FBA Issue 32: May / June 2010
Self-sufficiency vs. outsourcing, Neocolonialism vs. import dependency: The dilemma of North Asian feed security
If there is a part of the world that will determine the future of the world's feed grain markets, it is North Asia. Between them, China, Japan and South Korea account for approximately 24% of the world's population, the lion's share of East Asian feed demand and the greatest source of feed demand growth in the world.
Feed's emerging price setters
Just on its own, China contains 20 percent of the world's population but only 9 percent of its arable land. Together, these three prosperous North Asian countries account for approximately 61% of the world's soy import demand, with China single-handedly absorbing 54.5% of that total.
While China defines the world soy market, Japan is the world's largest corn importer, with South Korea usually coming in either second or third place. Before being dethroned by China, Japan was for years the world's greatest soy importer and with South Korea, holds two of the three top importer positions to this day.
With respect to corn, at 16.6 million tonnes yearly, Japan is the world's largest corn importer, followed by South Korea. The USDA estimates that these two leading Asian countries absorb 33.8% of global corn imports. If that was not enough, many believe that within ten years, China might become the biggest corn importer of all.
Going forward, all three of these countries - and the world - are facing critical feed sourcing issues. South Korea and Japan import virtually all their feed grains and oil seeds. China was once completely feed self-sufficient but now depends on imports for nearly 80% of its soy supplies, with corn import dependence looming less than a decade away. Consuming a lot of the world's feed materials and producing so little of it themselves, these three nations, more than any other, will determine the course of world grain markets.
North Asian feed's fearsome arithmetic
Moreover, closer examination of their markets reveals anomalies and unexpected consumption patterns that will make an impending, just-over-the-horizon crisis worse than it initially appear to be. Generally, we assume that developed countries with higher incomes consume more meat per capita than lower income developing countries. Therefore, common sense tells us that with per capita incomes approximately 10 times higher, the Japanese and South Koreans would consume significantly more meat than China. In north Asia, this assumption is completely untrue.
Strangely, South Korea and Japan enjoy per capita income roughly ten times higher than China, yet consume significantly less meat per capita. China's per capita meat consumption of approximately 60.4kg per person exceeds that of Japan's 43kg and South Korea's 47kg, even though the latter have personal incomes several times higher than China.
Moreover, at approximately 60kg per person multiplied by 1.38 billion and a 1.4% population growth rate, each year brings 20 million more Chinese to the global grain market. - And every one of those additional 20 million Chinese is eating, on average, more meat than Japanese or Koreans. Every nine years, the total number of new Chinese meat eaters added exceeds the combined current population of South Korea and Japan. â€“Furthermore, unlike the Koreans or the Japanese, both today's billion plus Chinese and their 20 million yearly additions are eating more meat and requiring significantly more feed per person, every year.
All this means that on its own, North Asia is responsible for the high feed prices and relatively low corn and soy inventories of recent years. Last year, China's record soy import demand brought US soy inventories down to near-historical lows. At this time, a Chinese corn harvest that came in approximately 25 million tonnes below expectations is largely responsible for bringing 2010 global corn inventories re-touch their late 2007, 'food crisis' era lows.
All this is loaded with implication. For South Korea and Japan, China's sudden dominance in the global oil seeds market means that they can no longer take the sourcing of soy for granted in the way they did in the more bountiful 1980s and 1990s. It is thought that the world can accommodate China importing corn as easily as it did its earlier reliance on American and Latin soy. Indeed, a feed grain shortage would become a very serious North Asian concern if China's entry into the world corn market coincided with India requiring massive imports of corn or soy.
Three different paths
Obviously, all three of north Asia's leading countries recognize that despite this year's soft CBOT soy and corn futures, a supply crunch looms. And they are doing there best to avoid such an outcome. However, each one is going about it in a different way.
China is taking a more autarkic approach, attempting to maximize its feed self-sufficiency, particularly for corn, at literally any cost. Nevertheless, China can afford to do this because it has blessings of abundant land rivaled only by America, though it is burdened with a population 4.5 times larger.
Indeed, China surprised everyone by staying self-sufficient in corn far longer than many analysts expected, though at a considerable cost to its consumers and feed sector. However, as the country's prosperity trumps its best efforts at raising corn yields, Beijing realizes that it must make other arrangements to ensure sufficient supplies of coarse feed grains.
In fact, just before this article went to publication, China purchased 115,000 tonnes of grain from the United States, with some analysts wildly speculating that it would need 2 million tonnes to alleviate shortages until the next harvest. The latter however, is probably too premature to say.
By contrast, South Korea, knowing full well it lacks land to grow its own feed, is buying or making long-term leases on farmland in Africa, Central Asia and Eastern Europe. In a policy that reminds many critics of 18th century colonial-era mercantilism, it hopes to secure itself an overseas feed growing base, particularly for corn. South Korea is buying up land in underdeveloped countries to ease its dependence on American corn, which has become the Saudi Arabia of coarse grains.
Only Japan continues to rely on traditional importing arrangements. Even here however, it is attempting to safeguard its supplies by buying overseas grain trading or handling operations. Sometimes, as in its recent 50% acquisition of Australian grain trader Emerald Group, it finds that it must compete against Chinese investors, who are driven by even deeper insecurities about long-term feed grain supplies.
Below, we examine in greater detail the specifics of their respective feed sourcing strategies.
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