Soybean ‘revitalization’ efforts bullish for long-term corn imports

Following the trade war with the US, China has become increasingly focused on increasing its soybean production and lowering its dependency on imports in a program dubbed the “Soybean Revitalization Program”.

While China is very focused on self-sufficiency in agriculture, soybeans have been the notable exception. The country had previously been a major exporter of soybeans, this flipped during the 1995/96 marketing year when it became a net importer of soybeans. 

With limited arable land and rapidly rising food demand, the government prioritized basic staple grains such as rice, wheat, and corn over oilseeds. At that time, China was much poorer and meat was still seen as an expensive item. If soybean imports were disrupted, that would affect animal feed production, but the country would still be producing its own staple grains that would provide the necessary calories for the population. 

While the phrase is meant to encapsulate all food, a very common quote of Xi Jinping is “Chinese people should hold their rice bowls firmly in their own hands” and not rely on other countries for food supply.

Even with rising imports, China’s imports of corn are just 6% of its total production, wheat imports are just 7% of production, and rice imports are 4% of domestic production.

In comparison, soybean imports are 472% of the country’s domestic production. In comparison with stable grains, whose imports are limited through a tariff rate quota system, soybean imports are liberalized and this has led to a sharp rise in imports over the previous decade. 

This has meant that it is difficult for Chinese farmers to compete with their international counterparts, and domestic soybean production has been mostly limited to non-GMO soybeans meant for human consumption rather than for animal feed. 

Even with the protection of import quotas, grain farmers have needed increasing government subsidies to be viable with ever-increasing production costs. This has been doubly true in the case of soybean farmers who lack the protection of import quotas and the government has had to massively subsidize soybean production in order to achieve its goal of “soybean revitalization”.

Subsidies are expected to increase again this year, as the government aims to increase soybean planted area by 10 million mu (667k hectares) over the next year. While these increasing subsidies have led to an increase in soybean production, it remains unclear what the end objective of the policy is. 

Food demand for soybeans has always been less than production. Last year, China produced 20.3 million tons of soybeans compared to food demand of just 15.9 million tons, meaning there was a surplus of non-GMO soybeans of 4.4 million tons. This compares to an average surplus of 2 million tons from 2014 through 2018.

Food demand for soybeans has grown steadily at around 5% per year over the past decade. But this trend is unlikely to continue long-term with China’s population now in decline. 

This also doesn’t substantially ease the country’s reliance on imported soybeans, with massive subsidies only boosting production by 3-4 million tons, compared to imports of 90-95 million tons. 

Increasing domestic production is also unlikely to flow into the animal feed sector due to the price spread. No.1 (domestic) soybeans on the Dalian Commodity Exchange trade at a premium of over 1,000 yuan per ton (USD147 per ton) to No.2 (imported) soybeans. 

This situation is also unlikely to change. China can’t implement any type of import quotas or tariffs and local small farmers are simply not competitive with thousand-acre farmers in the US, Brazil, or Argentina. 

The effect of this will be reduced area for corn. This year, the National Bureau of Statistics said there was a sharp increase in soybean area while corn area was relatively steady although most private analysts were predicting a drop in corn harvested area.

The government has to pay high subsidies to entice farmers to increase soybean production, but this usually comes at the expense of corn planting. 

This enthusiasm for increasing soybean planting is also political, with local governments making large efforts to show that they are on board with the national policy of “soybean revitalization” and this creates policy inertia that may be difficult to reverse. 

Heihe, a city in Heilongjiang that borders Russia, recently published an announcement titled “Heihe: Playing the strongest voice for soybean revitalization and development”.

In the article, the city boasts about its soybean production, local government efforts to increase soybean seed supply, how many millions of tons it ships to major urban centers, and other city government efforts to boost soybean production.

These efforts to increase soybean production won’t dramatically reduce China’s self-sufficiency in the area of corn, but even marginal changes can have major effects on the global corn trade. If Beijing is comfortable with corn imports going from 6% of national production to 10%, that would be an additional 10 million tons of corn imports. 

The US-China trade war highlighted to policymakers in Beijing their country’s dependence on US soybeans. Increasing Chinese soybean production is expensive and does not make sense from the perspectives of economics or efficiency.

However, a bigger political goal is the focus on self-sufficiency or at least reducing over-dependence on US soybeans. In that context, policymakers are likely to continue to push for “soybean revitalization” even if it comes at the expense of corn production. That reduction in corn production will continue to be a long-term bullish factor for Chinese corn imports.