Volatility World Grain Market Model ◮ Work presented today based on subset of larger model ◮ Two regions: China and Rest of World (ROW) ◮ Spatial equilibrium enforced through trade ◮ Competitive storage in ROW enforces intertemporal world price equilibrium ◮ Government storage in China undertaken by buffer stock authority at fixed support price ◮ Planned production responds to price expectations 16 / 21

China and World Grain Price Volatility Simulation Experiment Design Simulation Experiment Design ◮ Factorial design ◮ Autarky versus free trade ◮ Limited and unlimited buffer stock capacity ◮ No, low, high price supports in China ◮ Current and 20% increase in demand in China 17 / 21

China and World Grain Price Volatility Main Findings Main Findings ◮ A 20% increase in China’s demand for corn will ◮ divert 2.7% of ROW corn production to China ◮ raise world price and volatility by 10% ◮ A 20% increase in China’s demand for wheat will ◮ divert to 2.2% of ROW wheat production to China ◮ raise world price level and volatility by 8% and 6%, respectively 18 / 21

China and World Grain Price Volatility Main Findings Grain Price Support - Baseline Demand ◮ Consider corn price support 6% above historical market average, baseline demand ◮ If ability to defend unlimited, world price level would rise 8%, world price volatility would fall 4%, and Chinese corn imports would reach 2.8% of global production ◮ If buffer stock capacity capped, price levels and global trade would not be affected in long run, but world price volatility would fall 4% ◮ Similar results in the case of wheat 19 / 21

China and World Grain Price Volatility Main Findings Grain Price Support - Increased Demand ◮ Consider corn price support 6% above historical market average, 20% increase in demand ◮ If ability to defend unlimited, world price level would rise 9%, Chinese price level would rise 17%, world price volatility would increase 4%, and Chinese corn imports would reach 2.7% of global production ◮ If buffer stock capacity capped, world price level would rise 14%, Chinese price level would rise 26%, world price volatility would increase 4%, and Chinese corn imports would reach 4.1% of global production ◮ Similar results in the case of wheat 20 / 21

China and World Grain Price Volatility Extensions for Future Work Extensions for Future Work ◮ Explicitly model USA in addition to China and ROW ◮ Allow for distinct release price ◮ Account for private storage in China ◮ Model USA policy interventions more fully ◮ Explore trade restrictions more fully ◮ Model multiple commodities 21 / 21