Asia's hunger for western foodstuffs is rising sharply. Contamination of food supplies by Japanese radiation could add to the growing demand, although it is difficult to predict by how much.
Putting the Japanese issue aside for the moment, let's look at Asia's giant, China.
Because of past food shortages the Chinese are very, very sensitive about admitting that they need to import any foodstuffs. Recently the Financial Times reported that Chinese corn imports had risen sharply to a 15-year peak. World corn supplies are definitely getting very tight. Futures prices shot up last week by 13 percent.
But China's state grain companies denied making any new orders, and Chinese Vice Premier Hui Liangyu said that China would uphold a policy of food self-sufficiency. He emphasized that meeting the food demand of 1.3 billion Chinese people was the principal issue faced by the government and that China will stick to a policy of relying on domestic supply.
But that is not the real trend. Even the Chinese press acknowledges that.
Chinese grain imports have been rising since 2008. And, the latest reports indicate that 2011 will be a banner year.
China's net grain imports, including soybeans, reached more than 65 million tons in 2010. Of that total, the country imported almost 55 million tons of soybeans last year. That accounts for 60 percent of the world's total export trade, making China the world's largest soybean buyer.
Although last year's imports were a record, Chinese authorities say they will not rely heavily on foreign trade. Why? Because “global supplies are limited.”
That means worldwide food prices are rising. Meanwhile, China is attempting to combat food price inflation at the consumer level.
Will China Cut Back?
Sure, China says it wants to reduce foreign imports, but can it? Not likely.
As China develops a taste for more meat in its diet, demand for feed grains will continue to rise. Technically, China may be able to say it grows enough grain to feed its people, but that's not enough. China also needs to feed its livestock. In the end, that means rising imports and higher commodity prices.
China is also eager to improve the incomes of its farmers, many of whom live on plots as small as one third of an acre. By importing more low-cost grains from abraod, China can increase production of higher-margin fruits and vegetables on poor family farms.
There's one more sensitive issue holding back China's ambitions to expand food production. The industrialization of China.
As Lu Bu of the Chinese Academy of Agricultural Sciences told China Daily, resources are hitting a wall. "Limited available arable land, scarce water resources and rapid urbanization have made it very difficult for China to expand its grain harvest." He did not mention the problem that extensive industrial pollution is also posing for agriculture.
Even worse. The fallout from the Japanese nuclear accident is likely to reduce the availability of foodstuffs exported to the rest of Asia for some time.
THE INVESTORS' MENU
Quick gains were made last week by investors who were alert to the food demand rise.
Shares of Smithfield Foods (NYSE:SFD) and Tyson Foods (NYSE:TSN) shot up after a BB&T analyst said the two giant U.S. meat producers could benefit from increased exports to Japan and China. BB&T raised Smithfield and Tyson to a buy from a hold.
U.S. pork and beef exports to Asia had already been strong. After the upgrade, Tyson advanced 5 percent and Smithfield gained almost 9 percent in two days.
Wheat prices have also been rising sharply, up 56 percent over the past year. Drought in Russia and bad weather in Canada and the U.S. have also been blamed for tight supplies. But Chinese demand is key.
Wheat futures enjoyed the biggest advance in a week due to unexpected demand from China, according to Bloomberg. China bought 116,000 metric tons from the U.S. in the week ended March 17, the most for any week since July 2005.
As tight grain supply becomes a global phenomenon, investors should consider the possibility of continued rises among fertilizer suppliers, including Potash (POT), Mosaic (NYSE:MOS) and Agrium (AGU). Seed companies like Monsanto (NYSE:MON) may also feel the impact.
John Deere (NYSE:DE) has been rising steadily with increasing global food demand. This trend may well be sustainable as Asian consumption hits new highs.
Commodity plays and commodity ETFs are complex trades, best left to experts.
As in any gold rush, consider who usually makes the money. Often it is not the prospector. It is the suppliers of picks and shovels who makes the biggest profits. That's where I'm investing.
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