Relationship between China economy and agriculture price
1 May, 2020
Category: Basic Materials
Tags: Portfolio
How a slowing down China's economy can drag down agriculture prices.
On 21 Apr 2020, China announced its Q1 2020 GDP growth rate.
During this period, China's GDP contracts 6.8%, the first contraction since 1992,
when the country began releasing such figures.
On the same day, investors saw oil price plunge, fearing a
further decrease in demand for fossil fuel from the world second-largest
economy. Oil prices have been the headlines of major financial media, resulting
in most investors missing out on the fact that most agriculture prices have started
another round of falling since that day.
Hereby we explain why a slowdown in China economy serves as
a pulling factor for agriculture products price.
China, a fast-growing economy, relies on foreign resources
to fuel its economic growth. Although China is also one of the major
oil-producing countries, its production is insufficient to cater to the demand
for its domestic consumption. In 2018, China had overtaken the United States as
the worlds largest crude oil importer. Besides energy, China is also the
largest importer of industrial metals. In 2019, China has accounted for a 65%
share of the total global iron ore imports based on value.
This situation has made the countries that export energy
and metals to China highly reliant on China's economic growth rate. Those
countries include Russia, Brazil, Australia, and Canada. When China's economy
decelerates, the prices of energy and metals fall. As a result, the fall in
export value for these commodities creates lesser USD income for the countries
as mentioned, resulting in a fall in their local currency compared towards USD.
Coincidently, these countries are the world's major
agriculture product producers. When the local currency falls, the cost of
producing these agricultural products becomes lower from the US Dollar
perspective. Hence, the fall in agriculture prices.