FEED Business Worldwide March, 2012
Soy today, corn tomorrow & the weather always
by Eric J. BROOKS
Compared to fifty years ago or even just 15 years ago, we now live in a completely different agribusiness world from that of the past. Especially in Asia, the type of feed materials we use, how we use them, and especially where we get them from, has completely changed. To understand the fundamental transformations that Asian agribusiness's feed foundations is currently undergoing, it is best to recap and analyse the relationship between feed and livestock's primary supply and demand drivers, East Asia and the Americas, particularly South America.
In the early 20th century, almost of all of North & South Americas' feed grain exports were shipped to Europe, with Asia enjoying nominal feed crop self-sufficiency prior to World War II. China, not the United States was the world's largest soy producer and modern agribusiness was in its infancy. Even in the west, many livestock farmers continued making their own feed from available farm materials for the first half of the 20th century.
This all changed after World War II, though not as immediately in Asia. Coinciding with rising per capita meat consumption, a post-war baby boom made traditional livestock rearing based on traditional forages and home mixed feeds obsolete. Offering superior animal performance and better investment returns, the modern agribusiness based on corn and soy-derived feed took hold.
Even so, most of Asia did not adapt this agribusiness paradigm for another 30 or 40 years. Before the late 1990s, only in prosperous, fast growing northeast Asia did South Korea and Japan became major corn and soy importers, with the latter becoming the world leading importer of both these feed crops until the late 1990s.
1950 to 2000: Global agribusiness enjoys Pax Americana's abundance
Keynoted by fast rising meat consumption in the west and Japan, buoyant feed crop supplies, this was the day when America ruled the world's feed market –and indirectly, the meat on your table. Overseas, American technological exports such as chemical fertiliser, pesticides, irrigation systems or new hybrid crop breeds allowed crop yields to skyrocket. With these technologies making old land more productive and enabling new, previously uncultivated land entering production, feed supplies outraced growing meat demand.
While South Korea and Japan lacked the land to stay self-sufficient in feed crops, Green Revolution technologies allowed slow growing nations with low per capita meat consumption such as China, Vietnam, Indonesia and India to remain self-sufficient in feed crops. In Southeast Asia, Thailand successfully leveraged the entire range of agribusiness technology to create an export-driven meat industry –while staying self-sufficient in corn through to the end of the 20th century. Consequently, feed crop exports continued to mostly float across the Atlantic from America to Europe - along with the addition of two new, large customers in Japan and South Korea.
In this era, the United States did far more than develop modern productivity enhancing inputs such as farm machinery, irrigation, pesticides or fertiliser: In an era when Asia remained mostly feed self-sufficient, America supplied an astonishing 90% of the world's feed soy exports from the 1950s to the 1980s and up to 80% even as late as the mid 1990s.
Throughout this time, the United States also supplied up to 75% of the world's corn exports for most of the postwar era and 55% to 60% throughout the 2000s. Except for an inflationary outburst in the mid to late 1970s, US feed crop supplies stayed handsomely ahead of world meat demand throughout this time, putting feed and meat prices on a 50-year downtrend amid rising consumption.
This abundance was such that during some of those years, US corn inventories equaled or even exceeded its annual corn exports, even though it was supplying 70% or more of world exports.
1990s to 2000: Crop yields lag, South American supply, Asian demand, US dominance broken
However, as enduring as this stable, bountiful situation appeared, the 1990s saw the emergence of quiet, coincident, powerful - and very inflationary - trends. Within a decade, a series of coinciding factors broke America's market dominance, firmly tied South America's feed crops into Asia's meat dishes –and created a meat price spiral that persists to this day.
First, as the accompanying graph clearly demonstrates, the early 1990s saw the Green Revolution's one-time productivity boost tail off. For the last two decades, crop yields have risen at only one-third the rate of the previous 35 years. In theory, population growth has slowed down but in practice, the world's population is rising fastest in developing countries, where per capita meat consumption is growing much more strongly than in previous decades.
Consequently, crop yields have risen by less than meat demand for twenty consecutive years –and this ominous gap between crop yield growth and meat demand has been growing continuously wider throughout this time.
