- The Washington Times - Tuesday, March 23, 2004

China’s demand for more raw materials to fuel its fast-growing economy, a falling dollar and tight supplies are driving up prices for basic industrial and agricultural goods.

The high prices are squeezing some U.S. producers who are unable to pass on rising production costs to consumers, but are a boon to U.S. exporters of cotton, soybeans, metals and other commodities.

“It’s been very beneficial to us this year,” said Ron Heck, a soybean and corn producer in Perry, Iowa, and president of the American Soybean Association.

Soybeans last week climbed above $10 a bushel on the Chicago Board of Trade for the first time in 15 years, pushed by poor harvests and robust demand. The situation, while not unprecedented, is a concern for some economists.

“It’s quite dramatic, and what we’ll see is higher consumer food prices in 2005 and 2006. There’s always this time lag, but there will be that response,” said Christopher Hurt, an agricultural economist at Purdue University.

Soybeans are an essential source of protein in feed for poultry, cattle, hogs and other livestock, and soy products are common in foods. Soybean oil, for example, is used heavily by fast-food restaurants.

U.S. livestock producers who buy feed made with soybeans already are concerned.

“It’s affecting everybody to a certain extent,” said Jon Caspers, a pork producer in Swaledale, Iowa, and outgoing president of the National Pork Producers Council.

“As costs rise, it impinges on everybody’s profitability. In the long term, supply and demand tend to equalize that, so as costs rise production may cut back. That may lead to higher prices down the road to compensate for that,” Mr. Caspers said.

The situation is similar for other products — limited supplies and abundant demand in overseas markets, led by China.

China’s economy in 2003 grew 9.1 percent, a torrid pace compared with 3.1 percent in the United States.

“China’s been going through a huge upsurge in its economic growth and the demand for all goods has been soaring,” said Nicholas R. Lardy, senior fellow at the Institute for International Economics.

“For those that are able to sell into this, they are doing very well. For those down the supply chain, it is more difficult,” Mr. Lardy said.

China’s agricultural imports, which rose 30 percent in 2003, are expected to rise 40 percent in 2004, the U.S. Agriculture Department reports in its “Outlook for U.S. Agricultural Trade.” China’s worldwide soybean imports are forecast at a record 23 million tons in the 2003-04 season, 7 percent above the previous year’s record high.

China also is projected to import a record 7 million 480-pound bales of cotton in the 2003-04 season, the USDA said. China’s demand drove markets late last year.

Prices on futures markets hit long-term lows in October 2001, but in October and November last year they were the highest since 1994. At almost 68 cents per pound Friday, cotton prices are still well above the 33 cents paid in the 2001-02 season.

U.S. apparel prices, meanwhile, are falling because of cheap imports from Asia. The Labor Department this week reported that retail apparel prices fell slightly in February and are now below levels from 12 months earlier, leaving U.S. companies that manufacture cotton apparel stuck between high costs and low-cost competitors.

With other products, such as copper, steel and other metals, China also is increasingly consuming more than it produces. Steel consumption increased by 24.5 percent in 2002 and 25.5 percent in 2003 to almost 290 million tons, Morgan Stanley reported. China’s consumption is projected to rise to 349.4 million tons by 2005, compared with U.S. consumption of 124 million tons, the investment firm estimated.

Many steel-consuming companies blame China’s demand for rising costs.

“The sharp steel-scrap price increases and the tight supply problem are having significant, harmful affects on all manufacturers, buyers and consumers of steel or steel products,” Robert Stevens, chief executive of the Columbus, Ind., company Impact Forge Inc. said recently at a congressional hearing.

Prices on intermediate materials, such as semifinished steel-mill products and fabrics, also are rising. The Labor Department last week reported that January prices rose 3.8 percent from a year ago. Prices of crude materials, such as raw cotton and metals, climbed 13.7 percent from a year earlier, the Labor Department said.

Energy-related costs, also influenced by China, led the producer price increases. Oil prices Wednesday reached $38.18 a barrel, a 13-year high, because of political uncertainty in major oil-producing nations, low production and China’s rise as a major consumer.

Other material costs also rose. Raw cotton increased 6.8 percent in January, while iron and steel scrap prices jumped 5.7 percent in January after rising 8.8 percent in December, the Labor Department said.

The Dow Jones-AIG Commodity Index, a composite of 20 commodities that includes crude oil, industrial metals, grains and livestock, has risen by one-third over the past year.

In addition to tight supplies and rising overseas demand, other factors such as rising shipping costs and a falling dollar are driving up prices for some U.S. companies that buy raw materials.

A weaker dollar means that overseas competitors can buy more U.S. products.

“With the decline in the value of the U.S. dollar against the euro, in essence the European currency buys 25 percent more. This is a really big factor at this point,” said Purdue’s Mr. Hurt.

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