China’s growing demand for beef and dairy lifts prices for western producers but will also mean costlier inputs for Irish farmers, writes Mark Godfrey.
The Chinese press made much recently of the rags-to-riches story of Maoist icon Zhang Tieshang who became a very rich capitalist on the recent listing of the animal feed firm he founded: Liaoning Wellhope Agri-Tech Joint Stock.
Having been a model peasant revolutionary in the 1960s and 70s, Tieshang grew wealthy supplying feed to the Chinese pig sector and a growing dairy industry (his firm is the biggest supplier of dairy feed in China, producing 96,000 tons a year).
Wellhope plans to double its feed output within three years, but it still remains modest in scale next to some of its local peers, such as New Hope and Guangdong Haid. These have grown in scale in the past decade as China turns to commercial or industrially produced feeds to increase yields of meat and milk on local farms as marketing by western food companies shifts Chinese consumers to eat convenience, dairy and meat products not traditional to their diets.
This will increasingly be of global significance as firms like Wellhope and Haid look overseas for corn and soy resources.
This year has been a benign one for grain prices, given bumper harvests globally. But the trend of increased Chinese demand, driven by animal feed needs, is clear. Thus, while Irish Government and agribusiness rightly cheer the launch recently of the Irish brand of infant milk powder onto Chinese shop shelves – a link-up between Kerry co-op and Chinese food processing giant Beingmate – they should also be mindful of the future impact of the westernisation of Chinese diets on the price of global agricultural inputs like feed.
Using imported soy and, increasingly, imported corn, Chinese animal feed production is increasing 10% a year with top producing regions like Guangdong (home to some of China’s biggest poultry and aquaculture farms) growing output by 15% year-on-year in 2013 to almost 23 million tons.
China went from being the world’s number three animal feed producer in 2008 to taking the number one slot in 2011, behind the US, but just ahead of the EU.
After adding 120 million tons of new capacity in the past 20 years, China boasted 191 million tons of feed output in 2012, according to the China Feed Industry Association and the UN-run Food & Agriculture Association.
Estimates from various bodies suggest the current figure is between 200 and 210 million tons and the bulk of that goes to feeding pigs and poultry, with about 12% going to aquaculture as China is the world’s biggest producer and exporter of farmed fish.
China’s rising feed demand is central to rising imports of corn, which land at Chinese ports 20% cheaper than domestic produce.”
Meat consumption has grown in China off the back of rising incomes and marketing by huge meat processors like Shuanghui/WH Group as well as fast food giants like KFC, which counts China as its top market.
Thus, poultry consumption is set to rise 2.4% per year and pork 1.5% per year from now up to 2023. China’s overall (beef, pork, poultry) per capita meat consumption will grow from a current average 56kg per capita to 68kg in 2020 and inventories of animals are the key drivers of rising feed use.
The other big driver of Chinese feed use is consolidation of farms: the percentage of so-called backyard pig farms has fallen from 80% to 30% in the period 1985-2012, with the percentage coming from so-called ‘large scale farms’ (1,000 pigs and more) rising from 2% to 25% in the same timeframe, with larger farms using larger quantities of commercial feed containing corn and wheat.
China’s overall production of meat rose 5.4% year-on-year in 2012 to 82 million tons.
The country will breed 710 million pigs this year, compared to 660 million in 2005, while pork consumption per capita will rise 1% to 41kg per capita.
A wealthier, urbanising population continues to eat pork increasingly produced on large, commercial farms. Likewise, demand for beef has driven Chinese domestic beef prices 55% higher than US averages: $9,585/ton compared to $4,313/ton.
This figure is the mid-2014 figure published by the US Meat Export Federation and is based on average prices at wholesale meat markets in China and the US.
A key driver of soy imports, soybean meal consumption, rose from 37.5 million tons in the year 2009/2010 to 49.8 million tons in 2013, according to data published by the US Department of Agriculture.
Domestic soy bean cultivation has fallen from 14.4 million tons to 12.8 million tons in the harvest year 2011/12 to 2012/13 as the government has removed tariffs on imports of cheaper soy, encouraging local farmers to switch from soybean to crops such as maize.
Irish agribusiness should be mindful of the future impact of the westernisation of Chinese diets on the price of global agricultural inputs like feed.”
Demand for soy oils (also used in pig feed) is also rising as an input for animal feed use, Liu Denggao, deputy director of Chinese Soybean Industry Association, told a conference in Beijing attended by this writer.
There is some hope that the ultimate demands of China’s growing feed sector will be softened by a switch in Chinese government policy on feed versus meat production.
While China is currently seeking to promote self-sufficiency in both grain and meat, this policy will be harder to defend long-term as the gap between (costlier) local produce and (cheaper) imports will continue to widen.
The external costs of meat production – particularly the environmental costs in terms of pollution by larger meat production farms – also look set to make China rethink meat imports.
In that case, feed demand in China would likely become less intense, though the consolidation of farms into more professional operations looks set to continue and this will remain a driver of commercial feed sales.
China’s rising feed demand is central to rising imports of corn, which land at Chinese ports 20% cheaper than domestic produce.
China has long obsessed about grain self-sufficiency and the latest five-year plan commits the country to 95% self-sufficiency in grains and 100% self-sufficiency in corn and wheat. This looks like an unattainable wish however given corn imports have surpassed five million tons a year (total domestic production is set to hit 190 million tons in 2014) while continued subsidy support to the domestic grain sector (subsides for seed, fertiliser and other inputs will hit almost RMB200 billion in 2014) and statutory floor prices set by government look set to continue to make Chinese grain look pricey next to imports.
The price difference is currently at over 20% and is likely to persist because such floor prices are effectively used as a welfare programme intended to boost rural incomes, which remain significantly behind urban incomes.
This is treated as very good news by agri trading companies (like Cargill) in the US, the key supplier of corn and also among the select group of nations allowed to import wheat into China.
Only Thailand, Peru and the US are licensed to ship corn to China while Australia, Canada, France and Kazakhstan are licensed (along with Serbia and the UK) to supply wheat.
They are happy that China has allowed an increasing percentage of wheat to go to feed.
The current five-year plan for the development of the plantation industry (valid until 2015) also encourages the domestic feed industry to look at other alternatives, like barley and crop residues. That will be good news for China’s barley suppliers, principally Australia (which accounts for the bulk of 1.6 million tons of barley imports), Canada, Denmark, France and Argentina.
Supply and demand
Firms which are likely to benefit from Chinese demand for cereals and feed are multinational traders like Cargill, Louis Dreyfus and Bunge, all of whom have established significant growing, trading, milling and distribution networks globally.
Also set to benefit, to a lesser extent is Beijing-based China Oils Foods Cereals Co (Cofco), a state-run giant which long had the monopoly on grain imports into China.
But it’s less clear that farmers in corn and soy importing nations like Ireland – who’ll benefit in the short-term from rising Chinese demand for dairy and proteins – will benefit from the inevitable long-term growth in Chinese demand for feed.