In the immediate postwar era, many feed-short countries could probably have gotten around flat crop yields by using irrigation, fertiliser and pesticides to bring more arable land into production. Unfortunately, the world has nearly maxed out the endowment of arable land nature gave it for crop cultivation. By the 1990s, with even spare US growing land land maxed out, the only countries with large tracts of unused cultivatable land were…Brazil and Argentina
Second, multiplied by 1.4 billion people, China's per capita meat consumption zoomed from just 4kg in the early 1960s to 25kg by 1990. When its per capita meat consumption jumped above 30kg in the mid 1990s, China's land growing area became too small to grow enough feed corn and feed soy.
Seeing that corn imports leave it at the mercy of the United States (which controlled two-thirds of all exports) but soy was readily available from South America, China began to import oil seeds, while striving to remain self-sufficient in feed grains. Fortunately for China, South America rose to the challenge and now rivals North America as a source of feed crop supplies. And it is a good thing that China could rely on South America –by the late 2000s, its per capita meat consumption had almost doubled from mid 1990s levels and hit 60kg per person.
Moreover, roughly 60% of Chinese meat consumption is accounted for by pork, which has very poor feed conversion ratios. Hence, the immense, much-vaunted rise in Chinese living standards would cease to exist if the flow of soy from South America to Asia were suddenly discontinued.
Without exaggeration, fast expanding Latin American soy harvests, exponential growth in China's soy imports has become the foundation of that country's food abundance and prosperity. From almost nothing in 1994, China soy imports exceeded those of former front runner Japan within three years. In the year 2000, it imported 10.4 million tonnes of soy, more than twice as much as second ranked importer Japan. By the mid 2000s, China was not just importing more soy than any single country but the entire EU. In 2011, China imported 56.6 million tonnes, approximately 19 times more than Japan, which as the second ranked soy importer only took in some three million tonnes.
Despite fifty years of dominating feed grain exports, the United States did not have sufficient arable land to accommodate a 55 million tonne increase in one country's soy demand over 15 years, nor did almost any other country - except for Brazil and Argentina.
The Feed & livestock world's very own Persian Gulf
With China vacuuming up soy as fast as it could be harvested, Brazil's soy exports traced a steep curve similar to that of Chinese soy imports, multiplying nearly ten times; from a little over a million tonnes in 1990 to 15.4 million tonnes in 2000. After 2000, they then jumped another 153% over 11 years to an estimated 39.4 million tonnes this marketing year. Brazil's soy exports now rival or exceed those of the United States, which once owned 90% of the soy export market. Argentina underwent a smaller but still impressive 60% increase from 6.1 million tonnes exported 10 years ago to 9.8 million tonnes today.
There are two interesting facets to this profound market transformation. The first is that while the United States lost its one-time 90% dominance of the world soy market, the Americas themselves have not lost any of their feed crop supply dominance: Collectively, the US, Brazil and Argentina supply 87% of world soy exports. When you throw in Paraguay's 5.8 million tonnes of soybean exports, North and South America collectively dominate the world soy market more than the United States alone did before 1990.
However, while the America's dominance of feed crop exports is as strong as ever, what has changed is that a much larger proportion of this soy now goes to Asia: As recently as 1994, the EU imported almost twice as much soy as all of Asia put together.
By the year 2000, the soy export trade was roughly balanced, with Europe and Asia getting equal shipment volumes. However, by 2011, Europe only absorbed 12.6% of global soy exports. Asia now takes in some 74% of global soy exports, with China alone single-handedly eating up 64% of this amount. After centuries of feed grain typically crossing the Atlantic, three-quarters of soy exports are now shipped across the Pacific Ocean to Asia's eastern coast. Mathematically speaking would not be an exaggeration to say that Asia depends on North and South America's grain to an even greater extent than west depends on the Persian Gulf for oil. –In fact, the fact they are politically stable notwithstanding, the Americas are essentially the Persian Gulf of the feed and livestock world.
Asia, Americas & Agflation, Part#1: Soy
To accommodate this vast rise in Asian (and most especially, Chinese) demand, since 1994, world soy exports had to increase by 59 million tonnes - and there are two peculiar things to note about this statistic.
First, 80% or 47 million of this 59 million tonne, 17 year increase in soybean exports came from South America. Without Brazil and Argentina making the difference, the world would be critically short of oil seeds and we would all be eating a lot less meat than we are today.
