FEED Business Worldwide - August 2012

 

 

by Eric J. BROOKS

 

 

China's demand for oilseeds continues to relentlessly increase but several coincident factors are changing the nature of its import dependence. Aside from rapid demand growth, the most important supply-side factor is the domestic soy harvest, which peaked at over 18.5 million tonnes in 2005/06 before falling to an average of 15-16 million tonnes in the late 2000s. Since then, rising crop yields have not been able to compensate for falling planted acreage, as corn and other crops offer higher returns.

 

 

 

With the government struggling to minimise corn importation and domestic Chinese corn costing 50-60% above international prices, several million acres of arable land have been shifted out of soy into the golden grain. Consequently, this year's USDA-estimated China soy harvest of 13.0 million tonnes is the smallest crop since 2007/08. It is, in fact, a soy harvest size more commonly seen in the mid 1990s, when China's oilseed demand was much lower than it is today.

 

 

Moreover, government statistics show that from January to May 2012, China's feed output actually ran 23.6% of last year's record pace. Driven as much by the swine sector's integration as by actual increases in meat demand, the trend implies that the USDA's 2012/13 soy import projection of 60 million tonnes may be too conservative an estimate.

 

However, with world soy inventories having fallen a sharp 13% and CBOT soy futures trading near record levels, China is strongly motivated to diversify its oilseed sourcing away from soy. Towards this end, the groundwork has been laid for slightly greater reliance on rapeseed.

 

Unfortunately, rapeseed faces a similar challenge to the one holding back soy: Competition from more profitable grains has offset crop yield improvements. This keeps the USDA 2012/13 China rapeseed crop estimate at 12.5 million tonnes, unchanged from 2011/12's production.

 

Indeed, with corn offering such high returns, China's government is determined to ensure that not too much land is taken out of rapeseed cultivation. Towards this end, late June saw China's government announce that it would purchase some 3 - 5 million tonnes of this year's rapeseed harvest at a floor price of RMB5,000/tonne (US$783/tonne).

 

This is 27% more than rapeseed's international price of US$625/tonne price at the time. It reflects the fact that China corn's high domestic price forces the prices of all other feed crops to unnaturally high levels.

 

 

Nevertheless, despite such efforts to maintain domestic output, a foundation for higher quality and quantity of rapeseed imports has already been put into place. On the quality side, China recently banned rapeseed imports from India, which were found to contain

malachite green, a carcinogenic green dye that is used to make the rapeseed look fresher than it actually is.

 

To replace the 650,000 tonnes of rapeseed formerly imported from India, several other measures are in place. First, after restricting Canadian canola imports for fear of blackleg fungi contamination several years ago, early 2012 saw China approve 18 plants for crushing imported canola. Initially, it was believed all the plants would be located in coastal regions away from canola producing regions. Instead, seven of the 18 plants were located in the canola growing provinces of Jiangsu, Zhejiang and Inner Mongolia.

 

Along with the restriction of Indian imports, these changes will boost imports of Canadian and Australian canola. Hence, after 2009's blackleg-induced restrictions on Canadian canola crashed 2010/11's volume to 0.93 million, we now see rapeseed imports in a long-term uptrend.

 

Because early 2012's import and crushing liberalisation occurred in the middle of the 2011/12 marketing year, the USDA was forced to up its expected China rapeseed import number from 1.9 to 2.3 million tonnes. For 2012/13, rapeseed import volumes are expected to touch the 2.5 million tonne level.

 

However, given the emerging world soy shortage, this could turn out to be a conservative forecast. Oil World, for example, forecasts 2012/13 imports of 2.7 million tonnes and that, "imports of 3.0 million tonnes cannot be ruled out." It concluded that, "We expect that Chinese import demand for Canadian canola will be particularly high until December, and it remains to be seen how aggressively China buys."