The Biggest Urbanization Program Ever and Food Prices

Source: NYT

According to the New York Times (link here), China is in the midst of a program to move 250 million people from the countryside to cities, joining the 450 million that already live in Chinese cities. China's goal is to be 70 percent urban, and therefore modernized by 2025. A quarter of a billion people will be watching their ancestral villages return to the earth and are pushed into modernity "replacing small rural homes with high-rises, paving over vast swaths of farmland and drastically altering the lives of rural dwellers"

(China’s Great Uprooting: Moving 250 Million Into Cities, June 15, 2013 New York Times)

The building frenzy is on display in places like Liaocheng, which grew up as an entrepôt for local wheat farmers in the North China Plain. It is now ringed by scores of 20-story towers housing now-landless farmers who have been thrust into city life. Many are giddy at their new lives — they received the apartments free, plus tens of thousands of dollars for their land — but others are uncertain about what they will do when the money runs out.

Aggressive state spending is planned on new roads, hospitals, schools, community centers — which could cost upward of $600 billion a year, according to economists’ estimates. In addition, vast sums will be needed to pay for the education, health care and pensions of the ex-farmers.

While the economic fortunes of many have improved in the mass move to cities, unemployment and other social woes have also followed the enormous dislocation. Some young people feel lucky to have jobs that pay survival wages of about $150 a month; others wile away their days in pool halls and video-game arcades (ibid).

Economically, city dwellers create demand for goods and services and country-dwellers do not.

The primary motivation for the urbanization push is to change China’s economic structure, with growth based on domestic demand for products instead of relying so much on export. In theory, new urbanites mean vast new opportunities for construction companies, public transportation, utilities and appliance makers, and a break from the cycle of farmers consuming only what they produce. “If half of China’s population starts consuming, growth is inevitable,” said Li Xiangyang, vice director of the Institute of World Economics and Politics, part of a government research institute. “Right now they are living in rural areas where they do not consume” (ibid.)

In addition to moving people from rural to urban areas, the Chinese government is trying to get rid of unsightly hamlets and make way for large industrial projects such as dams. My uncle, fresh from a visit to China, writes: 

Mike,

Here are a couple of pictures of Chongqing showing the poorer area that will soon be demolished and replaced by modern high rise apartments. The other [third picture] shows a modern 'village' on the Yangtze River that replaced a village that now is under the river since the dam was completed. 1.5 million people were relocated when they built the dam.

Will this great experiment work? Will China succeed in creating a massive modern economy, dwarfing the demand for goods and services enjoyed in the United States, or will it create a large underclass of unskilled, slum dwellers? I don't know. I will guess, however, that this urbanization program will create greater demand for food. City dwellers tend to eat more animal and processed products, creating more demand for grains, sugars, and other basic foodstuffs. Farmers, rapidly decreasing in number, eat closer to the base of the food chain. I also believe that China's gamble on urbanization will decrease the supply of food. The government is paving over farmland or giving it to local governments and agribusiness. Meanwhile, brilliant investor Jim Rogers writes:

Until prices  reach a point where growing food is profitable, the world's farmers, who are currently aging and dying, are not going to be replaced. Prices must rise, and they will. In recent years, the world has been consuming more food than it has produced. Those inventories that were so high in the 1980s are now historically low, somewhere near 14 percent of consumption. The world is facing drastic shortages. Food prices are on the way up (Rogers, Jim, Street Smarts: Adventures on the Road and in the Markets, Crown Publishing, 2013, P.28).

Look for food prices to increase, whether inflation appears or not. (See my previous blog on this issue here.)