Hushed Data Shows China's Rapid Demand for Agriculture

DATA WATCH: Reputable organizations in the US and China provided expectations backed by secretive data that suggest China's shift in trade strategy. During the country's expansion, much focus is placed on industrial demand. Although this sector of trade remains strong, much of China's demand will consist of agriculture.

China's January PMI readings dropped to 52.9, below forecasts of a moderate decline of 53.9, signaling a slight drawback in manufacturing. However, PMI numbers were kept within a tight 51-55 range throughout 2010. Industrial orders are expected to remain in this range because of a domestic pullback as the Chinese government controls industrial expansion. Meanwhile, the strategy is to leverage inflation and fuel the agriculture markets even more.

Fifty years of history show sufficient supply  of corn to meet domestic demand in China. As time passes, imports tend to increase. According to the Financial Times, from 1978-79, China imported 3m tonnes of corn. From 1994-95, imports increased to 4.3m tonnes. The US Grain Council released data from unnamed sources that show China's shortage of 10m-15m tonnes of corn. Usually, the Chinese government keeps 30% of corn in stock, but sources say that that the government will only demand 5% in corn holdings. This means that China will need to tap the trade market for 9m tonnes of corn.

The strategy will surely increase the world's dependency on Chinese demand. As inflation increases their purchasing power, which will then fuel domestic demand, China will continue to be a strong trade participant. The game shift to agriculture is expected to prevent future economic shocks of inflation, which many investors worry about. Increasing imports of agriculture will increase supply, and thus decrease food prices in China. The current large demand for food in all developing countries places heavy pressure on production - but supply constraints brought on by weather, raise prices. China realizes this, but has a plan to make it work.

Remember, the 5% corn stock is just an estimate. There is probably a bigger story behind the statistics. China is known for keeping extra supplies by offering subsidies to hoarders. This extra stock kept within China will offer more opportunity for price control as food imports add to the increased supply of agriculture.

China's demand for corn is a great opportunity for the US. Corn is to America what oil to is to Saudi Arabia. The US will need to ramp up production to fulfill both domestic and Chinese demand. The US is a major consumer of corn, being a prime ingredient in almost all foods. An increase in production will be a strain, but subsidies will most likely help.

Some analysts worry that the currency appreciation of the US Dollar and Aussie will affect trade with China. But, the Yuan is also rising, increasing China's purchasing power. Australia and the US have farm subsidies to help offset this risk.

Expectations of wheat imports are up because of the worst drought in 60 years in the Shandong region of China. According to China National Radio, unnamed sources provided data that suggest China's imports of wheat to exceed 114.5m tonnes. Dantes Outlook reported our findings of a recent order from China to the tune of 150kt in feed wheat from Australia - 3 cargos of shipment from March-April. The demand is intense, and the opportunities for investors are clear.

All eyes are on Australia, with stronger growth forecasts. The RBA stated that economic activity is expected to expand at an annual pace of 4.25%. The increase in industrial and agricultural production will fuel employment, which will then equate to stronger household spending. Traders are busy factoring in their expectations for an RBA rate hike sometime this year - chances are after the natural disaster damages ease.

AUD/USD Daily Chart. Clear point of entry for a long term trade considering the due diligence of this post.