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Home Publications Blogs Beat the Press Those Damn Chinese Are Going to Buy Our Wheat

Those Damn Chinese Are Going to Buy Our Wheat

Sunday, 13 March 2011 08:29

The Post really outdid itself in running confused pieces when it ran a column by Lester Brown in its Outlook section warning us that China will start buying our grain in massive quantities. It's common for a column to get 2 or 3 things wrong, but just about every single assertion in this column is mistaken.

To start with, we are supposed to be concerned about China's ability to buy our food based on its holdings of $900 billion in Treasury bonds. Actually, as a country, China's ability to buy our wheat depends on its holding of any U.S. asset. It would have just as much ability to buy U.S. wheat if it did not have a single dollar in Treasury bonds, but instead held $900 billion worth of the stock and bonds of private corporations. (Most estimates put China's holdings of U.S. assets considerably higher than this.)

This distinction is important because U.S. indebtedness to China is a function of the trade deficit not the budget deficit. Many people deliberately promote this confusion in order to use xenophobic fears to promote their deficit reduction agendas. In reality, those who are concerned about indebtedness to China and other countries should want to see the value of the dollar decline. If we eliminated the budget deficit completely, and somehow maintained full employment, we would be borrowing just as much money from China and other countries each year, if we did not lower the value of the dollar. Conversely, if we lowered the value of the dollar to the point where our trade was balanced, the country would not be borrowing a penny from China or anyone else, on net, even if the federal government was still running large deficits.

This logic is also important in the threat that we would supposedly face if we tried to restrict grain sales to China. Brown tells us that China might then boycott our Treasury auctions.

Let's carry this one through for a moment. We have been pushing China to raise the value of its currency relative to the dollar. The way that they keep the value of their currency down is by using the dollars they earn from their trade surplus to buy Treasury bonds instead of just dumping them on international currency markets and allowing the dollar to fall. Of course if the dollar fell, then our trade deficit with China and other countries would shrink. 

So, China will threaten to do exactly what we have been asking them to do -- they will stop propping up the value of the dollar against the yuan. This is supposed to have us scared.

Finally, the real bad news in the picture -- China pushing up the price of wheat -- actually is not scary for people in the United States at all. The U.S. currently produces about 2 billion bushels of wheat a year, roughly half of which is exported. Prices have fluctuated a great deal in recent months, but let's start with a price of $10 a bushel, the higher end of the recent range.

At this price, we spend roughly $10 billion a year on the wheat we consume domestically and get $10 billion a year from the wheat we export. Suppose the buying by the Chinese doubled the price to $20 a bushel. This means that the wheat we consume would cost us another $10 billion a year. Meanwhile the wheat we sell overseas would allow us to buy twice as many imports as it had previously. The $10 billion rise in food prices would come to a bit more than $30 per person per year -- less than 10 cents a day. Are you scared yet?

Even if we said that the price of wheat tripled because of the Chinese and then doubled this impact because of China's buying up of corn, soy beans and other crops, we still only get 40 cents per person per day. In short, higher food prices are not going to be bad news for people in the United States.

Where this column misses the boat is that higher food prices will be a problem for the world's poor who must subsist on just 1-2 dollars a day. Hundreds of millions of people in Sub-Saharan Africa and other poor regions of the world will face serious consequences if world food prices rise substantially. Remarkably, these people did not find their way into this column.

Comments (7)Add Comment
written by skeptonomist, March 13, 2011 10:09
Brown's piece is really about the changes that will occur not only in China but the US when China runs up against the limit to its ability to produce food. But actually this has always been a problem in China and Chinese authorities are very aware of it. Recently it has been less severe because of mechanisation and other improvements in farming, but especially because the birth rate has been deliberately suppressed by the Chinese government. The population growth rate of China is now half that of the US. The need to build up a reservoir of foreign exchange in case of crop failure may well have been a factor in the currency strategy of China.

The severe inflation spike which peaked in 1975 was touched off by a wheat crop failure in the Soviet Union (which actually continues to have more effect on world grain prices than China), followed by the Arab oil boycott. The real damage in this spike and the later one of 1980 was probably caused by the Fed and other central banks, which went berserk and raised interest rates higher than ever before. Grain shortage and oil shortage may be impending again. What will the Fed do this time?
What is Earth Policy Institute
written by bakho, March 13, 2011 11:15
Who are these people? Who appointed them? Who funds them? Why is the WaPo publishing them? Why do they have the same acronym, EPI?

Always consider the source.
winners / losers
written by lark, March 13, 2011 1:20
Of course if consumers pay twice as much for wheat they will not get any help whatsoever by the fact that exporters make twice as much from exporting wheat. Economists like to wave wands and promise that the winners will compensate the losers but be real: that never happens.
Since When Did the Chinese Start Consuming So Much Wheat?
written by Paul, March 13, 2011 2:12
I have been to many Chinese restaurants and I have never been served anything made out of wheat.

Shouldn't Lester have tried to scare us about a rice shortage? Oh right, we don't consume much rice so we would not care.
written by dickeylee, March 13, 2011 7:58
Hey Paul, ever have a Budweiser?
I only drink Tsingtao beer at Chinese restaurants
written by Paul, March 13, 2011 9:40
It contains rice, in addition to the German purity recipe of water, barley and hops, but no wheat at all. Chinese don't use wheat for anything.
written by cwm, March 14, 2011 1:19
I'm so glad Dean is still reading the Washington Post so the rest of us don't have to. Lester Brown and his Earth Policy Institute were serious voices in policy circles 20 or so years ago before Brown went off his rocker over fantasies of "who will feed China." He helped the Farm Bureau sell PNTR and China's WTO membership in 2000 and 2001 through these wild claims that China cannot feed itself and will buy all the wheat and corn that US agribusiness can produce. This ignored reports at the from USDA officials in our Embassy in China who reported that China's grain silos were overflowing and that the biggest problem for their (then) 900 million farmers was getting the stuff to market -- which was why ADM, Cargill, etc. were really so eager for "market access." Over the past decade China consistently ran a global surplus in food including large surplus in corn (until last year) and only a tiny deficit in wheat (with surplus about half the time.) Soybeans account for China's major agriculture shortfall -- and were the biggest US export to China again last year. Like Texas, California, Russia and others, China suffered from too little rain last year so the Post (according to Dean) lets him scream fire again. Don't bet on it.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.