Market Matters Blog

Will China Import More Corn?

There's no bigger long-term question in the grain markets today: Will China import more corn?

The answer appeared to be a clear 'yes' just a few years ago. After all, China's share of the U.S. export market had surged from 2% in 2010 to 13.5% in 2013. China was on the path to becoming a regular and consistent buyer. But then it began rejecting corn cargo ships for low-level presence of biotech traits that we're yet approved for import, and China's potential as a major market for U.S. corn was once again in question.

Despite the fact that China has since approved MIR 162, the biotech trait at the heart of the issue, corn sales to China amount to barely a trickle. There are lots of reasons as to why, with the three biggest being China's domestic corn policies, the substitution of grain sorghum and U.S. grain traders' reluctance to risk another rejected corn cargo.

A recent article in the magazine Choices, a peer-reviewed publication run by the Agricultural and Applied Economics Association, attempts to answer that question by taking an on-the-ground fundamental look at China's livestock industry, the elusive statistics that just don't add up, demand for different feed grains and changes to China's self-sufficiency policy.

I don't think I've ever read an article that so thoroughly explains the state of China's corn and livestock markets. It's written by Brian Lohmar, who is currently the U.S. Grain Council's China director. He previously served as the director of economic research for Bunge CHINA and as a China specialist for USDA's Economic Research Service. He knows China agriculture as well, or better, than any American I've met.

I highly encourage you to take the time to read the article, but for those of you who are just plain busy this time of year, here's the CliffsNotes version. (Here's a link to the full article: http://bit.ly/…)

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-- The growth and modernization of China's livestock industry has changed the grain markets, but there's very poor quantifiable information on meat supply and demand in China.

Lohmar explains that generally, China is the largest producer of pork, eggs, and aquaculture products in the world and the second largest producer of poultry. Yet getting an understanding of the underlying supply and demand is quite difficult. Based on official statistics, China slaughters 715.6 million hogs annually, about 40.7 kilograms per capita. Yet consumption estimates show that Chinese consumers eat 21.2 kg/year at home. Even considering the amount consumed outside of the home, there's a pretty stark discrepancy.

China's Commerce Department even started gathering data on slaughter, and it doesn't add up to the official pork production numbers either, Lohmar said. All of this, especially when combined with the feed conversion ratio, plays an important role in understanding China's feed production estimates and demand for certain feed ingredients.

-- In 2012, total feed use in China was only 267.7 mmt, far below the 350 mmt suggested by commercial feed production estimates. Protein meal inclusion in rations has increased much faster than energy feed inclusion, at about 7% per year over 10 years compared to 3.5%.

"The point of all this is that China's official production and consumption estimates for livestock products are far apart and one must go through substantial gymnastics to arrive at estimates that are reasonable in themselves and reasonably close to each other," Lohmar writes. "Moreover, even an estimate that assumes meat production is much lower than official production estimates is well beyond the individual estimates of feed use for specific ingredients such as corn and soybean meal. For a country that puts such emphasis on not only development of the livestock industry but also on maintaining feed grain production growth to meet domestic demand, it is somewhat surprising that there are no real reliable estimates of livestock production, feed demand or demand for important feed ingredients such as corn. Or at least the estimates that do exist, do not seem to match each other."

He concludes that meat consumption is likely below the official production numbers, meaning there's substantial room for continued growth. Second, as protein meal inclusion rates increase to a level that maximizes efficiency, the growth of energy feed and protein meal will begin to converge. "For energy feed, this means an acceleration of growth vis-à-vis total feed demand growth."

-- China has conflicting goals: maintaining high domestic corn prices and developing a competitive livestock industry, all while attempting to embrace market mechanisms.

China's decision to adopt a 95% self-sufficiency policy for grains in the mid-1990s lead to the boom in soybean imports as farmers focused on growing food grains.

China's domestic corn production grew from about 99 mmt in 1993 to 213 mmt in 2013. Lohmar notes that 70% of the growth was due to expanded acreage, not yield improvements. It's also not clear where the 15 million hectare expansion of acreage came from. With China's fierce competition for land, Lohmar doesn't see acreage increasing, so any future gains in China's crop will have to come from yield. Yield improvements face challenges from China's land tenure system that favors small farms and makes it uneconomical to implement the fertilization programs needed to enhance yields.

"... It seems that corn production growth in China will slow in coming years," Lohmar writes. "Meanwhile, as protein meal inclusion growth begins to slow and converge with overall feed growth, demand for energy feeds will do the opposite. Energy feed growth can be expected to rise to converge to overall feed demand growth, and the additional energy feed will likely come from corn or other feed grains. Together, these two trends will cause corn import demand to grow, especially if demand growth for animal products remains robust."

China's focus on expanded corn production has lead it to pay increasingly higher prices to farmers in the Northeastern provinces for nearly five years in a row. Global prices have declined significantly in the past couple of years, and China reacted by restricting imports of cheaper global corn. This forces livestock feeders to pay higher prices for feed, making them less competitive.

"Whether China decides to import corn to support domestic livestock production rather than import the livestock products directly, will depend in part on how China resolves the current situation of large, expensive stocks and transitions to a policy that allows corn prices to converge closer to import parity," he writes. "However, it will also depend on whether China's producers can improve efficiency and also whether they can reduce some of the environmental impacts of large livestock operations. Livestock producers in China are increasingly efficient, but the industries, in aggregate, are still not as efficient as more developed industries in many of China's trading partners, who also currently have the additional advantage of low corn prices."

Lohmar eventually sees China liberalizing its corn import policies and trying to get its domestic prices to converge with global prices. "As demand for animal products continues to grow, and the industry continues to modernize and adjust to new realities, we will likely see imports of both feed products and animal products rise, with corn being a key component of these trends."

(CZ/SK)

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LIN TAN
5/30/2015 | 1:29 PM CDT
Increase in acreage in China: it is not easy to increase arable land in china physically. However, statistics can change depending on the government policy. Local government used to show their high productivity to their upper level leaders. An easy way to do it is to cut the acreage. Recent years, central government started to subsidize farmers based on their planting acreage, then farmers and local government would like to report the missed acreage for more subsidies. That is one of the reason Brian saw an increase in arable land.
FRANK FULWIDER
4/10/2015 | 12:55 PM CDT
How can China just cancel an order then buy more when the price drops?