Huge population, an expanding economy and growing middle class demand for a better diet – you can find the fundamentals that underpin market potential in both India and China.
Yet the challenge of turning that potential into export sales has played out in very different ways between the two nations and between commodities. China is the largest world importer of soybeans, buying 1 out of every 2 bu. the U.S. exports, but except for a short period (1994-1996), China has bought almost no U.S. corn.
Meanwhile, India, with almost as many people as China, is a modest but regular exporter of both corn and beans.
As U.S. farmers look at export potential, China and India are “the 900-lb. gorillas in everyone’s living room,” says Rick Fruth, an Ohio corn grower and current chairman of the U.S. Grains Council (USGC), the non-profit group that develops export corn markets. The underlying question for Fruth and other corn farmers is: What will turn all this potential into sales – and when?
For soybean growers, the questions differ: How much can we count on Chinese purchases? What will it take for India to follow China’s path?
China
China’s admission to the World Trade Organization in 1999 raised hopes the nation would open up to U.S. agricultural exports.
For soybeans, the hope quickly turned into reality. “China began buying U.S. soybeans, and they’ve never really looked back since then,” explains Brent Babb, director of program development and communications for the U.S. Soybean Export Council (USSEC). “Every time we expect them to hit a plateau, they grow again. Last year they purchased 23% of the entire U.S. crop.” China’s feed production has doubled, but its use of soybean meal has increased 600% over the past 15 years, he explains. That reflects the increased sophistication of China’s livestock sector and the rapid shift from raising hogs on scraps in the farmer’s yard to commercial hog operations.
“They have a great need for soybeans, for vegetable oil and for soybean meal, so it works for them to bring in the whole product,” Babb says. “China produces about half of the world’s hogs, and maybe 30-40% are now coming from commercial operations. So the largest sector still hasn’t shifted to commercial feed. As they continue to expand, we expect them to use even more soybeans,” he predicts.
Hogs aren’t the only sector driving soybean demand in China. The Chinese also raise more poultry (chickens, ducks plus geese) than any other nation, and they have a 70% share of world aquaculture production.
“Watch the pork sector,” Babb says. “They could add another 10-20 million metric tons (mmt) (367-735 million bushels) of soybean demand over the next couple of decades.”
Mike Callahan, the USGC senior director of international operations for Asia, recognizes some of the same trends in China’s livestock sector.
“They are moving more and more into large-scale intensive livestock production with higher levels of technology and better management. There’s also specialized household production, where a family may have 25-50 pigs instead of one or two; and instead of table scraps, they use vitamin-mineral premix or protein concentrate from a feed mill.
“Swine and poultry are the big demand centers for corn in compound feed, and there’s a new sector growing even more quickly – dairy,” Callahan says. “Even though imports haven’t started, in terms of the policy and the infrastructure, (the conditions for sales) are there. It can be done.”
The council’s analysis continues to point to feed demand surpassing China’s domestic corn production at some point. The challenge is China’s success in corn production.
“They have continued to move the peg on corn production, and they’ve become very adept at using other grain sources such as off-grade wheat or broken rice to stay ahead of demand,” he explains.
That success has come without major improvements in agronomic practices, Callahan says. Individual farms are still small – often only an acre or two.
“You can see these vast corn acres, but when you study it, you find it’s broken into very small plots, and each tended by a different family.”
Chinese farmers have extensive problems with corn borers and rootworms and use a lot of chemicals and fertilizers. Callahan estimates that most purchase hybrid seed developed in China, though as yet no biotech varieties are in use. According to USDA statistics, Chinese corn yields have averaged about 85 bu./acre in recent years.
“China’s corn provinces are very dependent on rainfall,” Callahan says. “If China has a major crop disaster, you could see their imports change fast. When you look at their 2009 production vs. total demand, you’re getting real close to where the two lines meet.”
With corn exports as yet on hold, Callahan points to one major new development affecting U.S. corn farmers: China has suddenly emerged as a major customer for DDGs from the U.S. ethanol industry.
