In China, Factories vs. Farms

Across the road from Zhao Yuanyi's wheat field in China's Shandong province, Beijing-based Chonche Group is expanding a rail car factory on what used to be 227 hectares of farmland. Nearby, Geely Automobile Holdings makes sedans on an 87-hectare (215-acre) site that four years ago was covered by crops. A five-minute drive away, farmland cedes to dozens of gray-tiled villas for wealthy residents of the city of Jinan, 220 miles south of Beijing. "This year, maybe next, they'll develop my field," the 63-year-old Zhao says, gazing at the land he has tended all his life. If that happens, Zhao would receive modest compensation. Without the farm, he says, "I don't know what I'll do."

The factories sprawling from Jinan, 15 miles to the west, put Zhao on the front line of a clash between a policy of food self-sufficiency and the industrial growth that has made China the world's No. 2 economy. Grain production is "on a shaky base," says Qian Keming, head of the Agriculture Ministry's market and economic information division. "With rising living standards and more consumption of meat, eggs, and dairy, grain consumption is inevitably on the rise."

Growing cities, expanding deserts from years of overgrazing, and a reforestation effort have helped shrink China's farmland by 8.3 million hectares in the past 12 years, the government says. With most factories rising in temperate, grain-growing coastal regions, the drier north must take up the slack. "Food production is increasingly focused in northern areas that have water shortages," Chen Xiwen, top agricultural adviser to Premier Wen Jiabao, wrote in Caijing magazine in December. That's "very worrying for food security."

With less land under cultivation, Chinese farmers are unable to boost production of corn and wheat fast enough to cool surging domestic prices, so the country is importing more. "China's increased demand for agricultural commodities will mean an increase in prices for the entire world," says David Stroud, chief executive officer of New York hedge fund TS Capital Partners.

China, the world's biggest grain producer, was a net exporter of soybeans until 1995. This year it's forecast to import 57 million tons, or almost 60 percent of global trade in the oilseed used in animal feed and tofu, according to data from the U.S. Agriculture Dept. China's food imports as a percentage of domestic consumption is "tiny"—about 3 percent, says Frederic Neumann, a Hong Kong-based economist for HSBC Holdings (HBC). "If you doubled that to 6 percent, that implies enormous purchases on the world market," he says. "The guy with the most financial firepower is going to drive up the price."

Making up for a 5 percent shortfall in China's grain harvest could consume 20 percent of current global grain exports, says Abah Ofon, a Singapore-based commodities analyst at Standard Chartered Bank. In February wheat on the Chicago Commodities Exchange reached its highest level since 2008 as traders fretted that drought was damaging China's crop, raising the risk the country would drain the world market. "As China continues to grow, demand and supply will struggle to keep up," Ofon says. "For China, the world's biggest consumer and producer, a small deficit can result in huge demand for imports."

The bottom line: As its farmland is plowed under to make way for factories, China is importing more food—including 57 million tons of soybeans.

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