29 April 2014

11 minute read

Each year, USDA prepares 10-year projections of global agricultural supply, demand, and trade. In each projection, China – with its large population, rapid economic growth, and anticipated dietary change – is a key component. Since at least the 1980s, agricultural analysts have anticipated that China’s dietary transition to a more meat-rich diet would have important impacts on world agricultural markets.

The latest USDA projections again foresee dietary transition in China. Past projections overstated the pace of change but there are signs of robust demand for meat and feed grains as China moves into a new stage of development.

Past Projections Over-stated China’s Grain Demand

Until the late 20th century, the Chinese population obtained over 90 per cent of its calories from carbohydrates like rice, wheat, millet, beans and tubers. Many observers expected this to change as China began to emerge from poverty and isolation in the 1980s; the expectation was that rising living standards would lead to increased demand for livestock and feed grains that would outstrip China’s production capacity. In a 1996 report, ERS compiled a dozen projections of Chinese grain imports in the 21st century by various analysts and institutions that estimated totals ranging from 20 to 50 million metric tons (mmt). One prediction even warned that China would need to import hundreds of millions of tons of grain.

Those projections overstated China’s need for grain imports during the first decade of the 21st century. China was a net exporter of grains until 2007. China imported modest amounts of premium rice from Thailand and imported wheat to replenish state reserves during 2004-05. The projections also failed to predict China’s enormous imports of soybeans, which grew from $75 million in 1995 to $38 billion in 2013.

There are now signs of a surge in China’s demand for imported grains, much of it from the United States. During 2013, imports of cereal grains rose to 18mmt. That total includes 3mmt of US corn and 4mmt of distillers dried grains with solubles (DDGS), a co-product of US corn ethanol production that Chinese livestock producers use for feed.

The United States supplied 70 per cent of China’s wheat imports. During 2013, China became a major importer of sorghum from the United States and Australia for the first time.

Tighter Labour and Feed Supplies Bring Structural Change to Livestock Sector

During past decades, China took advantage of abundant non-grain feeds and under-utilised labour resources to produce large increases in livestock output with little demand for feed grains. Impoverished farmers were eager to earn higher incomes by raising livestock. Small-scale 'backyard' farmers relied on widely available crop residues, wastes, vegetation and other biomass for feed, while under-employed family members provided the labour to collect and prepare feedstuffs and tend animals.

Beginning in the 1980s, officials enacted measures to promote livestock production, including support for development of a feed-milling industry and subsidised imports of more productive animal breeds. Indicators of livestock productivity, including feed conversion ratios and days on feed, improved markedly.

Soybeans – China’s largest agricultural import item – escaped the attention of most 1990s-era projections but played a role in the country’s livestock boom. Imported soybeans provide soybean meal used for animal feed; the increased supply provided protein that improved animal diets and increased productivity in the livestock sector. Importing soybeans allowed Chinese farmers to specialise in producing corn, which produces higher yields and net returns than soybeans. Corn became China’s largest single crop in 2013.

There are signs that China’s demand for feed grains has reached a turning point as a tightening labour supply and rising feed costs force significant structural change in China’s livestock sector. Over the last five years, economic growth has absorbed surplus rural labour and rural wages began rising 15 to 20 per cent annually.

Labour scarcity, animal disease pressures and rising living standards are prompting rural households to abandon 'backyard' livestock production. More recently, livestock production has increasingly become a specialised farm enterprise, with farmers focusing on maximising growth of animals, and substituting commercial feed for wastes and forages gathered from the countryside.

Rising feed demand has pushed up costs and motivated feed mills and livestock producers to explore new feed ingredients like distillers dried grains and sorghum – both imported from the United States.

More importantly, China has switched from being a corn exporter to a consistent importer of 3 to 5mmt annually since 2009. In 2014, Chinese officials announced a new strategic approach to food security, which tacitly acknowledges a need for imported feed grains. The strategy still stresses the importance of self-sufficiency, but it allows for 'appropriate imports' and focuses concern on food grains – rice and wheat – while placing a lower priority on corn self-sufficiency.

