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obstacles to U.S. Businesses in china

Managing Government Relations

Despite a robust market economy, government intervention, like that above, is common. Some analysts and industry pundits occasionally criticize Chinese government market interventions. Price controls, they grouse, are an anathema to market economics. Grousing aside, business success requires understanding China's markedly contrasting view.

Laissez Faire Economics in America

The U.S. business view is that market economics prevails and determines business success -- except in select areas where safety (animal, plant and human) and security (both national and food) inevitably lead to government interventions. In short, government relations are an ancillary need to address those select areas of government involvement. While this is an oversimplification, a close look at U.S. companies' spending on government relations suggests it is not a core concern of business development efforts. Adam's Smith's invisible hand is not government involvement, but the rule of law and a common business culture, which insure the business norms of capitalism.

Capitalism with Chinese Characteristics

In contrast, China's freewheeling capitalism assumes government involvement in business development. Explanations range from a not-yet-developed rule of law, to traditional Confucianism underlying China's Communist doctrine, to the lack of a common monotheistic morality underpinning business practices. Practically, this turns the relationship between government relations and business development on its head.

U.S. practices are for government relations to be an ancillary effort engaged at a nexus between business development and safety or security needs requiring government involvement; conversely, Chinese practices are for government relations to be a key component of business development efforts. In other words, successful Chinese executives are constantly engaging relevant government authorities. Weekly, if not daily, lunch or dinner meetings provide the venue for identifying business opportunities, prophylactically mitigating business risk and addressing regulatory obstacles when they arise.

Government Relations in China

It is no wonder U.S. diplomats reflect their industries' view that business opportunities in China are stacked against them. This is not the U.S. business model: The differences are both cultural and regulated. But the complaint fails to consider that asking the Chinese to change the game is a bit like sitting down to a game of Texas hold'em and demanding to play baseball.

In fact, successful U.S., European and other foreign companies have demonstrated that while the table may be tilted, business opportunities abound. All of these companies, however, have understood the importance, and taken advantage of, the close relationship between government and business.

American businessmen often subscribe to the "take me to your leader" approach to government relations -- a top-down approach that does not fit the market. There is no fixed menu for government engagement, but usually takes place at multiple levels: national, provincial and sub-provincial.

(This article was originally published in the 22 August 2011 issue of Ag Perspectives as part of a WPI weekly feature called "China In-Country Analysis." Click here to find out more  about subscribing to Ag Perspectives.)

Facing Market Perils

Freely traded commodity markets always face a continually difficult array of unknowns that can influence price direction in often unpredictable ways.  If this were not true, markets would not exist because they would lose their utility.  Unpredictability of price movement is the single most important factor behind any successful futures market.  Nevertheless, anyone involved in markets is always trying to predict in advance those unpredictable price movements.  It is what we do.  

The final Harry Potter film, "The Deathly Hallows – Part 2" opened amid great fanfare.  We have not followed the adventures of Harry Potter.  But after reading a synopsis of the movie and the numerous perils faced by Harry Potter and his friends in the Deathly Hallows, it occurred to us that this story can be seen as a metaphor for the perils facing grain markets and those who trade them.

Quite often market watchers like ourselves complain about all of those necessary unknowns that prevent us from foreseeing the future.  Yet, it seems as though today's grain markets face a wider, more varied, more difficult array of challenges than we can ever remember. They are the market's Deathly Hallows.

  • First, U.S. and world supplies of grain and soybeans are quite small relative to demand and are getting smaller in 2011/12.  Perhaps we should exclude world soybeans since despite the U.S. situation, world soybean supplies appear comfortable.  We do note, however, that world soybean stocks are forecast to fall about 7 percent in 2011/12.
  • With world grain demand growing and world grain supplies falling, the need to produce big crops in 2011/12 is obvious.  In large part, markets will react to how well the need is met.
  • Weather is always a sensitive factor for grain markets.  Growing demand, tightening supplies and need for big crops guarantees that weather will dominate grain markets for some period of time during the growing season.  This "weather market" has already begun, but weather markets are as fickle as weather itself.
  • As is almost always the case, China is a wildcard for markets in 2011/12.  Its still booming economy suggests its appetite for raw materials will continue, and its ongoing struggle to cool down food prices suggests it will take steps to ensure ample availability of commodities needed to do that.  China is importing a large volume of corn for the 1st time in 16 years.  Is this an event or the beginning of a trend?  And as China goes, so goes world soybean demand.

(This article, including a complete list of the Market's "Deathly Hollows," was originally published in Ag Perspectives on 14 July 2011 as part of Bob Kohlmeyer's weekly analysis feature "Common Thread." Click here to find out more about subscribing to Ag Perspectives.)

