Navigating Deflation: Agriculture and Energy Opportunities Amid China's Economic Shift

China's deflationary pressures are reshaping global commodity markets, creating both challenges and opportunities for investors. With consumer prices hovering near zero and producer prices plummeting, sectors like agriculture and energy are undergoing structural shifts. Here's how to position portfolios for this new reality.

Agriculture: Riding the Shift to Diversification

China's deflation is not just an economic metric—it's a geopolitical force. The trade war with the U.S. has pushed Beijing to diversify its agricultural imports, particularly in soybeans, creating fertile ground for investors in Brazil and Argentina.

Brazil's Agribusiness Boom
China's soybean imports from Brazil surged to 71% of total imports in 2024, up from 62% in 2023, as U.S. exports dwindled. Companies like Bunge Limited (BG) and Araçatuba-based Granol are beneficiaries of this shift. Their stocks could gain further traction if China's tariffs on U.S. goods remain elevated.

The Pork Puzzle
While pork prices in China fell to ¥26.07/kg in April 2025—a 19% drop from 2024 peaks—this oversupply presents a dual opportunity. First, alternatives to soy-based feed, such as rapeseed or cottonseed, could see demand rise. Investors might consider Wilmar International (W12.SI), a palm oil and alternative feedstock giant. Second, the shift to self-sufficiency has boosted domestic pork production, favoring meat processors with cost advantages, like Shuanghui International (SHH).

Energy: Betting on Deflation-Resistant Plays

Deflation in energy markets—where China's coal and oil prices have slumped—requires a nuanced approach. While pure energy producers face headwinds, infrastructure and technology sectors could thrive.

Coal and Oil: The Undervalued Tail
China's coal mining PPI dropped -18.2% year-on-year in June 2025, signaling oversupply. This creates a buyers' market for energy-intensive industries like steel or cement, but direct exposure to coal stocks like China Coal Energy (1088.HK) remains risky.

The Renewable Edge
Deflation in fossil fuels may accelerate the shift to renewables. China's 2025 renewable energy targets (30% of power generation) favor firms like Longi Green Energy (688599.SH), a solar panel leader, and BYD (002594.SZ), which integrates energy storage with electric vehicles. These companies benefit from lower energy input costs and policy tailwinds.

Infrastructure: The Belt and Road Play
China's push to modernize agriculture via the Belt and Road Initiative (BRI) creates opportunities in agri-tech infrastructure. Firms like Chenguang Biotech Group—building smart farming systems in Zambia and India—are well-positioned. Investors can access this theme through Caterpillar (CAT), which supplies heavy machinery to BRI projects.

Investment Strategy: Go Long on Diversification, Short on Commodity Speculation

1. Buy Brazilian Agribusiness: Exposure to Brazil's soybean boom via Bunge (BG) or local firms.
2. Invest in Feed Alternatives: Wilmar International (W12.SI) for rapeseed/cottonseed plays.
3. Focus on Renewable Infrastructure: Longi (688599.SH) and BYD (002594.SZ) for energy transition bets.
4. Avoid Pure Commodity Producers: Coal/mining stocks are vulnerable to oversupply.

Risks to Monitor
- U.S.-China trade truces could disrupt Brazil's market share.
- African swine fever or disease outbreaks in livestock.
- Policy shifts in China's grain stockpiling strategy.

In a deflationary China, investors must look beyond traditional commodities to sectors benefiting from structural shifts. The winners will be those who adapt to diversification, innovation, and infrastructure—the pillars of China's new economic reality.