Is China likely to cut soybean demand by 30m tons?

As global soybean prices spiked at the beginning of 2022 and crush margins in China remained loss-making for importers, the scenario of China cutting its soybean demand is once again on the table for discussion.

The world’s largest soybean importer could slash its soybean demand by 30 million tons if it cuts soymeal usage in animal feed, state media Xinhua said on Wednesday.

It is a tempting solution to China’s reliance on soybean imports that grew sharply in the past decade and peaked at 100 million tons in 2020.

However, despite that the volume dipped to 96 million tons last year, China’s total animal feed output soared 16% on year to above 293 million tons as hog herd expanded rapidly, according to data from China’s Feed Industry Association.

Hog feed output accounted for the fastest growth, rising nearly 47% year on year to almost 131 million tons. Soymeal consumption in feed rose nearly 6% last year.

It is possible in theory for China to ditch a quarter of its annual soybean demand in the near future, but the idea faces critical challenges.

Massive hog herd

More and more financial institutions and hog producers are backing the prospect of hog price in China to remain under pressure in the first half of 2022 as China’s huge hog herd will take time to digest.

Companies are halting new investments into new breeding sites but the existing sow herd is large enough to give birth to an even larger hog herd.

Top producer and feed maker New Hope Liuhe said it expected its slaughter rate will rise 3-8 million this year despite an unchanged sow herd.

This is representative for the wider hog industry in China that expanded rapidly last year when margins were attractive. Many large companies grew their sow herd particularly to prepare for higher hog output in 2022.

Even though it is possible to cut the share of soymeal in feed. It is unlikely to completely abandon the ingredient as companies will need to search for alternative supply for protein content.

It could be expensive and have a lower protein conversion rate than soymeal.

Cost competitiveness

Another reason for high soymeal use in feed is because it is cheap relatively to other feeds such as corn and wheat. Soybean imports were liberalized in the 1990s and prices in China are highly correlated to prices in the global market.

But Corn and wheat imports are still strictly controlled through quotas and prices in China are higher than prices in the rest of the world.

Many farms in China over-feed soymeal because it is cost competitive compared to corn.

While farmers could reduce soymeal use, it cannot happen in a vacuum. Farmers would need to get calories from elsewhere, likely from wheat and corn, which are trading near their record highs.

This would deepen the large losses hog farmers are already facing, and could push corn prices even higher.

Meanwhile, the country’s central government recently set the goal to maintain its annual pork output at 55 million tons while aiming to grow the total meat output by 3% from the 2020-level to 89 million tons in 2025.

Hence, the scenario of keeping a stable pork output while cutting down soymeal use is difficult to achieve as most hog producers are reluctant to grow their herd when pork price is trading at a low level.

The economic sacrifice

Lower soymeal consumption in animal feed will have ripple effect on the soybean crushing industry in China that processes nearly 120 million tons a year.

About 19% of crushed soybeans turn into soyoil which is one of the most consumed edible oils in China’s catering industry and it plays an important role in the biofuel sector.

Thus, a reduction of 30 million tons of soybean demand could lead to less economic output in coastal regions in China where most crushers are located.

Furthermore, China will ultimately need to source more alternative edible oil to substitute soyoil while global crude oil and palm oil prices are also high.

Same proposal, but less urgency

This is not the first time that the idea of using less soymeal to alleviate China’s dependence on soybean imports is proposed.

In 2019, similar proposal was made during the height of the US-China trade spat and China banned US soybean imports by imposing a 25% tax. US soybean exports to China slumped from 32 million tons in 2017 to 17 million tons in 2019.

At the time, China also looked to slash soybean demand to bridge a 30-million-ton supply gap, but total soybean imports remained steady at around 88 million tons in both 2018 and 2019.

Domestic soybean output grew to 18 million tons in 2019, up 2 million tons from the year before.

However, it was minimal compared to imports.

Though it is unknown how determined China is to slash its soybean demand, it faces paramount challenges.