June 17, 2015

Soymeal for Southeast Asia, beans for China and Latin America to the rescue?

With feed demand growth shifting from China to Southeast Asia, South American soy exports will boom, but in a very segmented, differentiated manner.

An eFeedLink Exclusive Commentary
Along with playing a huge role in putting meat on European and Asian tables, South America is a key feed crop supplier. Even so, the center of its export growth is shifting, from China, which has dominated the market for over two decades, to Southeast Asia. This is especially true for protein meals, where South America dominates the market far more than it does for feed grains.
Latin suppliers, ASEAN buyers
A recent Rabobank report ("Losing Steam: India's Soymeal Exports are Drying Out", Rabobank Industry Note #493, June 2015) noted that with 560 million people, the ten nation ASEAN region's feed demand is growing by 7% annually, the fastest rate in the world. At the same time however Southeast Asia's soymeal consumption is rising even faster, at a 10.8% annual rate. That is twice the rate at which China's soymeal demand is increasing.

From 2010-11 to the end of 2015-16, the USDA estimates that the combined soymeal consumption of Southeast Asia's five largest agribusiness markets (Thailand, Indonesia, Vietnam, Philippines, Malaysia) will have jumped a whopping 73.1%, from 10.90 million tonnes to 18.87 million tonnes. Although China consumes 3 times more soy than ASEAN, its consumption rose by slightly less than 40% over the same five years.

-But it should be noted that there is one qualification to comparing China and ASEAN's growing need for soy: China exclusively imports raw soybeans and crushes them into soymeal, whereas Southeast Asia tends to import soymeal to meet most of its feed and livestock needs.

That is why while Southeast Asia's soymeal imports increased by nearly 10% annually, from 2010-11 to 2014-15, its raw soybean imports increased by slightly over 3% per year -and most of that minor increase reflected the opening of two Vietnamese crushing plants at the turn of the decade. Furthermore, this difference in the way China and ASEAN procures its soy also has trade implications for South America.
Brazil for China, Argentina for ASEAN?
85% of Brazil's feed soy exports are in the form of soybeans but Argentina exports 81% of its feed soy in the form of soymeal. On one hand, this means that Brazil will ship the bulk of its soy exports in the form of raw soybeans to China, which has extensive crushing facilities for converting it to soymeal. On the other hand, because it crushes five times more soy than the raw soybean volume it exports, Argentina exports nearly 3.5 times more soymeal than it does soybeans. As we shall see, a rising proportion of Argentina's soymeal is destined for Southeast Asia, where most countries lack sufficient bean crushing capacity.

Going forward, from 2015 to 2020, Rabobank projects that Southeast Asia's soymeal imports will increase by 66% over the next five years, and total 23 million tonnes by 2020. This is equivalent to approximately 29 million tonnes of raw soybean imports.
India, America are out of the game
Traditionally, Southeast Asia imported its soymeal from India, but with India's own soymeal consumption quadrupling in ten years, this is not a sustainable procurement strategy. In 2008-09, Southeast Asia bought 3.0 million tonnes of the 3.2 million tonnes of soymeal that India exported that year, and India accounted for 36% of Southeast Asian soymeal imports. 

In 2015-16, India is expected to export only 2.3 million tonnes of soymeal. Moreover, with Europe's demand for GM-free food inflating Indian soymeal's price, Southeast Asia will only import a marginal few hundred thousand tonnes from India this year. Moreover, with its meat consumption outpacing crop harvests, by 2020, India is not expected to have any soymeal available for export. To make matters worse, the past year saw Japan snatch up much of China's once cheaper soy exports at a higher price than many Southeast Asian countries were willing to pay.

With India preparing to exit the world soymeal market, and China only able to supply about 2 million tonnes of the 23 million tonnes that ASEAN will need in five years, Latin America will come to play a crucial role in the protein meal market. When we total up all past and projected Chinese and ASEAN imports of soy beans and soymeal (converted to raw soy equivalent), we find that by 2020, China and ASEAN will need to import an additional 26 million tonnes more of either soy beans or soymeal converted to raw soy equivalent annually.

In short, about 15.5 million more tonnes of soy imports will be needed by China while an additional 8.3 million tonnes of soymeal (equivalent to 10.5 million tonnes of raw soybeans) will be needed annually by Southeast Asia. By 2020, China will be importing at least 94 million tonnes of soybeans. ASEAN's will import 23 million tonnes of imports soymeal and 7.5 million tonnes of soybeans (equivalent to 36.5 million tonnes of raw soybean imports).
Latin America to the rescue -again
China and ASEAN's combined soy demand is rising by approximately 6% annually. However, with US crop growing land maxed out and crop yields only rising by about 2% annually, the other 4% of extra soy import growth to the Far East will have to come from South America, which still has ample room for crop acreage expansion.

To supply all this soy to the Far East, we can project the following: From 2015 to 2020, to take care of their rapidly growing domestic meat consumption, rising meat exports, alongside rising protein meal demand in ASEAN and China, we can expect average annual increases in Brazil and Argentina's soy harvest's of 7% and 5% respectively. That will in turn allow for annual increases in Brazilian soybean export volumes of 8.8% and Argentine soymeal exports of 6%.

From the 94.5 million tonnes of soy grown in 2014-15, Brazil's soy production will rise to 133 million tonnes by 2020-21. Having already taken top spot from America as the world's largest soy exporter, Brazil will also become the world's largest soy producer, as the US will only be growing about 120 million tonnes by this time.

On one hand, Brazil will be exporting approximately 70 million tonnes of soybeans, to America's 60 million tonnes. China will absorb 50 million tonnes of Brazilian soybeans but up to 10 million tonnes soybean will be destined for Southeast Asia. This is because depending on how many new crushing plants open, ASEAN's soybean imports should rise from the current 6.4 million tonne level to anywhere from 7.5 to 10.0 million tonnes within 5 years.

However, with demand for Brazilian meat growing strongly both in Brazil itself and in overseas markets, its crushing capacity will only keep pace with soymeal demand. That will keep Brazilian soymeal exports close to the 15 million tonnes it currently ships to other countries -and leave Argentina in a position to supply Southeast Asia's soymeal

Exporting more soymeal than Brazil, America and China put together, no country will be in a better position to supply ASEAN's soymeal imports than Argentina. From the 59.5 million tonnes of soy it grew in 2014-15, we can expect Argentina's soy harvest to rise to 75 million tonnes by 2020-21. While its soybean exports will only grow 8.0 million tonnes to about 12 million, this will not bother them, as they prefer to boost their soymeal exports, which contain more value-added.

From 28.5 million tonnes in 2014-15 and a USDA projected 31.0 million tonnes in the upcoming year, we can expect Argentina's soymeal exports to total approximately 40 million by 2020-21. Out of the approximate 10 million tonne increase we project for Argentine soymeal exports over the next five years, we foresee the ASEAN region absorbing 7.5 to 9.0 million tonnes of the amount.

In a way, we are seeing a repeat of the previous decade, but with a slight change in the plot: Led by Brazil, the early 2000s saw Latin America come to the rescue of the world soy market, meeting most of the increase in Chinese soy demand.

Over the coming decade, Southeast Asia will account for a large chunk of the increase in world meat demand -and this time, it looks like it will be Argentina's turn to provide Indonesia, Vietnam, Philippines and Thailand the soymeal they will need. The only question is if the next round of deepening connections between Latin America and East Asia will trigger the same feed cost inflation that the first round did.

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