Second, despite Brazil and Argentina's impressive soy harvest expansion, China's meat demand overwhelmed them, and this has created much inflation. In fact, while biofuels are playing a role in the post 2010 feed inflation, the first round of global agflation was mostly caused by soy.
A staggering 95% of North and South America's 59 million tonne increase in soy exports was eaten up by China, whose own soy imports jumped by over 56 million tonnes. Needless to say, with meat consumption rising rapidly throughout heavily populated South East Asia, Eastern Europe, North Africa and the Middle East, this leaves very little additional soy to accommodate the meat demand of their fast growing populations.
Consequently, when China's soy consumption accelerated after the mid 2000s, South American supplies proved insufficient, record soy prices were set and the first round of 'agflation' occurred. While feed inputs such as corn or fishmeal also played a role, 2007 to 2008's 'agflation' was driven mostly by China's exponential rise in soy imports, most of which were sourced from the Americas.
In our current decade, China's soy import growth will be joined by that of Southeast Asia, where Vietnamese soy imports are preparing to take off, as are those of Indonesia. Indeed, it would not be surprising if within ten years, Vietnam, not Japan or Mexico, becomes the world's number two soy importer behind China itself. With Southeast Asia soy demand being added to China's, we expect East Asia's demand for Latin American soy to boost feed prices on many more future occasions.
21st century feed inflation vs. 20th century fuel inflation
Nonetheless, it was China's move from soy self-sufficiency to net importer status that did to feed what America's early 1970s transition to oil importer did to energy. In both cases, in just a few years, a huge new buyer ended up importing more of a commodity than the entire world put together did, sparking massive price inflation.
But while there are similarities to 1970s energy inflation and 21st century feed inflation, for feed and livestock's stakeholders, the differences matter even more: In this respect, whereas energy tends to be singularly defined by oil, feed depends on several key grain and oil seed inputs. Should Asia start importing any other feed input the way China did soy in the mid 2000s, another round of agflation will be launched –and that is exactly what happened several years later, with corn. This can be seen in the accompanying graph, which showed that while 2007/08's feed inflation was keynoted by soy, the 2010/11 price outburst was led by corn.
Asia, Americas & Agflation Part II: Corn
Corn's price rise is long in the making and implies the need for a further deepening of the relationship between Asian meat demand and South American corn growers.
By going from major corn exporter to importer, China's corn demand gets most of the headlines. With domestic demand exceeding harvests since the early 2000s, China allowed domestic corn prices to rise up to 50% higher than CBOT futures. Over a decade, it ran down its once-formidable corn inventories from over 100 million tonnes to below 20 million to avoid importing for as long as possible.
Indeed, while factors such as ethanol production certainly played a role, corn did go from US$3.25/bushel in April 2010 just before China started importing it to over US$6/bushel in less than a year. But then, the relationship between Asia, the Americas and corn is an entirely different one from the one with soy.
Most importantly, unlike soy, whose market is now defined by China, corn imports have been growing rapidly across Asia's southeastern coastline. For example, a corn exporter just ten years ago, Vietnam's corn imports have tripled from 640,000 tonnes to nearly 1.85 million tonnes last five year.
While China delayed the onset of net corn importer status by running down inventories, Southeast Asia deferred corn import growth by opting to import DDGS, whose import volumes grew rapidly after the mid 2000s. However, by the end of this decade, many ASEAN countries were approaching the upper limit of the proportion of DDGS they could put into their feed rations. Hence, by 2011s, China's slipping into net importer status by 1 or 2 million tonnes was joined by 7 million tonnes of corn imports flowing into Southeast Asia. This, as much as biofuel production or bad weather, helped spark the corn-led food price inflation of 2010 and 2011.
As was the case with soy in the 2000s, the 2010s will require South America to supply most of the additional corn China and ASEAN will soon demand. In theory, the United States could supply all the extra corn itself.
In practice, with ethanol production giving US famers higher returns than the feed market alone, they have very little incentive to raise exports, as this would lower their revenues from corn sales.
The strain of meeting both export and ethanol demand has plunged the US corn stocks-to-use ratio to the 5% to 7% range –from postwar highs of over 40%. Once boasting more corn in inventory than it exported in a single year, America's potential as a corn exporter is literally maxed out. This can be seen in the fact that om 2011, the US share of world corn exports fell below 50% for the first time in the modern era.
