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Feeding Frenzy: China Backs Down On Grain Self-Sufficiency

|Includes: Archer Daniels Midland Co. (ADM), BG

For the last 60 years, China - a country devastated by famine in the 1940's and 1950's - promoted a policy of grain self-sufficiency. This policy appears to be changing.

Ending its long pledge to be self sufficient, China's State Council set domestic grain targets lower than its consumption. The State Council's guidelines called for grain production to stabilize at 550 million tons by the year 2020. This figure is below last year's harvest of 602 million tons. This marks a pretty important change in policy and it appears that reality is setting in; China urbanizes 18-20 million people per year and the country cannot feed them with its limited arable land and water. The policy guidelines further define what China should focus on - labor intensive crops including certain fruits and vegetables, and what it should not - land intensive row crops such as grains.

Perhaps equally as important is the growing emphasis on food safety. In a country racked by food scandals over the past several years, ranging from fox meat sold as lamb, to thousands of dead pigs found floating in Shanghai's Huangpu River, Chinese consumers are demanding higher accountability from both food companies and regulators.

Investors should note that the policy shift could have major ramifications for land rich farming countries such as the US, Brazil and Ukraine. If China becomes an increasingly important importer of agricultural soft commodities, why shouldn't Chinese firms take equity stakes in the commodity producers themselves? Last year a Chinese PE-backed firm - Shuanghui - acquired Smithfield Ham in a US$4.7 billion buyout. Could we see Chinese firms buying positions in Archer Danield Midland (NYSE: ADM) or Brazil's Bunge (NYSE: BG)?

Or perhaps the world might witness a more interesting scenario. Could China follow in South Korea's footsteps? In 2008, a Korean firm - Daiwoo - struck a deal to lease 3 million hectares in the African country of Madagascar; 50% of the country's arable land. The deal sparked protests throughout the country and was largely responsible for a coup d'etat in which over 100 people died and that removed resident Ravalomanana. The new administration in Madagascar quickly nullified the Korean land deal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.