The big news that has avoided the media attention it deserves. Central document number one is the first policy document of the year, each year. For the eighth consecutive year it has focused on agriculture. As China has developed since 1978, changing and adapting agriculture has been the key and within that to transforming it from mass peasant production in communes, to small plots for the peasants, and now to major agricultural organisations across the nation. Moving 1 billion peasants off the land was a prerequisite to transforming Chinese agriculture.
This required building jobs in the industrial sectors – urbanisation – and then in the service sector. China’s agricultural land is very modest in relation to its population and to its total geographic mass. Early on in 1978 the party identified the forms of agricultural production that would be needed and for what products to be secure and feed the majority of its populations needs. This is leading to the global pattern of peasants moving to the towns and cities – urbanisation – and the remaining peasantry becoming an agricultural working class instead of being peasants – ie working for companies and not, in the main, working for themselves.
This huge plan has been developing over the last 36 years. It leaves behind the political ideology of communes, and enables cooperatives, but mainly on a large scale, and agricultural production, distribution and packaging companies to develop, which, ultimately, will become global in their footprint.
This emergence of national major agricultural companies, like their retailers and car companies involves massive development work to prepare the conditions necessary. In retail and cars it is about absorbing global technologies and systems, in agriculture it is all that and the reorganisation of the land and the people who live on it, without causing distress and reaction.
The key to China’s economic development is to produce an agricultural sector which, in the main, provides for its people, but also draws on global supply sources. Whilst buying product from global supplies is part of their plan, so as in oil, it is to acquire ownership of supplies overseas and to develop key national relationships to consolidate supplies – Brazil and Argentine are just two.
Now we are beginning to see the new agricultural China emerging with national champions who will go overseas.
Let us take cotton as an example. China has been producing about 7 million tons on the same large acreage for many years. It is now on a journey to reduce that to 4 million tons. Most of it will come from Xinjiang Province in secure areas. China has increased, sharply, its supply of polyester to fill the gap, and exported textile production to cotton growing areas in Asia and Africa and South America. That has involved the movement of Chinese textile companies and creates growth in those countries. China’s need for cotton is reduced by about 3 million tons by exporting the exporting production. So China reduces its domestic demand from 10 million tons to about 7 million tons, but the 3 million tons deficit still exists, although reduced by new polyester production, but increased by new domestic demand from a population with increasing spends.
So China has been busy in different parts of the world acquiring cotton production and distribution, as well as sourcing cotton on global markets. But, in the long run. China will, in the main, source the cotton from its owned sources.
For now, China is bridging the reduction of domestic cotton production, by using reserves. China has massive cotton reserves, and the world thought China had lost control. But they just built up inventories to enable them to go through a 3-5 year transition of reducing production without being at risk from lack of supply – cotton lasts many years in warehouses.
At the same time large areas of land across China have been freed to food production, and the farmers encouraged to switch through careful use of subsidies to encourage them to food, and away from cotton. If you travel across Eastern China by train you will see the cotton fields have gone. But the people still have adequate supplies of good quality clothes.
The world price of cotton has gyrated from 50cents to $1.50 and back to 60 cents during this transition over the last three years, mainly due to hedge funds trying to exploit shortages which were not there. China’s clever adherence to its long term policy meant the state has subsidised the transitional stocks at a high cost, but China has, as in many other commodities, organised itself to be in a leading position as you would expect from a nation that consumes 25pc of world production.
In copper recently we saw Chinese “hedge funds” assist the return of copper prices to more realistic lower prices. They will appear in agricultural commodities in the future.We will, increasingly, see China as a force for stable and reasonable commodity prices, which will create challenges for Western agricultural companies who have been used to distorting world supply and demand with their powerful deep pockets. Now China will emerge as the price setter, but it will not be imperial and try to run the world. Just secure its needs and help manage realistic pricing, avoid speculative spikes, and develop productivity to meet rising world demand.
Why will China do that and not try to build an Empire? Because it has seen what has happened to other nations who have taken and not returned value. China’s policy of Common Prosperity is based on a global citizenship which shares the benefits. As China grows, it develops through the “belt and roads” policies, so it will help build new supply bases and lines to China, bringing prosperity to the countries near China’s borders.
China’s agricultural policies can bring demand and production to the West, to the U.S.A. and Europe if politically they do not try to extract concessions from China.
It is a time of big change domestically and globally as China transforms its agricultural production domestically for the last time. This will take 5-10 years, but the bulk of it will be in place by 2021 their first target year established in 1978.
At the same time Chinese demand will transform global supplies.
It is a boom time for China but Western agricultural companies and their suppliers will begin to feel the wind of change. Not only in the markets but also the technologies. They may try to organise resistance to this new force, but they are dealing with a process already 36 years old, and prepared for reactions.
It is not smooth sailing. China has to deal with many human issues and deal with them well. But that is why the bringing down of provincial corruption and excessive power, and replacing it by regions is so critical to Chinese agricultural transformation.
The key indicator of change in Chinese agriculture is to be found in the new Northern region based around Beijing Hebei and Tianjin – actually it is already 10 years old. This region is to agriculture what the Shanghai Free Trade Zone is to the service industries. It is the centre of experimentation and roll out of long-developed national policies.
China will produce a modern agricultural economy with modern state of the art technologies, and the world of commodites wil be surprised by this, but it has been 36 years in preparation.
Happy Chinese New Year