China not cause of U.S. corn price rise

It’s argued that Chinese corn purchases, based on China’s domestic growth, are the cause of rising U.S. corn prices. I would like to offer reasons why that argument is unrealistic.

First, prices of all commodities -- along with stocks, bonds, metals, oil, and all other assets traded on financial exchanges -- are being driven by an increase in the quantity of money circulating on those exchanges. Corn prices have risen (and fallen, even as Chinese purchases were increasing) in parallel with these other markets. ]

Second, China doesn’t need corn. Its per capita production is rising each year, adequately meeting domestic consumption; its imports are in excess of its consumption. It was a net exporter of corn until 2009.

China’s domestic consumption has increased an annual average of 3.8 percent over the last decade (vs. our 3.3 percent) compared to an annual average of 12.6 percent increase in corn prices. The Chinese don’t suddenly need 12 percent more food -- they simply have more money in their pockets to spend on food.

Third, 15.2 percent of U.S. corn production is exported, and that percentage has fallen, not risen. China buys just 2.4 percent of U.S. corn exports (.004 of a percent of total production).

Japan buys 29.6 percent, and the top six purchasers above China buy 74 percent of corn exports. China is a small importer. While there is a 70 percent correlation between the direction of U.S. corn exports and U.S. corn prices, there is no correlation between China’s share of U.S. exports and the price of corn in the U.S.

Fourth, mathematically speaking, for China’s corn purchases over the relevant period of 2006-2011 to raise the price of corn from $2.40 in 2006 to even $4 (less than today’s price), China would had to have spent $24 billion; instead, it spent only 3.1 percent of that amount.

Fifth, people confuse monetary and real demand. Real demand consists of exchanging what one has produced for what one desires to purchase with that production. Thus, real demand is created by supply.

Increased supply makes prices fall, not rise. Prices rise while supply increases only when more money is spent (i.e., monetary demand) to purchase that increased supply.

Corn prices -- and all prices -- are rising due to increased money supply; institutional investors borrow newly created money and purchase commodities for investment purposes, thus bidding up prices to compete with other buyers, including the Chinese (and ethanol producers), who must purchase dollars for U.S. corn purchases.
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Kel Kelly is GROWMARK’s manager of economic and market research. His e-mail address is kkelly@growmark.com.