China is now attempting to move into a new stage of economic development that will feature continued urbanisation and more attention to improving living standards for the entire population. Urbanisation and rising living standards could prompt further dietary change, while the transition to larger-scale, capital-intensive modes of farming will likely promote use of feed grains in place of traditional locally-sourced feeds.

Food safety incidents, disease epidemics, and attention to waste management provide further impetus to push production away from traditional 'backyard' operations.

USDA Projects Rising Meat and Feed Demand in Next Decade

USDA projections show a continuation of China’s robust economic growth over the next 10 years, although at a slower rate than in the previous decade. China’s population is expected to grow at a slow rate of 0.3 per cent annually, but will increasingly reside in cities and towns. The urbanization rate has surpassed 50 per cent and is expected to increase to over 63 per cent by the 2023/24 marketing year.

Rising living standards and availability of a wider variety of foods from supermarkets, restaurants, and cafeterias for an urbanised population will promote dietary change and create opportunities for new foods to gain a foothold in the Chinese market.

China’s meat consumption is expected to rise at a pace similar to the trend over the past decade. Pork plays a central role in China’s meat economy – China accounts for half of world production and consumption – but poultry is gaining in popularity, largely because it is cheaper than pork.

Restaurants, fast-food chains and cafeterias play a key role in diversifying meat consumption since many feature specific kinds of meat or chicken. In particular, beef and mutton are important parts of popular hot pot, kebabs and other types of ethnic cuisine that are becoming popular among the broader population.

Per-capita pork consumption is projected to rise 6.6kg by 2023/24, which is more than three times the increase in poultry (2.7kg) and more than seven times the increase in beef (0.85kg). However, poultry is projected to account for an increasing share of China’s meat consumption, with per-capita consumption rising 2.4 per cent annually during the next 10 years, compared to a 1.5 per cent annual growth rate projected for per-capita pork consumption.

The model does not account for fish and shellfish, an important source of protein in Chinese diet and increasing.

China produces nearly all of its own meat. Its output of pork, poultry, and beef rose from about 20mmt in 1986 to over 70mmt in 2012, with the fastest growth during the 1980s into the early 1990s. USDA projects an increase in pork, poultry and beef output to 90mmt by 2023/24, an increase of about 30 per cent.

Since about three kilos of feed are needed to produce each kilogram of meat, feeding a large and increasing population of animals will be a growing challenge. Growth in feed consumption has accelerated recently, and as China’s livestock farms transition to a more concentrated mode of operations that uses commercial feeds more intensively, USDA projections expect this faster pace to continue. China’s combined use of corn and soy meal for animal feed is expected to rise from 200mmt to over 300mmt over the 10-year projection period. Chinese animals also consume a variety of other grains, protein meals, bran, and hulls from grains, and growing use of these commodities is expected to support the expansion of meat output.

USDA anticipates that China’s soybean and corn imports will continue to rise. China’s soybean imports are expected to reach over 70 per cent of global soybean imports by 2023/24, while China’s corn imports are projected to rise to 22mmt by 2023/24. China will rely on imported soybeans for most of its soybean meal supply, but imports are expected to account for less than 10 per cent of corn consumption by 2023/24.

China is expected to account for 40 per cent of the rise in global corn trade over the coming decade – USDA anticipates that the rapid growth will make China the leading importer of corn by 2023/24. The United States will likely be the main supplier of China’s imported corn but other countries including Ukraine, Argentina and Brazil will also play a role. The United States is also a key soybean supplier, accounting for over 40 per cent of China’s soybean imports in most years.

China’s imports of corn will likely benefit US producers. The record US harvest in 2013/14 caused prices to fall, and projections anticipate that US corn prices will continue to fall through 2015/16 before they begin to recover. More robust demand from China could stem the decline and support an earlier recovery of US corn prices.

Constraints Could Slow Growth of Meat Output...

China’s livestock sector is under pressure from rising costs, disease, environmental regulations and resource constraints. China’s meat imports could rise even further if production cannot sustain its current pace of growth, shifting from feed ingredient imports to meat imports, a pattern already being followed by some of its East Asian neighbours.

