The Chinese government’s response to the continuing financial crisis in that country is causing heartburn for the U.S. commodity markets, and that distress is being felt all the way to the farm gate in America.
Most growers are aware China was the primary driver in the demand for U.S. soybeans until recent months. China’s massive purchases helped push U.S. soybean futures to more than $15 per bushel during the 2012-13 and 2013-14 marketing years.
In recent months, soybean prices have fallen by nearly a third, in part, due to significantly higher soybean plantings in the U.S., and to the growing economic uncertainty in China, according to Bryce Knorr, senior grain analyst for Farm Futures. (USDA’s latest forecast had U.S. farmers harvesting a record 83.5 million acres of soybeans in 2015.)
“It looked like maybe we were in store for a little less volatile time when the Chinese markets reopened after a four-day holiday to celebrate the end of World War II (on Labor Day),” said Knorr, speaking during a Food and Agribusiness webinar presented by the University Arkansas’ Division of Agriculture.
“When our markets reopened, we posted some gains, and it looked like maybe we were ready to settle down and just trade supply-demand fundamentals. But that didn’t happen. It looks like we’re back to some anxious times.”
Knorr displayed a copy of the cover of the September 2008 Farm Futures magazine that had a photo of a farmer in a tailspin. The title of the article was “High Anxiety,” which referred to the trouble due to the housing crisis. Now China is the culprit, and it’s impacting commodity markets and farmers.
Shanghai Index a barometer
The Shanghai Composite Index is a barometer of the stock market in China. Until recently, few in the United States paid much attention to it. Prices on the Shanghai stock market peaked in late spring and early September and then started to sell off. The index is down more than 40 percent from last spring.
“Even more important than that has been the government’s response or lack thereof,” said Knorr. “The response has been pretty clumsy and really shook the market’s confidence in the government of China’s ability to handle this type of financial crisis.”
The government tried to control the selling in the stock market in some heavy-handed ways, which didn’t work, he noted. “Then investors looked to the People’s Bank, the Chinese version of the Federal Reserve in this country, hoping it would step in and stabilize things. It didn’t. That caused the market to fall again.”
To see a video of Knorr's presentation, visit http://youtu.be/DQNZomXLEpw.
When the People's Bank finally stepped in, it devalued China’s currency, the yuan, by 2 percent. Bank officials indicated they would let the market adjust more than they have in the past. And the yuan fell even further.
“So this is one of the things that has destabilized the markets,” said Knorr. “We've gone from a fairly tightly controlled system to one that has less regulation. But this is really the tip of the iceberg. If you've been listening to my presentations over the past more than three years, we've been talking a lot about slowing Chinese growth and what it might mean, particularly for the soybean market.”
Observers have been seeing weak manufacturing data, including some that came out right before the latest plunge in the stock market over in China.
GDP growth falls to 7 percent
“They used to go in double digits in terms of their GDP,” said Knorr. “Now they are maybe down to 7 percent. That's their target, and a lot of people think they are considerable lower than that and perhaps even seeing negative numbers.”
It doesn’t help that outside observers don't have good data to let them know what's going on in a country of 1.3 to 1.4 billion people, a common problem not only in the financial markets but in the commodity markets, as well.
“The debt has also become a problem, and there have been a lot of shadowy loans similar to what was happening during our subprime crisis,” he said. “These so-called shadow loans aren't really regulated. A lot of housing debt, real estate debt is hanging over the market, as well.
The Chinese government has indicated it was willing to accept slower growth and has tried to rein in some of the problems with debt and with pollution. Corruption has also been an ongoing issue during the boom times that preceded the slowdown.
Population dynamics are also contributing to the slowing growth. “If you remember back 40 to 50 years ago, (Communist Party Chairman) Mao instituted the one child per family policy. That means there are just fewer children now having families, and an older population just tends to slow down growth.”
Market economy focus
The Chinese government is trying to manage the slower growth, attempting to shift from an export-driven economy to one that's more consumer-oriented similar to that in the United States. They’re also making a transition more to a market economy.
“That's why they want their currency to become more of a floating currency so it will be accepted on international markets and become more of the standards that's used for trade around the world,” says Knorr.
“So we survived that World War II holiday. And the stocks looked like they were going higher for a time in China. Now we'll have to see how the Chinese markets react to the latest downturn in the U.S. stock market. We’re, of course, getting ready for a meeting of the Federal Reserve next week amid speculation on whether the Fed will start to raise interest rates.”
Why talk about all of this? Knorr notes China has become the biggest customer for U.S. soybeans – accounting for two-thirds of soybean trade – and trading in soybeans in the U.S. has a strong correlation to the Shanghai Composite Index.
“The current charts are showing a correlation of above 85 percent. That's about as strong as you can get. So as the Chinese stock market goes down, so have U.S. stocks and that's yet another reason why we have to pay attention to this.”
While China says its GDP growth has slowed to 7 percent, some think it's lower. USDA forecasting Chinese soybean imports will slow down in the 2015 crop year. “And the question is, are they going to slow down even more than USDA forecast?”
For more on the University of Arkansas’ Food and Agribusiness Webinar series, visit http://www.uaex.edu/farm-ranch/economics-marketing/food-agribusiness-webinars/