Food for Thought

By Debra Tan 10 November, 2011

Chicken or Corn? Beef v iPads? Will there be price hikes all round?

It has been quite a flurry of activity in the lead up to the point when China Water Risk went live at the end of October … so just taking a moment here to put down three interesting questions/points from the talks, investor conferences and panel discussions that could change the way we behave, consume, invest or do business in the future…

Chicken or Corn?

It all started with the CEO of a listed Brazilian farming concern asking me if China was to import more chicken or corn from Brazil given the water resource in China’s top four farming regions … after all, “chickens are just corn, feathers and water”.

Difficult question with no correct answer but if I were to hazard a guess, it would be chicken. Corn is a grain staple and of paramount importance to food security – we could technically do without chicken.

Which then brought to mind a research report (issued by a respected investment bank) back in August that stated whilst “Japan buys from everywhere in the world, no single country currently dominates China’s imports”. They were talking about current food trade routes and how this will change in the future as China becomes more affluent. Now, the Secretary of the Intergovernmental Group on Grains Trade and Markets Division of the FAO was also present and a discussion on tight corn stocks and pricing ensued. I am not going into that here but let me leave you with this…

On the topic of grain staples, according to the FAO, China’s the #1 producer of rice and wheat. China produces 65% more wheat than the USA and as the #2 grower of maize enjoys 20% of the global market share.

Given that the Top 4 Farmers are water scarce and grow more wheat than the US, would the price of wheat be trending upward over the long run? No wonder a top global leather shoe brand is worried about the production/price of wheat, which then goes to feed the cow that provides the leather. Maybe I should go long on Brazilian chicken … or beef, which brings me on to …

Beef v iPads?

Beef is one of the most water intensive meats. So China could definitely “save” more water by importing beef instead of chicken. Just in case you don’t think China’s big in beef, think again, China produces more cattlemeat than Australia and Argentina!

This was a question that I threw out at a panel discussion I moderated. Too random?

Not really, the graphic below says it all … 5 regions in the Dry 11 are both the Top 10 agri and the Top 10 industrial producers of China.

With 3 of the top 5 producers of Industrial Output and 4 of the top 5 producers of Agricultural Output amongst the Dry 11, competition for water resources is inevitable – who is the priority? The people, food or manufacturing products?

Again, no one answer here. However, all three panelists agreed that industrial use of water and electricity consumption is disproportionately high compared to developed countries. This is primarily because China’s population is not consuming that much electricity or water on a per capita basis. In short, competition for water in these regions will be greater going forward as they become more affluent, leaving provincial governments with no choice but to consider changes in their mix of industries to maintain social stability and economic growth.

Now, it is not often a water policy adviser to Chinese ministries, a conglomerate and a quantifier of environmental impact are in agreement. They must be on to something… apparently the conclusion is that the price of water is way too low. Since water is the backbone of the economy, is this the end of “cheap” Made in China goods?

Water Tariff Hikes Will Not Lower Demand

According to one of the large full water services provider in China, the demand of water is inelastic. History has shown that with a significant tariff hike, there may be a short term fall in demand for water but the overall long term demand trend is upwards.

So why raise tariffs at all? This hike is not to reign in demand but is necessary to make certain water technologies viable, to make the desalinated water more attractive and to encourage a more effective use of water in industrial operations and irrigation. Regardless of its non-impact on demand for water, most experts agree that tariffs will still be on the rise and this rise will be significant. In fact, the National Development and Reform Commission (NDRC) is expected to submit a plan to the State Council before the end of this year to review water tariff reform. According to China water experts, all three component parts of the tariff – raw water resources fee, tap water supply tariff and wastewater treatment tariff are all expected to rise.

Maybe it’s not about whether a price hike will lower demand for water but that it will stop the demand for water from rising at a faster rate. It’s all about managing the rate of growth of demand for water … the Ministry of Water Resources seems to have the same idea. It has set a cap on water consumption at 670 billion m³ by 2020 and they are setting aside RMB4 trillion for water infrastructure/projects over the next 10 years so that supply of water can meet the rising demand.

Of course a significant price hike of a basic raw material like water would erode margins across industries. Questions posed to more efficient users of water within their industry on price hikes were thus welcomed with relish. No surprises there then … but what of smaller companies who cannot gather economies of scale to make such investment ahead of the rise? Is it game over for the small guys – farmers and manufacturers alike?

I realize that I have raised more questions than I have answered but I guess that’s why I this piece is called “Food for Thought”. If you would like to expand, comment or disagree, please email us at [email protected]