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Future Profits? Think China

January 30, 2013
By: Ed Clark, Top Producer Business and Issues Editor
china flag

During the next decade, a country some 7,000 miles away will have more to do with your profits than any other factor. Through 2020, demand from China is mostly a good-news story; there are some caution lights at the margins—economic and political.

"As late as 1995, China
was a net exporter of soybeans. This year,
USDA estimates exports
to China of 63 MMT."

The numbers are nothing short of phenomenal: 63% of U.S. soybean exports go to China, or more than one out of every four bushels produced. "During the last decade, Chinese imports have gone up so fast that the rest of the world has gone down," says John Baize of John C. Baize & Associates, an international agricultural trading and policy consulting firm. "China has outbid the rest of the world."

As late as 1995, China was a net exporter of soybeans. This year, USDA estimates exports to China of 63 million metric tons (MMT). "That will grow to 80 MMT by 2020 at the latest," Baize says. China’s demand for soybeans is growing at a rate of 2 to 3 MMT per year.

Is Corn Next? China has given up trying to be self-sufficient in soybeans, but that isn’t the case for corn and wheat—primarily for political reasons. However, corn could give China trouble and it might have to turn to the U.S. for more supplies unless it allows global seed companies to sell genetically modified seed to its farmers. China has been dragging its heels, but aside from  boosting imports, there is no way it can obtain the increasing amounts of corn it needs for human, livestock and industrial needs, Baize explains.

Darrel Good, a University of Illinois ag economist, disagrees. "They have put significant effort into increasing production with hybrids and fertilizers," he says. "They also carry large reserves of corn." In individual years when China has a poor crop, it might import significant amounts of corn, but such imports will be inconsistent, Good says.

DDGs Fill Containers. China has become a major importer of dried distillers’ grains (DDGs), Good says, so much so that the Chinese government has accused the U.S. of dumping DDGs onto the world market. China largely imports DDGs so containerships that delivered manufactured goods to the U.S. don’t have to come back empty.

Baize does not see a slowdown in the increasing demand for corn and soybeans to fuel China’s plan to grow its livestock industry.

While Baize is bullish long-term on Chinese demand, the nation will have to work through two problems. First, it faces huge internal debt, some of which will never be repaid, as the loans funded projects that have little chance of success. Second, the nation must work through its political problems. "People are fed up with corruption and the abuse of power," Baize says. Last year, there were more than 200,000 protests.

Baize predicts economic growth of 7.5% to 8% this year, which is strong but not the double digits realized in much of the last decade.

Good does not expect the growth in soybean exports to China to continue at the torrid pace of the past 10 years—on the order of a four- to fivefold growth. However, he does not foresee exports to China declining, either. He believes more moderate growth will continue between now and 2023.

Baize and Good are not the only ones bullish on China. "China today has the second largest middle class in the world, at 157 million people, which will surpass the United States’ middle class in the next 10 years," says Bill Cordingley, head of food and agribusiness research and advisory for Rabobank in the Americas. "China’s demand for agricultural commodities will continue to grow."

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FEATURED IN: Top Producer - February 2013



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