CHICAGO (DTN) -- The relationship between U.S. farm exports and the state of China's economy means American agriculture's risks accumulate along with risks that could slow China's growth.

Global economics highlighted the opening general sessions Wednesday at the DTN/The Progressive Farmer Ag Summit in downtown Chicago. The theme of this year's Ag Summit is "Rebalancing Risk and Reward." A year of strong commodity prices and farm incomes suggests a balance that tipped toward the reward side of the scale, a fact reflected in summit attendance of nearly 650 registrants.

With China advancing to become the top customer for U.S. farm exports, there are growing concerns about what could cause the Chinese economy to stumble.

David Nelson, a global strategist for Rabobank International, sees China not only as a major importer of pork and soybeans, but also as a significant buyer of corn in coming years, purchasing anywhere from 20 million metric tons to 25 mmt. China has a problem as its corn supply isn't enough to sustain its livestock industry, but there's a lack of acknowledgement of that problem on the part of the Chinese government.

"To me, China's corn situation doesn't add up," Nelson said.

Chinese soybean and meal imports are indicators of corn usage. With a ratio of two bushels of corn used for every ton of soy meal, China should be feeding about 90 mmt of corn, but the country consistently shows usage of about 30 mmt. The implication is that China isn't being forthright about its corn production and needs for its domestic livestock industry. There is no sign of China moving toward more transparency on agricultural production, even though the country will likely be buying more corn.

"It's totally a state secret in China what their grain situation is going to be and I don't see that changing," Nelson said.

Other countries such as Russia are becoming bigger players in feeding the world, but Russia adds to volatility in the markets. The country had a major drought last year and then instituted export bans this year, making Russia unreliable as a supplier, Nelson said.

Nelson also highlighted expectations for tighter beef, pork and poultry supplies for consumers globally, partially because droughts in Texas and Mexico have led to significant cattle culling. In addition, U.S. poultry producers have suffered through one of their worst years in recent history. There are significant market signals to boost production, but little movement among major meat-producing nations. U.S. consumers could see meat prices rising 10% over the next year.

"The U.S. this next year is going to have an unprecedented tight supply in terms of protein," Nelson said.

Nicholas Lardy, a leading expert on China and a senior fellow at the Peterson Institute for International Economics, explained that China faces a growing housing problem not unlike the scenario that led to the U.S. economic collapse in 2008.

"Property has become the biggest driver of economic growth in China over the last five or six years," Lardy said.

Along with the housing boom, banks also have increased their own exposure to real estate in China. Borrowing for housing has soared with a higher percentage of Chinese residents taking on debt for homes, mainly apartments.

"At some point, there will be a limit on the degree in which households want to concentrate their wealth in residential housing," Lardy said.

Thus the financial and construction sector have heavy investments in housing. Local governments and infrastructure spending would also be adversely affected by a housing bubble because most local-government revenues come from long-term leases of land for development. "It's not just property that is the big driver, but government income from leasing land would decline as well," Lardy said.

An economic correction that slows residential purchases would dramatically slow China's growth, partially because there also is a rise in real-estate speculation by developers.

Another problem with sustaining China's economic status is that growth of consumption lags behind gross domestic product by 25%, largely because the Chinese are aggressive savers, banking as much as 40% of their after-tax income. Furthermore, interest rates are lower in recent years, so that has caused the Chinese to save more. Lardy noted one reason why the Chinese save such a high percentage of their income is that they must protect themselves against risks such as medical expenses. Hospitals in the country often won't even take a patient without knowing they can pay upfront.

When asked about tensions in U.S.-China relations over currency manipulation, intellectual property and trade imbalance, Lardy noted President Barack Obama has met more with Chinese officials than perhaps any other president, certainly for one term in office. Chinese holding of U.S. debt requires the two countries to ensure some mutual success.

"We have an inter-dependent relationship that is very deep, so there is an incentive to make it work," he said.

Chris Clayton can be reached at chris.clayton@telventdtn.com

(CZ/AG)

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