BMI View: China's weight in the global agricultural sector is swelling, as the country has a growing impact on international production balances and prices. China will maintain a strong appetite for key commodities for the foreseeable future and we see particular potential for production growth in sugar, dairy and meat products. High demand growth, strong government support and potential for investment and consolidation in these industries will help them outperform in the coming years. However, the agribusiness sector is experiencing challenging times, with GDP growth slowing down, consumers' trust in food safety dwindling, food ingredients prices rising, labour costs soaring and bank loan requirements for small sized enterprises tightening. This is best seen in the slowdown in meat and milk powder consumption in 2015 amidst low supply, elevated prices and the ongoing crackdown on red tape and government receptions, which also supported demand in recent years.
Agricultural production in China has recorded exceptional growth over recent years, driven by an expansion in area cultivated and strong growth in productivity. However, output growth is slowing down in some of the largest producers, due to pollution and land constraints. The government has acknowledged the challenge and is more reformist than ever. In 2015, China will continue to amend its stockpiling policy and will accelerate its reforms to partially liberalise land and prices, which will enable the country to maintain an elevated level of food self-sufficiency.
|Agribusiness Market Value|
|BMI Market Value By Commodity (2005-2019)|
|e/f = BMI estimate/forecast. Source: BMI, FAO|
Corn production growth to 2018/19: 10.3% to 241mn tonnes. Output expansion will be driven by a steady improvements in corn yields, the probable adoption of GM corn in the coming years and sustained public support. China's production deficit will amount around 4mn tonnnes by the end of our forecast period.
Pork production growth to 2018/19: 16.4% to 66mn tonnes. Increased production continues to be encouraged on the back of elevated local livestock prices. The increased availability of vaccinations and the ongoing commercialisation of the industry are also likely to boost output.
Sugar consumption growth to 2019: 19.8% to 19mn tonnes. Consumption will be boosted by rising income, which will support demand for products in key industries, such as the confectionery, dairy, beverage, and food processing
BMI universe agribusiness market value: USD1,375mn in 2016 (up 5.5% compared with 2015, growth forecast to average 4.7% annually between 2016 and 2019).
2016 real GDP growth: 5.9% (down from 6.7% expected in 2015, forecast to average 5.9% between 2016 and 2019).
2016 consumer price inflation: 2.7% y-o-y ave (up from 1.3% expected in 2015, forecast to average 2.7% between 2016 and 2019).
China's government has been heavily supporting grains production over the past decade, via minimum price support programmes and generous fertiliser, machinery and seed subsidies. However, the government is in the process of reevaluating its grains policies and there seems to be a change in its food security policy paradigm. The unintended consequences of the government's policy - overproduction, elevated prices far above international levels, excessive stockpiling and environmental degradation - have now come to the fore. Although China will continue to ensure that about 95% of its wheat and rice is grown at home, the government seems to have taken a less strict stance on corn self sufficiency. In line with its goal to maintain elevated level of food self-sufficiency, the government decided to maintain floor prices for key grains at 2014's levels in 2015.
Meanwhile, the government has listed food safety and modernising farms as among key priorities in 2015, in order to tackle falling agricultural productivity. The government also mentioned protecting farmland, as a large share of cropland is heavily polluted, threatening yields and the availability of arable land in the future. Urbanisation and industrialisation are also reducing farmland. The country also intends on expanding its land reform to entire provinces, allowing farmers to trade their land to alleviate poverty and create bigger and more efficient farms. Finally, the government plans on improving financing systems for farmers (loans), and developing infrastructure in rural areas (irrigation, power grids).
China is in the process of modifying its stockpiling policy for key commodities. Large state procurement at above market prices for many commodities, including soybean, cotton and sugar, has led to the ballooning of government-held stocks. Moreover, the price support programmes maintained prices of these agricultural goods at elevated levels, fostering large imports from cheaper suppliers abroad. The drop in this policy (ongoing for cotton for example) should help ease imports in the coming years.
The outlook for China's grain crop in the upcoming 2015/16 season looks favourable. We forecast the country's total grain production to recover after it saw weaker growth in 2014/15 and to reach a new record high. Meanwhile, grains consumption in China will grow at a slower pace in 2015. The slowdown in China's real GDP growth and, as a consequence, of domestic demand for more value-added agricultural products, such as meat, is weighing on demand for feed and soybean. The improvement in supply, coupled with elevated stocks and lacklustre consumption patterns in 2015, will keep a lid on China's corn and wheat imports in 2014/15 and 2015/16. Meanwhile, imports of alternative feed ingredients, including barley and sorghum, will remain strong in 2015.
China's dairy sector is going through challenging times, amidst low dairy prices, lacklustre demand and growing competition in the downstream segment. Demand growth for dairy products in China was softer year-on-year in 2014, due to the rally in dairy prices over H213-H114 and the ongoing slowdown in the country's GDP growth. Therefore, structural changes in the sector will accelerate in 2015, towards farm consolidation and investment abroad. The outlook for the upstream - dairy farm - sector will improve in the coming quarters, as milk prices in China will pick up towards the end of 2015.