Will China's Appetite for Corn and Soybeans Ever End?

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China’s accelerating imports of American corn and soybeans in 2020 has continued this year. To understand whether this marks a long-term shift requires not just a review of demand drivers, the geopolitics straddling Sino-U.S. trade relations and food security, but also innovation in food technology.

So far this year, China’s demand for corn continues unabated. After buying a record 11.3 million metric tons of corn in 2020, according to General Administration of Customs data, this marketing year’s total could reach as much as 26 million metric tons according to the United States Department of Agriculture (USDA). In response, global corn prices have continued to climb, now above $6 a bushel — a near eight-year high.

China’s soybean imports have also been tracking higher, reaching a record 98.5 million metric tons in 2020 and are set to top 103 million metric tons this marketing year, according to the USDA. This has led to a boom for U.S. soybean farmers as China imported over 50% more in yuan terms in 2020, as supply disruptions in Brazil spurred additional U.S. cargo purchases.

 

A key factor behind surging agricultural imports has been China’s need to rebuild and feed its hog population following a calamitous outbreak of African swine fever. By some estimates the virus had wiped out half the domestic hog population in 2018 and 2019, which has since been built back to nearly 90%of previous levels. Furthermore, much of this new capacity has been industrial style, large-scale hog operations, which use a significant amount of both soybean meal crushed from soybeans, and corn in their feed mix.  

Addressing Food Security

China continues to rely on overseas agriculture markets as it prioritizes food security.                   

While China has typically always imported soy, it has in the past aimed for self-sufficiency in corn. The combination of limited arable land and a population of over 1.4 billion makes providing affordable and plentiful food an ongoing challenge, which historically has been a potential source of popular unrest. Add into the mix rising geopolitical tensions and the COVID-19 pandemic, it is understandable that Beijing would move to address food security.  

As a starter, in March this year the government’s latest Five-Year Plan placed food security at its core, introducing policies to lessen the reliance on imports and to develop its “dual-circulation” or internal, demand-led strategy. This has been given further impetus as food supply self-reliance has been promoted as a key priority and policy focus ahead of the Chinese Communist Party’s 100th anniversary this July. 

New initiatives improve subsidies for domestic corn and soybean producers and encourage high-quality animal feed crops such as silage corn. Another focus is to encourage the adoption of modern agricultural technologies – such as gene editing, synthetic biology and AI – to boost the seed industry and industry yields, which remain low by international standards. The $43 billion purchase of Swiss agri-tech group Syngenta in 2016 by the state-owned ChemChina, could well hint at a bigger move in this direction.

The BioTech Puzzle

The road ahead to food self-sufficiency, however, is far from smooth and pitted with challenges, questions and concerns. A longstanding obstacle has been winning Chinese public acceptance of biotech crops. While China has been planting insect resistant cotton and biotech papaya since 1997 and 2006 respectively, GMOs have not yet made it into the major grains and oilseed crops, such as corn and soybeans. The central government’s plans remain shrouded as they seek to forge a path that balances public resistance to GMOs, alongside the pressing need for food self-sufficiency.

Corn-based ethanol is another policy puzzle. After trialling the use of biofuels to reduce vehicular emissions of pollutive contaminants, plans for a nationwide roll-out of E10 ethanol-blended gasoline by 2020 have been delayed. The reason is unclear: it could be that grain self-sufficiency is now overriding environmental health concerns or alternatively, electric vehicle adoption –  not biofuels –  is now the priority. Only with some clarity on these competing policy issues can we get a picture of the longer-term demand for corn.

But probably the biggest mystery of all is the question of just how much corn is actually stored in China’s state and private grain inventories? This has driven CBOT corn and soybean prices over the last few months, as guesstimates from industry analysts seesaw between severe shortages to overflowing bins. There is also little consensus in analyst commentary with corn buying binges explained away as authorities refilling empty state warehouses or China making good on buying commitments from its Phase 1 trade deal with the U.S.

The Role of Fiscal Stimulus

Beijing has publicly made comments cautioning about the risks of large U.S. fiscal stimulus, coupled with the Fed’s and other central banks’ extremely accommodative monetary policy. The leadership will no doubt recall that many commentators blamed the Fed’s QE2 for the last commodity supercycle.   

If we do start to see further steep price increases, another threat is protectionism as countries focus on feeding their domestic populations and insulating themselves from global markets. For example, Russia, the world’s largest exporter of wheat, had implemented grain export taxes early this year, while Ukraine uses export quotas instead. Such acts could potentially create a negative feedback loop, causing importing nations to hoard even more and unnecessarily drive prices even higher, as the cycle repeats itself.

Conventional Wisdom Remains Uncertain

China also tends to have an outsized impact on commodities markets, not only in agricultural products, but also in metals and energy. The sheer size of China’s population and rapid improvements in the quality of life, has created a continuous demand for most agricultural commodities. So will China’s appetite for corn and soybeans ever end? Based on conventional wisdom, the answer would likely be no.

However, the world as we knew it is changing quickly. We live in a technological age. Plant based meats. Precision agriculture. Advanced seed technologies. A generation concerned with environmental, social and corporate governances. A youth movement united against climate change and conspicuous consumption. These are trends not only seen in the West, but all around the world.

In this new reality, we should not be surprised if conventional wisdom gets turned upside down, as we have witnessed throughout most of 2020 and 2021. No answer today is safe from the potential disruption of tomorrow.


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