January 21, 2016
A modern miracle: How Chinese feed milling changed global agribusiness
By Eric J. BROOKS
An eFeedLink Hot Topic
- Its feed sector lifted China from 10kg of per capita meat consumption in the 1970s to eating 55% more red meat than Japanese today
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Government intervention played a key role in this success story
- Demand for imported inputs led to feed crop hyperinflation, high food prices
- China disproved that meat consumption is proportional to consumer incomes –even at low income levels, all you need is rapidly expanding feed supplies
China's feed sector is a modern miracle of world agribusiness. Humble as they may appear to be, it was feed mills that made it possible to quadruple the quantity of meat available to everyone of China's 1.4 billion people in thirty years -and this, more than anything else, made the country's economic miracle possible.
From under 4 million tonnes in 1980, feed output increased at an average 11.3% annual rate, jumping 50-fold over 35 years, totaling an Alltech estimated 180 million tonnes by 2015. Similarly, China's meat production also grew, from 13 million tonnes in 1980 to a USDA estimated 115 million tonnes in 2015. By the end of this period, its feed output overtook that of both Europe and the United States, to lead the worldWith China's population rising by only 1% annually and its prolific feed output enabling 6.7% annual growth in the protein supplied over this period, China's per capita meat consumption multiplied from approximately 13kg in 1980 to approximately 60kg today. Per capita pork consumption rose from 11kg in 1980 to 41kg in 2015 -while keeping pace with 40% population growth totaling an additional 400 million people over this time.
Alongside enabling China's people to eat as much pork as their emperors once did, it was its feed sector's hunger for inputs that made feedgrain markets gyrate, ignited two rounds of nasty food price inflation in less than five years –and gave China unprecedented influence over agricultural commodity markets.
As befits an industry that once produced less feed in a year than it now does in a week, its beginnings were humble. Whatever one thinks of government's role in the economy, it cannot be denied that the country's feed sector would not have grown as rapidly, or as efficiently without strong official guidance.
Though far less efficient than mills constructed over the last two decades, the government kick-started China's in the mid-1970s, importing technology and machinery from communist East bloc countries such as East Germany and Czechoslovakia. Many of the first mills were started by local governments, with much official help and approval from Beijing's policymakers.
When Deng Xiaoping announced his first round of economic liberalization in 1978, agriculture was the first sector allowed to respond to free market forces and feed was designated a key industry by him personally. That same year, China's Ministry of Commerce set up a Feed Bureau, which constructed 143 mills in the first two years of its existence, with many facilities clustered in densely populated rural areas surrounding Beijing and Shanghai.
The official plan for the feed industry included tax waivers on its revenues, zero or minimal tariffs on imports of feed milling technology, and special allocations of foreign exchange that encouraged imports of feed-milling machinery. This period also marks the time when Thailand's CP and America's Continental Grain became the first foreign investors in China's feed industry, bringing advanced technology with the first of their many milling and crushing facilities.
In 1982, the government announced its goal of producing 100 million tonnes by 2000, implying feed output growth of 9.2% through the rest of the century. China took till 2005 to reach this figure. Nevertheless, feed production grew from 1980 through 2000 at an 8.3% pace, totaling 74 million tonnes at the turn of the century -much faster and more quickly than any foreign observers had expected.
From the mid-1990s onwards, the government withdrew its direct involvement in feed milling's ownership or operations but still played an instrumental role in its ongoing expansion. On one hand, private feed milling conglomerates, be they large Chinese multinationals like COFCO or New Hope Group, or multinationals like CP and Bunge, began to take over the industry's reigns.
On the other hand, the feed mills soon started to outgrow their resource base of domestic inputs. Here, despite the government's retreat from feed milling's operational details, policymakers played a crucial role in keeping the feed sector's ongoing expansion on track. By the mid-1990s, it became apparent that China would need to become a net importer of either feed grains, oilseeds or both.
Seeing that the US, its geopolitical rival dominated the world corn market, China choose to liberalise imports of oilseed, lowering tariffs on soy, rapeseed and fishmeal, while keeping tariffs on corn very high. Even so, to keep as much value-added in China itself as possible, it only liberalised imports of raw oilseeds and fishmeal, not finished oilseed meals. Towards this end, it allowed foreign crushers to expand their operations while providing financial incentives for domestic rivals to keep pace.
Along with maintaining growth momentum and enabling China's feed sector to continue expanding at a 5% to 10% rate for another ten years, the liberalization of oilseed and fishmeal imports had a multitude of world-shaking side-effects.
