China Agribusiness Report Q3 2009

In BMI's China Agribusiness Report for Q3 2009 we introduce the new Soybean Outlook. In it we discuss how China's rapidly developing soybean sector has been coping with the turbulence in the world market for the commodity over the past year.

The growth in China's soybean consumption over the past year has been meteoric. In the decade up to 2008, consumption more than tripled and China moved from being pretty much self-sufficient to being the world's biggest importer by far. This has been driven by the development of the country's livestock sector. With meat consumption expected to grow strongly beyond the current economic problems, demand for soybean will climb ever higher.

As for many other commodities, 2008 was a roller-coaster year for soybean prices. The rapid rise in prices starting in late 2007 and continuing until mid-2008 caused the government to worry about the impact on the domestic livestock sector and cut import duty by two percentage points to 1%. China's soybean farmers meanwhile expanded the area planted in the hope of reaping the benefits of the high prices. By the time harvesting season came around, however, prices had plummeted. Government intervention with a programme to purchase 5mn tonnes of soybean at around 15% above the market price pleased nobody. Farmers griped about difficulties accessing the scheme, while processors complained that the higher prices were impacting their competitiveness.

The rapid rise in demand has led to some major changes in China's soybean sector. Crushing plants have sprung up around port cities to meet incoming shipments. Foreign involvement in the sector is also high.

The combination of rapidly rising imports and high foreign ownership in the soybean processing sector has unsurprisingly sparked concerns about the impact on food security. However, with China's everwealthier consumers hungering for more meat, it seems there is little the government can do to stem the flow without seriously damaging the country's livestock sector. We therefore see continued strong growth in soybean consumption throughout our forecast period to 2013.

Away from soybean, the expected slowdown in Chinese economic growth - BMI is now forecasting growth in 2009 of 5.6% year-on-year, down from 9.0% in 2008 and 12.0% in 2007 - will see some changes in demand patterns for agricultural goods. We expect demand for the staple rice to pick up as consumers cut down on more expensive foods.

Growth in meat consumption will slow. We forecast both poultry and beef consumption to fall in 2009 as consumers cut back their food budgets. Pork consumption should hold up better owing to the falling prices.

Despite these short-term set backs, we expect demand for meat products to grow strongly over our forecast period as the economy picks up speed again. For most commodities, we expect growth in consumption to increase strongly in the later years of our forecast period to 2013 after slowing in 2009 and 2010. The notable exceptions will be the staples wheat and rice, for which we expect growth to turn negative when the economy picks up as consumers have more money to spend on varying their diets.