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 (2011-2019)|
Corn production growth to 2018/19: 23.7% to 27 1.2 mn tonnes. Output expansion will be driven by 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 tonnes by the end of our forecast period.
Pork production growth to 2018/19: 16.7% to 66.0mn 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: 21.3% to 19. 1 mn 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 sectors.
BMI universe agribusiness market value: USD1.31trn in 2015 (up 4.9% compared with 2014, growth forecast to average 4.9% annually between 2015 and 2019).
2015 real GDP growth: 6.7% (down from 7.3% in 2014, forecast to average 6.0% between 2015 and 2019).
2015 consumer price inflation: 1.5% y-o-y ave (down from 2.0% in 2014, forecast to average 2.5% between 2015 and 2019).
2015 central bank policy rate: 5.20% ave (down from 5.60% in 2014, forecast to remain 5.20 between 2015 and 2019).
Key Revisions To Forecasts
Milk production forecast for 2014/15 revised down to 38.7mn tonnes (compared with a previous forecast at 38.9mn tonnes).The outlook for dairy production and consumption in 2015 is not as bright as in recent years, as domestic demand is slowing down slightly, leading to a situation of oversupply in the liquid milk market.
Cotton consumption forecast for 2015 revised up to 36.6mn 480kg bales (compared with a previous forecast at 36.3mn bales). Low cotton prices and the government's policy to encourage use of local inventories will boost temporarily cotton consumption in 2015.
In latest the document released every January outlining China's agricultural policy, the government reiterated its goal to remain self sufficient. It 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.
Sugar is one of the commodities for which the government has decided at the beginning of 2014 to eliminate the reserve purchase programme. The change in sugar stockpiling policy has led to a steep drop in domestic sugar prices. We see sugar output declining in 2014/15, as sugar mills have responded to lower prices and falling profits by cutting cane prices. Looking at the upcoming 2015/16 season, for which plantings will start in May, we see downside risks to cane and therefore sugar production, as the Guangxi province decided in December 2014 to again lower cane prices paid by mills to farmers. Although this may help sugar mills' performance in the coming months, it may accelerate cane farmers' shift towards more profitable crops, leading to another decrease in area under cane cultivation.
The cotton sector will also be affected by the ongoing changes to China's stockpiling policy, as in 2014 the government dropped its three-year price support programme, which initially aimed to encourage cotton production by guaranteeing a minimum price at which the state would buy domestically grown cotton. The country is switching from a policy of stockpiling the domestic harvest to one in which growers of cotton will be directly subsidised. The government announced its new policy for cotton in November 2014, leaving Xinjiang, China's largest cotton producing region, as the only province to receive subsequent state support. The ongoing change in China's cotton policy will lead to a stabilisation of cotton production in Xinjiang, while farmers in other regions will switch to more profitable crops, mainly grains.
China's soybean consumption and imports will grow in 2014/15, but at a slower pace than in the past. This will be a direct consequence of the ongoing slowdown in China's real GDP growth, which is weighing on the country's demand for meat and feed. In fact, feed production decreased in 2014, according to the China Feed Industry Association, as a result of lacklustre dynamics in the livestock sector. The operating environment for soybean crushing will remain challenging amid lacklustre meat and soy oil demand and the pickup in international soybean prices.
We expect corn imports to pick up over 2015 after a dispute over the presence of MIR 162 (a non-approved genetically modified strain of corn) in imported shipments led to a steep reduction in imports during November 2013-November 2014. In December 2014, China approved the import of this strain, which is likely to ease import flows to some extent. However, we do not expect a large increase in corn imports for now, as the government is eager to first release its hefty stocks on the domestic market. Moreover, the slowdown in China's real GDP growth and, as a consequence, of domestic demand for more value-added agricultural products including meat, is weighing on demand for feed.