Technology, Feedstock, and Land

The passage of the 2005 Energy Policy Act and the 2007 Energy Independence and Security Act (EISA) mandated the use of biofuels under the renewable fuels standard (RFS), creating a rapid acceleration in the growth of the biofuels industry.  EISA provides for the use of 36 billion gallons of biofuels by 2022, but caps corn-based ethanol at 15 billion gallons by 2015.  With corn ethanol production projected to reach 14 billion gallons in 2011, the question is: Where will the next generation of biofuels come from?

The answer to that question necessarily will come in three parts involving the state of the technology, the supply of feedstocks, and the availability of land.  The 215-page report accompanying the recently passed FY2012 House Energy and Water Appropriations bill, at least indirectly, recognizes this.  The Appropriations Committee's report notes with regard to feedstocks,

Increased demand by the energy sector for food crops can put upward pressure on crop prices, disrupting other industries and increasing food prices domestically and abroad. The Department (of Energy) is directed to conduct only research, development, and demonstration activities advancing technologies that produce fuels and electricity from biomass and crops that could not otherwise be used as food.  The Committee supports efforts to develop cellulosic feedstocks and directs the Department to consider a broad portfolio of options, including biofuels sources such as the non-food components of biomass sorghum and continue research on biomass grasses.


Over the next 10 years, the U.S. will have to add about 21 billion gallons of biofuel use to meet the RFS. As the chart below shows, most of that biofuel is scheduled to come from cellulosic ethanol specifically.

RFS 2012-2022

To keep pace with the RFS, cellulosic would have to grow from less than an expected 13 million gallons of production next year to 16 billion gallons by 2022. Coming anywhere close to that goal requires addressing issues with technology, the supply of feedstocks, and the availability of land.

(This article, including a complete analysis of the future for biofuels, was originally published in full in the July 2011 issue of Ag Review. Click here to find out more about subscribing to Ag Review.)


When it comes to commodity markets, the meaning of the word "collapse" is in the mind of the user.  However, it would be hard for anyone to object to the use of "collapse" to describe what has happened to grain and soy futures markets recently.  The price washout has been one of epic proportions.  From their high points during June until mid-session today (as we write this) CME July Corn has fallen $1.38 after setting a new all time high on 10 June.  CME July Wheat has plunged $1.43, and the July Soybean price has dropped $1.08.  No matter what one's market bias might be, the grain and soy price collapse has been stark and spectacular!  With the massive liquidation of long positions held by managed money, the market is now lean and mean.

With this severe reversal the 10-month long bull market has hit a major roadblock.  More than a few observers have declared that it is over.  Perhaps someday hindsight will show they were correct in making this assessment, but we doubt that the situation is quite so simple.  Markets do not perform in response to on and off switches like electric appliances.  There are too many widely varied and often contradictory influences swirling around them to have much faith in this kind of instant "sound bite" judgments.  What we do have faith in are the markets themselves.  Markets are never wrong.  They are ever-changing.

Given what has happened, we would like to step back and take stock.  Here is the way we look at the individual corn market in light of some of the current and potential fundamental influences and macro issues it faces or may face in the near future.  As always, these are our views and opinions, and they are for whatever they may be worth – if anything.


Since, comparatively speaking, corn futures prices have soared the highest, it is probably fitting that they have fallen the farthest.  Prices climbed earlier this year as protection against a combination of factors: the prospect of very tight supplies for the balance of the 2010/11 crop year, the need for additional planted acreage, weather-delayed planting, fear of lost acreage to floods and other crops, and fear that corn yields would fall below trend causing the 2011 crop to fall below projected demand.

What has happened to all of these concerns?  Well, the corn crop finally got planted albeit late enough to cause a drag on yields without a near perfect growing season.  Planted corn acreage has fallen.  In June the usually conservative USDA already reduced estimated plantings from 92.2 million to 90.7 million acres.  We think that late flooding and wet conditions have probably caused the loss of an additional 400,000-600,000 acres.

Once the corn crop got planted, most of it has enjoyed good weather.  The exception is the South where drought threatens serious damage to the earliest harvested portion of the crop – the bridge between the old crop and the Corn Belt harvest.  However, the weather models hint at a lengthy stretch of above-normal temperatures for the Midwest during July, which would not be good for the late seeded crop. Perhaps even more than usual, weather promises to be a key influence on corn market price action during the summer.

(This was originally published in Ag Perspectives on 23 June 2011 as part of Bob Kohlmeyer's weekly analysis feature "Common Thread." Click here to find out more about subscribing to Ag Perspectives.)

A spring update on corn in China

Although the Chinese government has taken a series of measures to quicken the procurement of local corn to replenish reserves, the overall procurement pace is still very slow, as most farmers in China are holding no higher than 20 percent stocks of corn at hand and they are not in a hurry to sell now in expectation of higher prices and with attention now focused on spring planting.

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Supplying soybeans and soymeal to export markets is key

For most of the last 30 years it has been the growth in domestic demand for soymeal and soyoil that has been the prime driver behind investments by U.S. oilseed processing firms. 

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