Leeds: Bubbling Demand

Although my four kids have mostly outgrown their fascination with blowing and popping bubbles, every once in a while they rummage through the garage and find an old bottle of bubble solution. Their goal is to blow the biggest bubbles and to see how far they can get them to float before they burst. If a bubble bursts close to someone’s face, they are usually startled by the sudden pop, even though they know it is just a matter of time before all bubbles burst.

As adults we create all kinds of economic bubbles, and they too always seem to pop. In the 1980s it was the dot-com bubble. More recently it was the housing bubble. Many economists believe that bubbles caused by over exuberance are a natural part of economic cycles. It is just a matter of time before over exuberance leads to a financial pop.

Over the last several years, I have often used this column to talk about China and its growing importance to Iowa and US soybean farmers. With exports of US soybeans to China approaching 700 million bushels a year, it has become a major factor in the global supply and demand picture for soybeans. With this growth, there is lots of exuberance in the market place.

So one has to ask, is the Chinese demand for imported soybeans a bubble that is about to pop? Although I do not share the level of concern of some, I am growing a bit uneasy with some troubling trends.

My first concern is simply with our growing dependence on China on the demand side. It wasn’t all that long ago that China was a net exporter of soybeans, but today they take approximately 60% of all US exports. What happens if this demand were to go away or go down sharply?

A second concern has to be the back and forth between the Chinese and US governments. Even with the recent “thawing” in this relationship, there are plenty of remaining issues that could cause either side to move toward more aggressive political positions. For example, calls from some in the US Congress to label China as a “currency manipulator” could easily escalate into a tit-for-tat exchange, with devastating consequences for Iowa and US soybean farmers.

A third area of concern is just the reality of the past 10 years of growth in China. Can it be maintained? A recent article in the Asian version of the Wall Street Journal cited growing concerns about a real estate “bubble” in China much worse than the recent one in the US. As part of the Chinese version of a “stimulus package,” the amount of overbuilding in the Chinese commercial sector is staggering, with thousands of office buildings reportedly standing empty.

So will we see the China bubble burst? I think the answer is, most likely yes. When will we see it? That is a much harder and relevant question. Let’s just hope that the soybean industry is prepared for the inevitable popping sound.

-Kirk Leeds