Olympic Proportions

Economic Growth Continues to Fuel Chinese Soybean Demand

By Laura Temple

On 08/08/08, a culturally auspicious date, China re-introduced itself to the world. A memorable spectacle of the 2008 Summer Olympic opening ceremony featured the Chinese people.

Those Olympics gave the rest of the world an enticing look at those people – China’s huge demand base of more than one billion with money to spend. China had just achieved a 14 percent increase in gross domestic product (GDP) in 2007.

“About 20 years ago, China started realizing significant economic growth that peaked in 2007,” says Roger Bernard, senior policy analyst for IEG Vantage. “The draw of China’s huge market sparked global investments to compete there. Though their growth rate has moderated, their GDP is still growing more than six percent a year, significant for an economy that size.”

Diet improvements accompany economic growth and development.

“China must feed its people to maintain stability,” says Barry Flinchbaugh, ag economics professor for Kansas State University. “As the standard of living increases with economic growth, people want to eat better. That means increasing the amount and quality of protein they eat. That happens quickest with chicken, and then pork.”

Agriculture in China and around the world responded to the opportunity to meet demand from more than one billion people able to afford more and higher-quality protein.

“Anyone who has income has food,” Flinchbaugh says. “The Chinese people like pork, and pigs like soybeans.”

China’s soybean demand has grown with their economy. When China joined the World Trade Organization (WTO) in 2001, it used about 15 percent of the world’s soybeans in the world. By last year, China used nearly one-third of the world’s increasing soybean production, according to USDA estimates. The U.S. and other soybean producers stepped up to meet that need.

China’s Growth and Development

According to Flinchbaugh, economic growth in China is rooted in a government commitment to improve the people’s quality of life made decades ago. China began opening to global trade in the 1980s, and a lengthy process of economic change culminated with the country joining the WTO as growth accelerated. But as China allowed industry privatization and foreign investments, the government remained deeply involved.

“China has used central control to spur the economic gains we’ve seen,” explains IEG’s Bernard. “Unabashed lending fueled it. The government injects lots of liquidity and finances into the economy to encourage growth and development.”

Bernard attributes some slowing growth rates in the years since China hosted the Olympics – and the global economic crash – to the curtailing of government lending in response to mounting debt. However, recent signals indicate an increase in government lending, in part to minimize the impact of the trade war with the U.S. on the Chinese people.

“As China’s economy develops, it is transitioning from centralized to market-based,” says Bernard. “But the state ultimately still exerts control.”

Global Agricultural Implications

To make the best use of its land, China’s support policies focus on commodities they produce reliably, like corn, wheat and rice. China looks to lower-cost suppliers for other commodities.

“To ensure supply in areas where China is less than self-sufficient, China has made investments worldwide,” says Bernard. “Despite headlines about land purchases, most of their international investments are in infrastructure and logistics to ensure they have access to what they need.”

The soybean supply chain is a prime example.

“Chinese agricultural subsidies have favored corn production, which sets up for soybean imports,” says Wes Petkau, senior oilseed and products analyst for IEG Vantage. “They are in high demand to feed livestock as affluence and protein demand increase.”

Petkau notes 10 years ago, China imported 50 million metric tons of soybeans. But soybean imports grew between five and 10 percent to reach 94 million metric tons in 2017-18.

“Internal sources indicate China may shift future subsidies toward soybeans, which may begin to increase their domestic production,” he says. “But the rest of the world has been investing to meet these needs. Brazil has been increasing soybean production and market share in China, while several smaller-producing nations, including Canada, have done the same. The U.S. claimed more than 40 percent of China’s market earlier this decade, while building a reliable soybean supply chain that became a pipeline to deliver soy to China.

“U.S. infrastructure efficiently carries increasing soybean production through inland waterways to New Orleans or via rails and rivers to Pacific coast ports,” he continues. “Grain terminals at those ports load cargo ships for China. In recent years, market share has slipped as production and exports from other countries – primarily Brazil – have increased.”

That pipeline developed through intentional investments over three decades.

“The U.S. soybean industry worked hard to establish relationships in China,” says Flinchbaugh. “We held trade missions back and forth to build relationships. We developed soybean standards that met their needs, and farmers dramatically increased production.”

Changing Economic Dynamics

China’s upward economic trajectory is changing in ways difficult to predict. The ongoing trade war between China and the U.S., China’s aging population and African Swine Fever (ASF) continued slowing of the Chinese economy. Other factors make it difficult to anticipate needs.

And those factors all have implications for soybean markets.

For example, many imported soybeans feed China’s pigs. ASF has decimated the Chinese swine herd. But conflicting private and government reports obscure the actual percentage of reduction. And ASF may or may not change Chinese pork demand.

Similar uncertainty about other economic factors lead analysts to differing opinions about the future of U.S. soybean market share in China.

Flinchbaugh expects continued growth resulting in ongoing need for U.S. soybeans. “If the Chinese government allows the open market to work, soy demand will continue to grow, though perhaps at a slower rate,” he says. “The number of mouths to feed in China isn’t declining. Once better protein is available, it’s hard to go back. Other countries can’t fully take our place because of our volume and ability to efficiently increase yields. It will take a while for them to ramp up.”

He anticipates that although ASF will decrease soybean needs in the short-term, China will eventually rebuild their swine herd to previous levels. Flinchbaugh also believes the WTO can police trade-related issues between China and the U.S.

“The marketplace works,” he says. “We need to let it. China depends heavily on exports for their own economic growth. Their interdependence on the global economy will force them to play fair. We need to work together so that everyone wins.”

Petkau has a more measured outlook for both China and U.S. soybeans. He points out that Chinese soybean import growth stalled in 2017-18 and is forecast to decline to an estimated 86 million metric tons in 2018-19, due in part to tariffs and ASF. And China has options.

“The rest of the world is eager to prove they are just as good at producing soybeans,” he says. “Canada, Russia and Eastern Europe have all increased production. Argentina’s production rose 18 to 19 million metric tons following their drought. Though logistics take time to develop, competition is real.”

China’s changing demographics may also alter food consumption trends as the impact of controlling population growth has yet to be entirely felt. Petkau thinks the longer-term ASF impact remains uncertain and hasn’t had as large an impact on soybean trade as first feared. He cites several factors like price competitiveness and feed requirements of protein alternatives.  

“If the current situation continues, global soybean supply could begin to tighten during 2019-20,” he says. “That could open doors for U.S. soybeans to once again play a larger role.”

Regardless, the U.S. and others will work to meet the appetite of China. And the Chinese people will have changed even more when they welcome the world for the 2022 Winter Olympics.

Olympic Proportions