April 9, 2007

 

China's soy demand creates tug-of-war between top producers

 

 

In a bid to secure more soy supplies for the nation's growing animal industries, China is increasingly looking to South American nations, Brazil in particular, as a major soy supplier.

 

China's soy demand has resulted in a unique three-way tug-of-war: with China trying to court Brazil for soy supplies while the US tries to court China.

 

In fact, if China's search for a new producer sounds like desperation, it probably is: studies in the mid 1990s revealed that the water table in northern China, its main soy-growing region, has been dropping at an alarming rate.

 

While the US remains the largest soy producer, Brazil last year passed it as the world's biggest exporter. The US would likely drop further from the world stage as its soy exports are expected to fall by 23 percent by the 2009-2010 crop year, according to the USDA.

However, even as ethanol chips away at US soy production as more farmers grow corn, the same is happening in Brazil, where soy acres are being reduced to grow sugar cane for ethanol.

 

Moreover, with a superior transport and logistics system, the US is unlikely to fade from the world market anytime soon. A lack of money to develop such systems in Brazil would keep the competition alive for years, analysts said.

 

In a way, China is hoping Brazil could catch up to the US. In recent years, it has pledged almost US$10 billion in investment projects to help the country develop the kind of transport and infrastructure that would facilitate soy exports. 

 

However, not much has happened as most of the projects have stalled due to  Brazilian red tape. Still, China has kept its eye firmly on Brazil.

 

Brazil's soy exports to China went up 50 percent last year, to 11 million tonnes. This was double the amount in 2004. Another record crop is expected in Brazil and analysts expect that China would absorb most of the increase.

 

In the long-run, Brazil, with its vast areas of arable land, could easily match US production.

 

However, a different set of worries cloud Brazilian producers even as China's buyers court it with such ardour.

 

Brazilian producers are worried that the trade with China, growing at such a breakneck pace, could lead to an increasing reliance on exporting raw products which are sold cheaply and which tax natural resources heavily instead of value-added goods which bring in more profits.

 

The strain on Brazil's tremendous soy export growth is starting to show, where for the past two years, profits for soy farmers in Mato Grosso state has been low. The state produces more than a third of the country's beans.

 

This was partially due to a higher Brazilian real and a snagged transport system which delayed deliveries.

 

Moreover, most of the Brazilian agricultural sector is controlled by multinational grain companies such as Cargill and ADM who control huge swathes of land and rent it out to soy farmers. The same companies who dominate Brazil's soy production also controls China's soy crushing operations.

 

Despite ideal conditions, growers in the state of Matto Grosso incurred billions in debt due to rising production costs. As farmers can no longer afford storage space for their grains, they were forced to sell harvested grains to the multinationals upon harvest, giving them no control over prices. As debts mount, these farmers are dropped by multinationals.

 

Farmers who are dropped thus may become tempting targets for Chinese companies looking for Brazilian soy supplies, analysts suggest.

 

Still, the fact that China rejected Brazilian soy shipment as late as 2004, meant that Brazilian farmers are leery of throwing in their lot with Chinese buyers.

 

To guard against Chinese dominance over the Brazilian market, producers are working with the US to diversify their buyers. Last year, a joint Brazilian and US delegation visited India, hoping to tap its soy market.

 

As for China, it is still hoping for the day it could deal with Brazilian farmers directly, thus bypassing the multinational grain companies. In fact, it recently started the China Soybean Association and sought to consolidate buying in an effort to seek better prices.