The predominance of pork in China’s meat production and consumption is a legacy of traditional farming systems that are becoming problematic as the economy urbanises and modernises.

Facing land scarcity, most rural families traditionally raised pigs as part of a diversified small-scale farming operation. Pigs could consume a variety of wastes, vegetation and forages, and they supplied manure for use as organic fertiliser for grains and other crops. Chinese statistics report that 700 million pigs are slaughtered annually – one for every two Chinese people.

Traditional backyard farming systems are now being replaced by larger scale farms that use grain-based feeds but pigs still predominate. Manure is seldom used as fertiliser now, and its disposal has become a major environmental concern. Swine disease epidemics are a constant threat, and the disposal of diseased carcasses became a concern when thousands of dead pigs were discovered floating in Shanghai’s Huangpu river in 2013.

Many local officials who were rewarded for promoting pig-production in earlier decades now view pig farms as a nuisance. Regulations and land use plans increasingly confine pig farms to designated areas distant from human settlements, roads, markets and waterways.

Other livestock species are also encountering constraints as their numbers grow; feed resources are limited and costs are rising. Grasslands and pastures are scarce and often degraded, limiting the supply of beef, sheep and dairy cattle. Traditionally, most beef was supplied from draught animals but their numbers are declining as mechanisation increases, and poultry production has been disrupted by avian influenza epidemics.

Abuse of feed additives and pharmaceuticals has also been a rising concern among Chinese consumers.

...Leading to Larger Meat Imports

While USDA projects robust increases in China’s meat production, meat imports are also projected to rise. Pork imports are expected to rise from 750,000mmt to 1.2 billion metric tons. The United States, Canada and the European Union are the main suppliers of pork and breeding stock to China.

Consumption of ruminant meats like beef and mutton was traditionally concentrated in regions of western China where grasslands were abundant. As the broader population gains a taste for these meats, supply is falling behind demand and prices are soaring.

China will continue to produce nearly all of its own meat; however, imports of beef have grown sharply since 2010 and are expected to rise to over 750,000mmt by 2023/24. Despite this increase, imports will account for only three per cent of China’s meat consumption by the end of the decade. China’s beef imports come primarily from Oceania and Latin America, as China’s market has been closed to US beef for the past 10 years due to bovine spongiform encephalopathy (BSE) concerns.

Policy Changes Underway Could Bring a Different Outcome

USDA’s projections of future supply, demand and trade are based on current conditions and available data. Actual outcomes could be different, with many structural, institutional and policy changes on the horizon.

China’s volatility was evident during 2013 when its livestock sector was hit by a weaker demand for meat, an avian influenza epidemic, revelations of pharmaceutical abuse on chicken farms and declining hog prices. Commercial feed production declined 1.8 per cent after years of rapid growth.

Policy adjustments in China make it difficult to forecast the country’s demand for imports. China’s price supports contributed to the surge of grain and oilseed imports during 2012-13 by lifting domestic prices above world prices. In early 2014, officials announced that price supports for soybeans and cotton would be eliminated, a move that could motivate more farmers to abandon these crops in favor of corn.

During 2012/13 and 2013/14, record corn harvests and a slow-down in demand put downward pressure on Chinese corn prices. Large reserves of corn were built up as the Government supported prices, and large domestic supplies could slow China’s demand for imported corn for several years. The recent build-up of grain inventories was not anticipated in the baseline projections, and could slow China’s future corn imports, similar to what happened in the late 1990s.

USDA officials are working with counterparts in China to ensure that new Chinese regulations, standards and policies do not disrupt trade. Discussions about lifting a decade-old ban on US beef over BSE concerns and accommodating new Chinese inspection and certification requirements for suppliers exporting to China are currently taking place.

Other important issues include achieving a more transparent process for approving imported genetically modified crops in China and restoring broiler chicken trade that was disrupted during 2010-13 by a Chinese anti-dumping action.

April 2014