Does yet another large reduction in world cereal stocks in 2004 point to a “real” tightening of world supplies?
China has been the main contributing factor to the decline in world cereal stocks. Of the overall decline of 288 million tonnes since 1999, China alone accounted for nearly 80 percent. These substantive reductions in cereal stocks have given rise to important questions about China and the world grain economy. Most importantly,for how long can these reductions be sustained, when will they come to an end and what consequences will a continuation of past developments have on both China’s and international cereal markets? It has also given rise to the question of how accurately current information reflects the true market condition.
The earlier FAO revision of China’s stocks helped to explain how the combination of declines in China’s production along with rising exports could be accommodated; it also provided less ground to be alarmist about shrinking world supplies driving up international prices1/. The rise in some international cereal prices since 2002 has been mostly in reaction to droughts in major exporting countries. Instead, large exports from China may have kept world prices under downward pressure, especially for maize. In fact, production reductions in China appear to have had very little impact even on China’s own domestic market, evidenced by generally stable domestic price movements over the past few years.
The question now is how long can this situation persist? FAO is again putting its cereal balance for China under scrutiny, this time looking into cereal consumption levels (food, feed and industrial use). While it is too early to speculate on the findings, it is important to consider at least two very contrasting possibilities: the historical consumption estimates could turn out to be overstated, thus stocks are underestimated – and hence may need to be raised again; or historical consumption estimates are close to existing estimates, in which case FAO’s current stock figures for China are probably not too far from reality.
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The first possibility is definitely more reassuring for the global cereal market as it would imply that China could continue, perhaps for more years to come, to reduce its cereal stocks without any significant repercussions for world markets. However, should the latter case prove closer to reality, more serious consequences are likely, not only for China but also for the world’s most vulnerable, import-dependent countries. If stocks in China have indeed dwindled as rapidly as are currently estimated, China may soon emerge as a significant importer, creating upward pressure on world prices and the import bills of import-dependent, developing countries. This may happen at any time; thus, the sooner the international community learns about the real situation in China better it can prepare.
1. The issue of deliberate policies to downsize cereal inventories in China was dealt with in previous Food Outlook reports. However, it is important to draw attention to FAO’s revision of China’s historical supply and demand balances, first reported in February 2001. The revision resulted in a ten-fold increase in FAO’s cereal stock estimate for China and that, in turn, gave way to a two-fold rise in FAO’s previous estimates of world cereal stock levels.