China shocked the oilseed market a couple of weeks ago when buyers there cancelled 600,000 tonnes of soybean imports.
The question is whether that signals a serious slowdown in oilseed demand.
Reuters polled 15 analysts and traders for their view of China’s soybean imports. The average of the results was that the Asian giant would in-crease its soybean imports in 2012-13 by only three percent, down from 15 percent last year and the slowest increase since 2006-07.
China’s imports account for 60 percent of the world’s soybean trade. That demand supports the price of all oilseeds, including canola.
However, Chinese crushers are running into financial problems. They got spooked by the U.S. drought and rising soybean prices. Worried that prices would climb higher, they started an aggressive buying program.
Then, when U.S. farmers actually harvested the crop, yields were not as bad as feared. Soybean prices began to soften. They fell more as it became clear South American farmers were seeding what will likely become a record large soybean crop.
Chinese crushers were stuck with commitments to buy expensive soybeans and they started posting heavy losses when the market fell.
China’s crushing industry is already weakened by excess capacity after a rapid crushing plant construction boom in recent years.
Capacity grew last year by 10 percent to an estimated 125 million tonnes per year, a huge surplus considering domestic consumption last year was 72 million tonnes.
Also, crushers say they expect meal demand from the livestock industry will weaken, as it often does after the Moon Festival holiday in early October.
While China’s demand growth for soybeans might have slowed, U.S. soybean exports so far this crop year are good.
Exports sales, both those outstanding and those already shipped to date this marketing year, are well ahead of last year at the same point. Total commitments are 27.045 million tonnes.
The U.S. Department of Agriculture’s target for the year is 36.61million, so there are still 9.56 million tonnes yet to be sold.
A drastic drop-off would weigh on oilseed prices and potentially in-crease the carryout at the end of the crop year. However, it is too soon to know if that will happen.
China’s rising oilseed imports have been a critical factor in oilseed markets for about a decade, and corn exporters have been waiting for the day that China can no longer meet its own grain demand.
China gave up on supplying its oilseed needs but still has a firm policy on being 95 percent self-sufficient in grain.
However, many analysts believe China is incapable of keeping up with its rising corn needs.
A Rabobank report from early this year projects that by 2015-16, China’s corn deficit will rise to 12 to 22 million tonnes from almost no deficit in 2011-12. The growing pork industry is the key driver for growing corn demand.
However, the Chinese government seems intent on not losing a grip on its grain self-sufficiency goal, even as it works out trade deals with Argentina and Ukraine to pave the way for corn imports from those countries, ensuring that it won’t be dependent on the United States if it falls behind in the production race.
Agriculture was discussed at the recent Communist Party of China congress in Beijing, where leadership was passed on to a new generation.
Agriculture minister Han Changfu said the next five to 10 years are a key period for the development of China’s agriculture sector, with production factors such as land, water and labour getting tighter.
“Beijing will breed a new type of agricultural player and develop large-scale mechanized farming,” Reuters reported Han as saying.
China’s corn yields average only 60 percent of those in the U.S., but they could catch up if they adopt the latest in seed technology.
However, they will have to make the change in conjunction with farm consolidation and a huge push to mechanization to make up for a lack of labour as young rural people head for the jobs, excitement and other opportunities in cities.
Xinhua, China’s official news agency, recently ran a story about a farmer in Jilin in northeastern China who joined a research and demonstration project using new seed varieties and technology to boost yields.
The farm’s production grew by 50 percent over the previous year.
The same story notes China has built more than 3,500 high-yield farms, each one covering about 1,600 acres of cornfields.
International seed companies such as Monsanto, DuPont Pioneer and Syngenta are also active in China, seeing potential to sell improved seed varieties. At least one company is optimistic that China can remain self-sufficient by adopting new technology.
“My view is that within the next seven to 10 years the gap in terms of demand and supply will probably be reduced to close to zero if the technology can reach the farmer,” Diego Diz, China corn marketing lead for Monsanto, told Reuters.
It looks like China’s rural population faces a total transformation in the coming decade.
Aside from discussions about technology, it means a jarring shift in the country’s agrarian culture. Beijing will need a deft hand to avoid social unrest.