First, in just five years, China became the world's largest soya bean importer, going from under a USDA estimated 800,000 tonnes in 1995 to 10.1 million tonnes in 1999 (versus Japan's 4.9 million), 28.3 million tonnes by 2005, 52.3 million in 2010 and 80.5 million tonnes in 2016. A similar situation occurred in fishmeal, where in less than a decade, it went from a few thousand tonnes to a million tonnes today, four times more than second ranked importers like Norway and Japan.
Second, with China importing several times more of key protein inputs than other top importers combined, this resulted in several spikes of feed cost inflation and with it, five years of worldwide food price inflation from 2007 to 2012. While the levelling out of US biofuel production and the breaking of several years of drought in the Americas also played a role, it is no coincidence that feed costs fell after 2012, when China's feed sector suddenly stopped expanding.
Third, even after it opted to import oilseeds and promote feed grain self-sufficiency, no one expected China to stay self-sufficient in corn after 2010 –but once again, well-crafted government policy helped it beat the odds. Using subsidies and high domestic prices to boost domestic crop acreage, high tariffs, strict official corn import limits, and the importation of alternative inputs such as sorghum, China kept itself nominally self-sufficient in corn.
Six years ago, analysts expected China to be importing anywhere from 15 to 20 million tonnes of corn by this time. Instead, it imported less than 3 million tonnes, totaling a mere 1% of total consumption –and even that was not necessary.
Corn inventories ballooned from less than 60 million tonnes five years ago to nearly 110 million today. While many criticize China's less-than-free market in corn, there is no doubt that no matter how much these policies inflated livestock production costs, they also kept China's feed mills nominally self-sufficient in feed grain.
Fourth, all the above occurred as China's feed milling output growth underwent a profound deceleration. From up to 20% a year before 1995, feed milling output grew by an average of 8.1% from 2000 to 2010. However, after 2012, feed output actually fell for the first time since China's economy was liberalized. From an Alltech estimated 198 million tonnes in 2012, feed output fell 9% over three years, to 180 million tonnes in 2015.
In all, from 2011 to 2015, feed output stagnated, growing at an average 0.6% annual rate –a far cry from the 8% growth rates of the 2000 to 2010 decade. Though a succession of poultry and swine disease outbreaks played a role, so did the fact that China's economy is decelerating.
Fifth, while the quantity of feed produced is levelling off, qualitative aspects such as feed quality and productivity have never been higher. According to eFeedLink statistics, in 2015, China produced 143% more feed than it did in 2000 –but the number of feed mills fell by more than 50% from 12,000 to less than 6,000 today. An average feed mill produced just under 6,200 tonnes of feed annually in 2000; in 2015, it outputted 27,273 tonnes of feed per year. On present trends, it will produce 44,400 tonnes of feed yearly by 2020.
Sixth, from 2010 onwards, rising feed costs, livestock disease outbreaks, food safety scandals and China's own economic deceleration has slowed down the feed sector's 2015-2020 growth projection into the 2% to 3% range but even so, impressive results no one thought possible had been achieved by this time: Despite having a per capita income under US$8,000, Chinese currently eat about 25% more meat per person that either their Japanese or South Korean counterparts.
In fact, Chinese feed milling's greatest accomplishment was to disprove that 'you do not have to be rich to eat a lot of meat.' Before China's feed milling miracle, economists and market analysts believed that meat consumption was proportional to income level. In particular, that mass consumption of expensive, feed inefficient red meat requires high consumer income levels.
As the attached graphs show, even though Japanese have adjusted for purchasing power parity (PPP) four times more disposable income, at 58kg, the Chinese somehow eat 11.5% more meat per capita than the Japanese (52kg). -Even more interesting is how despite China's low PPP per capita income of US$7,600 and Japanese having US$37,500 of disposable income, at 48kg, China's per capita red meat consumption is 55% higher than Japan's 31kg.
Similarly, even though America has seven times more GDP per person than their China, the Chinese, despite having a fraction of US incomes approximately eat approximately the same large quantity of red meat (48kg) as Americans. Even though Americans still eat 1.5 times more meat per capita, the entire difference is due to America's higher chicken consumption -a protein line that Chinese are culturally biased against.
Moreover, we see the same anomalously high red meat consumption at low income levels in Vietnam -a nation which deliberately copied China's feed-driven meat consumption model. Here too, we see how, despite having 17% lower income than Filipinos, Vietnamese, eat 20% more red meat per person. In fact, even though Singaporeans have up to 13 times more income per person, the average Vietnamese eats 88% as much red meat as a Singaporean.
Oddly enough, it is this complete breakdown between per capita income and meat consumption that was the Chinese feed milling's greatest contribution to world agribusiness. Far sighted policymakers showed the whole world that you do not have to make a country wealthy for its citizens to enjoy high protein, red meat diets: All you need is a strong, vibrant feed sector.
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