China agricultural imports seen growing after pause

by Josh Sosland
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Rapid growth in U.S. agricultural exports to China ended during 2013-2014.

WASHINGTON — While exports of agricultural products, including grains, to China have grown dramatically over the past 20 years and trade is expected to grow further in the future, economic reforms that are being implemented in China are clouding nearer-term prospects for trade, said Fred Gale, a senior economist with the Economic Research Service of the U.S. Department of Agriculture.

Mr. Gale offered an in-depth look at changes in the U.S.-China farm trade relationship in an article in the current E.R.S. publication Amber Waves.

The pace with which China has emerged as the leading importer of U.S. farm goods has been breathtaking. As recently as the 1990s, China accounted for only 2% to 3% of U.S. farm exports. In 2012-14, China’s share ranged from 16% to 18%, catapulting the country past the traditional leading customers of the United States — Canada, Mexico and Japan. Similarly, the United States is the leading exporter to China, accounting for 24% of the country’s imports in 2012-13. The United States holds the top rank in China as a supplier of soybeans, cereal grains, distiller dried grains, cotton, meat, cattle hides and hay.

Recounting this transformation of China into a major and broad importer, Mr. Gale cited the country’s 2001 accession to the World Trade Organization as a key turning point. While in the 1990s, China was a net exporter of soybeans, today it accounts for 60% of global imports with 40% of those coming from the United States.

Domestic agricultural production in China has not suffered during this period of burgeoning imports. With its entry into the W.T.O., China established tariff rate quotas on imports of cereal grains and focused domestic farm-support policies on production of wheat, rice and corn. Overall grain output expanded each year between 2004 and 2014, an unprecedented string of increases, Mr. Gale said. Even with these extraordinary gains, China has emerged as a major importer of grains, he added.

The key to this expanded appetite for grains has been growth in consumption of meat and dairy products, fueled by the country’s economic growth during this period.

“China’s rapidly growing livestock sector has stimulated a growing demand for feed and forage,” Mr. Gale said. “The country has emerged as the largest overseas buyer for distillers dried grains — the byproduct of corn ethanol production; it is also a major buyer of sorghum and alfalfa. Imported breeding animals and poultry are the foundation of a livestock sector that converts feed to meat more efficiently than in the past.”

Effects of economic slowdown

With a more recent period of slowing economic growth in China has come a parallel slowing of agricultural trade, beginning in 2013-14.

“China has entered a key period of transition in which economic growth is slowing at the same time Chinese leaders are pursuing numerous economic reforms, a period they describe as the ‘new normal,’” Mr. Gale said. “During this period, consumption patterns and China’s approaches to policy and regulatory enforcement are undergoing changes that could influence the further development of the U.S.-China agricultural trading relationship.”

This transition in economic policies has been progressing in fits and starts, Mr. Gale said. He noted that in 2013-14, imports of certain agricultural commodities expanded even as overall demand growth slowed. This situation reflected stockpiling of commodities and moves taken by government officials to keep domestic prices from declining, even as global prices fell.

For example, China imported 19 million tonnes of grain and 5.6 million tonnes of distillers dried grain in 2014. The large volume of imports may suggest domestic tightness, but Mr. Gale said that was not the case. In fact, the country faced a grain surplus.

China's imports grew as authorities stockpiled even larger volumes of domestic grain.

“Chinese authorities reported purchasing 125 million tonnes of domestic grain — about 20% of that year’s harvest — to prevent prices from falling,” Mr. Gale said. “In early 2015, Chinese officials said that reserves of corn, wheat, and rice exceeded 50% of annual consumption — a volume that far exceeded storage capacity — due to the large purchases to support prices.”

Importing even with domestic surplus

Explaining the market distortions associated with these moves, Mr. Gale said domestic support in the years after China entered the W.T.O. included tax cuts and direct subsidies for grain growers.

“Several years later, officials began to rely on price supports as a means of supporting farmers when subsidies did not offset the impact of rising production costs,” Mr. Gale said. “From 2009 to 2013, officials raised support prices each year to protect farmers against losses in the event that crop prices dropped. There was little impact on foreign trade since U.S. grain prices were also high following a drought in major U.S. grain-producing regions during 2012.

“U.S. grain and oilseed prices fell sharply in 2013 as both the United States and China had record corn harvests. Chinese officials, however, increased their support prices as usual that year. This action created a large gap between the prices of Chinese corn and imported corn. Feed mills had strong impetus to import cheaper corn from the global market, but imports were limited by a quota. Authorities further limited imports by rejecting most U.S. corn shipments in which they detected any trace of an unapproved genetically modified variety. With imported corn largely inaccessible, imports of sorghum and barley — also cheaper than domestic corn — soared to a combined 11 mmt during 2014.”

Imported corn has been cheaper than Chinese corn since 2013.

Officials in China have acknowledged the distorting nature of the country’s farm support programs and have pledged to adopt more market-oriented measures. In 2014, the country jettisoned its price support programs for soybeans and cotton in favor of a pilot “target price” deficiency payment program, Mr. Gale said.

Reforms create market uncertainties

Efforts to shrink the country’s stock piles have generated uncertainty in global commodity markets, he added. Despite this uncertainty, Mr. Gale said further growth in agricultural trade between the United States and China is likely, if unpredictable.

“China is engaged in important economic reforms that could affect both demand and supply for agricultural commodities,” Mr. Gale said. “Chinese leaders say the reforms are designed to strengthen the role of consumers as drivers of demand for commodities, reduce price distortions, and ensure that rules and regulations are applied uniformly. If the reforms lead to a more market-oriented Chinese economy, they could lay a foundation for a more stable U.S.-China trading relationship. Uncertainty for exporters could be reduced if Chinese authorities standardize rules and sanitary standards and consistently apply inspection and testing protocols.”

From China’s perspective, achieving and preserving food security will require a strong trading relationship with the United States, Mr. Gale said. If U.S. producers are confident in the sustainability and reliability of that relationship, they will invest to supply that market, Mr. Gale said. By contrast, “unpredictable trade and murky trade rules will like contribute to greater market volatility as china becomes a larger agricultural importer.”
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