Brazil for soy, Argentina for corn
With well over 160 countries net corn importers, the US providing nearly half of all corn exports itself and only five countries accounting for 85% of 2011's exports, only South Africa, Brazil, Argentina and Ukraine are potential alternative corn exporters to America.
At 62kg, Ukraine's beef, chicken and broiler consumption per capita is far remains far lower than Argentina's 99kg. At US$5,700, Ukraine's per capita GDP is three times lower than Argentina's US$17,000. This implies that over the long run, much of Ukraine's corn output is going to be eaten up by rising domestic meat demand. With Ukraine's per capita meat consumption growing notably faster than Argentina, it remains to be seen if it does not eat up its own future corn exports. Much like Ukraine, South Africa has fast rising population growth and rising meat demand.
In theory, Brazil could supply the extra corn too. Except that whereas American farmers are addicted to ethanol, Brazilian agribusiness finds it more profitable to turn transform surplus corn into meat exports and has fast growing domestic demand of its own.
Consequently, while most of the soy that supports East Asia's growing meat demand currently comes from China, the corn required for tomorrow's higher consumption will, by default, have to come from Argentina.
The implication is obvious: Just as the 2000s saw Latin American soy being diverted to Asia, the next decade will see corn trade flows move in Asia's direction. The United States will continue to supply roughly one-third to two fifths of both corn and soy exports, with a rising proportion of these feed crops flowing Asia's way.
Brazil can be expected to supply most of the remaining soy, with neighbouring Paraguay making a smaller but still significant contribution. Argentina will entrench itself as the second largest corn exporter after the United States. Brazil, South Africa and Ukraine will probably continue making minor corn export contributions, depending on how quickly their respective domestic and export demand for meat grows relative to their crop yields.
But with South America taking over half of the America's feed crop export load, one factor that will increasingly come into play is Latin America's highly cyclical crop growing climate.
Weather cycle makes for strong (yet shaky) supply relationship
It is a scientific fact that the corn and soy growing regions of Brazil and especially Argentina are much more prone to drought than the US Midwest. With Latin America supplying a rising proportion of feed crop exports, we can expect prices of soy and most especially corn to be more unstable in the future.
Generally speaking, in years when the El Niño warm water ocean current dominates, Latin America gets plentiful rain and harvests are bountiful. As a result, feed crop export volumes will increase and all other things being equal, corn and soy prices will soften.
On the other hand, when the La Niña warm cold ocean current dominates, Latin America enters arid, drought-like conditions. Brazil's soy harvest is diminished and Argentina, where drought takes hold more intensely, will have its corn crop diminished by an even greater degree. In such a La Niña dominated situation, feed crop export volumes will increase and all other things being equal, corn and soy prices will soften.
According to meteorologists, South America's climactic oscillation between and undergoes a 30-year cycle, whereby El Niño events mostly predominate for 30 years, followed by 30 years keynoted by frequent La Niña episodes. It has been reported that as of 2007, the eastern Pacific began a 30-year cycle when La Nina episodes predominate.
Since the 2007 change over in favour of dry La Niña conditions, Argentina's corn and soy exports have been seriously dented by drought three times in the last five years, causing CBOT corn prices to rise by 20% or more in every instance. With another 25 years of frequent, La Nina episodes left, we can expect that South America's ascendancy into the world corn market will be shakier than its rise as chief soy supplier.
Going forward, we expect Asia's demand for Latin American corn to define the next decade as much as China's need for Brazilian soy did the 2000s. South America's entry to Asian soy markets was accompanied by strong feed price inflation. With Chinese and ASEAN demand for corn taking off, expect South America's satisfying of Asian corn demand to be accompanied by similar inflationary bursts.
However, with that continent's crop growing weather entering a more arid phase, corn's price volatility over the next 10 years will be even more volatile than that of soy during the previous decade's transition away from US soy dominance. By 2020, Asia could be as strongly wedded to South American corn as it is today to that continent's soy. Strangely enough however, the bonds between Asia and the America will grow stronger, yet shakier even though volatile weather is poised to shake up South America's end of the feed supply chain.
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