“They use a sharp pencil to calculate their feed costs and they’ve realized the value of DDGs,” he says. Chinese DDG purchases totaled about 8,000 metric tons at the end of November 2008. By the end of 2009, U.S. DDG sales to China totaled more than 540,000 metric tons.
Edward Allen, an agricultural economist who tracks international grain markets for USDA’s Economic Research Service, confirms much of what Babb and Callahan say.
“It’s pretty universally accepted that soybean sales to China will remain strong,” he says. “The biggest question is not Chinese demand but the issue of competition from Brazil and Argentina.
“This (corn purchases) is something we’ve been forecasting would emerge for more than 20 years,” Allen comments. “It’s been slower to emerge, clearly because China has made corn production a very high priority.
“When you look at the dynamics, when you look at the meat demand in comparison with corn yields, it should happen,” he says.
India
Market fundamentals like population and economic growth may be similar in India and China, but the outlook for U.S. corn and soybean sales is very different.
“A lot of people think India will be the next China for soy sales, but they are very different countries,” says Jim Call, the Minnesota farmer who serves as international marketing chairman for the United Soybean Board. “In China, swine production is driving a lot of growth, but in India they don’t eat pork because of their religion, and I don’t see that changing anytime soon.”
Babb agrees with Call’s comments. “India doesn’t have the history of eating meat in large quantities, though they are increasing their consumption of poultry and dairy products,” he says.
He notes that India has the world’s largest dairy industry, is second only to China in aquaculture and both sectors have “huge potential” to develop a more commercial approach to production.
“We’ve been working in India for about 12 years,” he explains. “Our main focus is to get India’s feed and food industry to use all their soybeans domestically. Beyond that, we do see a future when they will have to import soybeans.”
With more than a billion people to feed, India’s status could shift quickly. He notes that India went from zero purchases of U.S. soy oil two years ago to the No. 1 U.S. export market last year, when it imported more than 172,000 mmt of U.S. oil.
Soybeans also face a policy barrier. At present, India permits vegetable oil imports but market access for whole beans is extremely limited.
USSEC has had success introducing soybean meal to India’s aquaculture sector and is working through avenues such as school feeding programs to encourage the use of soy protein products in foods.
“If you see the barrier (to protein products) start to crumble, then India becomes a market we can develop for U.S. soy exports,” says Babb. “In a vegetarian diet, there’s lots of potential for soy use.”
Chris Corry, the senior director responsible for the USGC’s India program, calls the potential for corn exports moderate.
“The population may surpass China’s by 2015, but most people are still vegetarians,” Corry says. “While a lot of Indians have broken with tradition and now consume meat, they may only eat it two or three times a week.”
The pivotal question from his perspective is whether India will have the capacity to continue supplying enough corn to its growing poultry sector.
“Our perspective is that India will eventually be a consistent net importer, but I think that’s still far away,” he says. “No one knows for sure, but probably less than half of its corn crop is from hybrid seed. The rest is open pollinated.”
India’s corn acreage is not increasing, but as technology improves, yields are expected to climb beyond the current 33 bu./acre. Corry also notes that India’s government subsidizes fertilizer use and predicts it will continue to promote corn production.
Unlike soybeans, corn shipments to India no longer face a prohibitive import duty, and Corry says there are occasional windows of opportunity when imported corn can compete on price with domestic corn. But the windows “aren’t open very long, and shippers get nervous about it because there’s no transparency to India’s biotechnology regulations.”
So far, he says, exporters just don’t want to invest in three to four weeks of shipping when there’s a risk the cargo will be rejected on arrival.
“There are five or so wet milling companies on India’s west coast,” he adds. “They are worth watching because they will probably be the first to import corn, and right after them will be the poultry producers.”
Ultimately, the experts agree on a lot about these very different markets. They expect India to eventually become a moderate importer of corn and soybeans. They believe China will continue to dominate the world soybean trade as its demand for protein grows. As for corn, market dynamics still point to China becoming a net importer – but when?