Chinese demand for food commodities may be playing a bigger role than analysts believe in the rally in grain prices, and betrays a shortfall which may lead to "permanently higher prices", one of Europe's most respected economists has said.
While Russia's drought-hit harvest created a spark for the surge in grain markets, which has seen Chicago wheat prices stabilise 60% above late-June levels, China's dependence on agricultural imports may fuel long-term strength, Dylan Grice said.
Mr Grice, with Albert Edwards, forms one of the City's best-respected economic teams, at Societe Generale, the French bank which on Wednesday advised investors to sell down soft commodity positions, citing concerns over regulation.
However, Mr Grice's paper, which advised investors that shares in groups such as America's Archer Daniels Midland, Australia's Incitec Pivot, Europe's Syngenta and Singapore Golden Agri Resources "might be worth looking at", represents a longer-term view.
'Permanent structural shift'
He compared the rally in grain markets to the jump in oil prices in 1973 caused by an embargo by producers' cartel Opec, which worked so "spectacularly" because the US had by then run out of spare production capacity.
A similar embargo in 1967 had no impact, because the US at the time still had a surplus of its own supplies.
The" violence" of the 1970s' jump in oil prices, which have never recovered in real terms to levels before the embargo, and their "continued volatility was caused by a permanent structural shift", Mr Grice said.
"Real oil prices would have eventually risen anyway because underlying conditions reuired.
"A similar shift seems to be playing out in grain markets today."
Farms vs factories
Unlike 1972, when a poor Russian grain harvest also sent crop prices soaring, Chinese demand, stoked by its decision to turn from a farm-based to factory –based economy, could keep crop prices high.
"The logic of industrialisation in such a land and water constrained country implies scarce water and land be effectively imported via grain and livestock, while abundant labour is exported through manufactured products," Mr Grice said.
China, with 7% of the world's land but 22% of its population, wasn't "coming close" to raising its agricultural productivity in line with demand from its increasingly demanding consumers.
"The strain first started to show in the collapse of Chinese inventories in the early 2000s. Now, as China tries to rebuild them, it is showing up in China's surging import dependency.
"It seems reasonable to think that it will soon be showing up in price."