According to a recent economic analysis prepared by agricultural cooperative GROWMARK, China isn't to blame for rising commodity prices – Wall Street investors are.
"There is a common assumption that China's rapid economic growth has resulted in its having an increased demand for and consumption of world commodities, and that China's increased consumption has driven up global commodity prices," says Kel Kelly, GROWMARK economic and market research manager, and author of the report. "Our analysis shows the inverse is true."
The report, released last week, asserts that China consumes mostly its own supply of commodities, not the remaining world supply, contributing to lower, not higher, commodity prices.
Further, it says, other market participants purchase more commodities and have a stronger relationship with commodity imports than China; and many commodities that China doesn't buy have also seen price volatility, indicating that "other factors besides Chinese purchases are driving commodity prices."
"The 'demand from China' theory fails to explain how all commodities collapsed together during the 2008 financial crisis, while Chinese purchases did not, and, why most commodity prices tend to move in sync, even though they have different fundamentals," report authors write.
Aside from explaining why China may not be responsible for price swings and/or higher commodity prices, GROWMARK says there are other factors that have been overlooked – namely Wall Street banks, broker/dealers, securities firms, hedge funds and exchange-traded funds investing in commodity futures.
"The high correlation of commodities with each other and with other financial assets—along with the related fact that commodities fall, along with financial assets, by as much as 50%during financial crises, even as China continues purchasing them—shows that China cannot possibly have a dominant effect on commodity prices. There are other forces at work," the report says.
"It is not physical 'demand from China,' but instead monetary demand from Wall Street that drives up prices."
Regardless of the country's impact on prices, there is agreement, at least among Rabobank customers, that China will continue to drive demand for certain commodities.
More than 60% of participants in a December, 2012, forum said China would be the key country with the greatest impact on demand over the next 10 years.
Despite some economic slowing in the country, executives polled by Rabobank said China would continue to be the most important driver of long term global economic growth. Forty one percent of respondents said China would drive the global economy for between five and 10 more years, while 40% said China will remain the primary driver of global economic growth for the next 50 years.
Read GROWMARK's report, Demand from China: Fact or Fiction in its entirety.