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China's hogs need U.S. beans

When it comes to soybeans, Jerry Gidel is a bull in China's shop of food imports.

China's huge soybean market accounts for two of the three reasons the analyst thinks export demand for U.S. soybeans will remain strong in the marketing year that started in September.

“I'm saying right now to any producer, I have no desire to sell 2012 new crop soybeans,” says Gidel of North American Risk Management Services, Inc. in Chicago.

Gidel's reasoning

1. China's swine herd, nearly five times the size of the U.S. hog population, will hit a record in 2012. Gidel expects 479 million head, up about 3.5% from 2011. Pork is China's most popular meat.

2. Last summer, China abandoned price controls on oilseed crushers. The inflation-fighting cap started a year ago was hurting domestic soybean crushers in China. Because their margins are improving, so will demand for imports from the U.S. and South America.

3. Brazil harvested a record soybean crop last spring, but even so, Gidel was expecting South American exports to taper off this fall, just in time for some newly harvested U.S. soybeans to start flowing to our largest customer. Gidel thinks Brazil's 2012 crop could be smaller than USDA projections.

All this is happening just when total U.S. soybean exports are expected to be down from the 2010-11 marketing year.

USDA's forecast for soybean exports for the 2011-12 marketing year is 1.375 billion bushels, down some from 1.5 billion in the year that ended in August.

Still, it would be our third biggest year for exporting soybeans. Gidel attributes much of that to China, which buys roughly half of U.S. bean exports.

With U.S. planted acres and yields of soybeans down from last year, Gidel isn't surprised by the likelihood of smaller exports of soybeans.

“What I'm sensing as we go through time, we're going to be somewhat restricted on our exports,” he says. “But are our exports going to completely collapse? No.”

Grant Kimberly, an Iowa farmer and director of market development for the Iowa Soybean Association, agrees with Gidel that the growth of livestock production, including swine and aquaculture, bodes well for U.S. soybean exports to China.

Kimberly had a chance to visit China in late March on a trade mission organized by the Iowa farm group. There, he heard a Chinese official with a private soybean crushing firm offer an astounding forecast for soybean imports by the 2014-15 marketing year.

Renault Quach, vice general manager of Dongling Grain and Oil Co., Ltd. in Guangzhou told the Iowans he expects China to import 68 million metric tons (mmt) of soybeans by 2014-15. That's a leap from the 52 mmt in exports to China that USDA expects this year and the 56.5 mmt for 2011-12.

“It's hard to believe,” Kimberly says, “but at the same time, we've met with the guy the last three years or so, and he seems to be hitting it on the head.”

Bean Bargaining

A group of Chinese soybean buyers crowds around Iowa farmer John Heisdorffer at the edge of his soybeans just before harvest, firing questions at him through an American Soybean Association marketer who translates.

“In my opinion, the quality of the beans exported to China is too poor. The most concern is the foreign material (FM) is too high,” says Cai Qingxian, vice general manager for COFCO Eastocean Oils & Grains Industries Co., Ltd. Even without translation, you can understand the companies he blames – ADM and Cargill. And the amount of FM in U.S. soybeans has been rising, hitting up to 4.5% last year, he says.

Some Chinese and Americans in the group say the amount of FM in soybeans is set by a contract between Chinese buyers and companies exporting soybeans from the U.S. Beans with higher FM sell at lower prices. The issue comes up often and is evidence of the Chinese skill at driving hard bargains.

Whether or not China increases imports of soybeans will also depend on how much of its government-owned stocks are released into the market, says Zhao Changjiang, COFCO's general manager for the oilseeds purchasing division. He, too, expects record hog numbers in China. See more of his comments in a short video at http://bit.ly/pXIHCG.

Like Gidel, Kimberly doesn't expect much of a jump in U.S. soybean exports to China this year with tight supplies from the 2011 crop, “but once you get beyond this year, then the trend would move higher,” he says.

Renault also told Kimberly's group that China's feed production has grown at an annual rate of 7.7% over the last 10 years, according to the China Feed Industry Association.

The trade team also visited fish farms in China, a nation that dominates aquaculture. China's has 62% of the planet's aquaculture. Its fish farms already consume the equivalent of 300 million bushels of soybeans a year and that, too, is a market that will likely grow.

Kimberly has visited China four times. That nation, too, has its own set of economic worries, from controlling inflation to slowing a housing bubble. But China is still growing, Kimberly says.

“From my standpoint, the development is still increasing,” Kimberly says. “It might have slowed a little. Compared to the way things grow in the U.S., they're growing at a lightning pace.”

Fred Gale, an economist with USDA's economic research service who visits China frequently, has also seen a slowdown in China. But it may not affect U.S. exports to that nation.

“Generally, the slowdown in the world economy is starting to hit China,” Gale says. Even more than in the U.S., China's consumers are being hit by inflation and rising food costs, especially for pork.

“The hog inventory was down earlier in the year,” Gale says. “Now it's expanding because pork prices have gone up to record levels.

“The rise in pork prices is the main factor that's driving the increase in China's consumer price index,” Gale says. Pork is 60% of China's meat consumption.

China's booming consumption of cooking oils is another factor driving the demand for soybean imports. But until last summer when the government lifted price caps on vegetable oils, the industry was struggling, Gale says.

With price caps and a smaller swine herd earlier this year, China's soybean imports were down slightly in the first six months of 2011, Gale says. According to China's Council of Customs Statistics, they were off by 5% from the previous year. However, even with relatively high world prices for soybeans, “imports of soybeans are still strong,” Gale says.

Imports remained at high levels partly because China's own soybean acreage dropped this year.

“A lot of China's soybean land was switched to rice and corn, both of which have pretty robust prices,” Gale says.

China still produces most of its own corn, but it hasn't been self-sufficient in soybeans for years.

In 2011-12, USDA expects China to import 56.5 mmt of soybeans, which will supply most of the 60.6 mmt of soybeans going into crushing for livestock feed. Most of China's own 14.3 mmt soybean crop goes to the domestic market for tofu and other foods. In 2010, China grew a 15.2 mmt soybean crop.

Soybean crushers weren't the only food industry affected by China's price caps last winter. So were other oilseed processors, especially those producing peanut oil from China's own peanut crop. Peanut prices have risen fast and “imported soybeans are one of the things that haven't gone up as much,” Gale says.

Finally, China has overcapacity in the soybean-crushing industry. The government has offered domestic crushers financial incentives to expand, hoping to counter some of the influence of multinational companies that are also operating crushing joint ventures in China.

“That's part of the reason imports have been so robust,” Gale says. “They've been adding more capacity.”

Gale doesn't forecast future demand for China's import needs of soybeans. But he, too, expects it to grow.

“The Chinese government would like to stay as self-sufficient as possible,” he says, “But they have a really hard time keeping up with demand.”

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