China's Next Steps - 5

Future of U.S. Exports

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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U.S. farmers have struggled in the past few years to export pork to China while the country continues to ban beef and poultry products. Soybeans look to remain the biggest commodity export to China. (DTN file photo by Chris Clayton)

OMAHA (DTN) -- Former U.S. Agriculture Secretary Dan Glickman was in China earlier this month on a trip focusing not on food or agriculture but security issues such as energy, the South China Sea and North Korea. Still, Glickman was struck by how urban and modern the cities were compared to his first trip to China as a young congressman 35 years ago when basically everyone rode bicycles and wore the same kind of clothes.

"It's just remarkable the amount of infrastructure that's been developed -- roads, sewers, bridges, buildings, just developing," Glickman said. "I've never seen anything like it in my life."

In this fifth and final story in a series, DTN continues to look at China's influence on U.S. farmers who have become more reliant on China as an export market.

U.S. farmers would like to be the go-to market for China in meat, soybeans and grains, but China has proven to be as fickle as a Beverly Hills diva window shopping for the latest name brand on Rodeo Drive. Demand for meat protein is high in China, but the country maintains a ban on U.S. beef, poultry and eggs while only allowing imports of pork certified as ractopamine-free.

On Thursday, U.S. Trade Representative Michael Froman announced the U.S. had made headway in its trade disputes with China by getting the Chinese government to end export subsidies for seven industries. The USTR remains quieter about the prospects of reopening China to U.S. poultry or beef; the USTR press office did not respond to emails from DTN about the status of any talks to lift those import bans.

Still, reflecting on the food needs of the country, Glickman noted China now has 100 cities with at least 1 million people. The trend towards urbanization continues unabated as people are still moving away from the farms and the less-populated areas to the cities. Additionally, it's much easier these days to identify the nation's wealthy and middle class. Glickman pointed out that the Communist country now has more billionaires than the U.S.

"The other side of the coin is their demand for an ... (increasingly better) lifestyle based on higher incomes and living conditions is going to continue unabated," Glickman said.

That has to bode well for demand for global farm products, particularly soybeans and other feedstuffs that will allow Chinese consumers to eat more protein. "Those trends are absolutely fundamentally clear," Glickman said. "Their economic growth and demographic changes are probably pretty good news for producers in the U.S."

SOYBEANS REMAIN KING

When it comes to U.S. exports to China, soybeans remain king. The U.S. Census Bureau, which tracks trade, shows the only products crossing the Pacific from the U.S. to China with a higher value than soybeans last year were aircraft engines and parts, valued at $15.4 billion, compared to $10.5 billion for soybeans.

Sorghum exports were valued at $2.1 billion, along with $1.27 billion for animal hides, $1.4 billion for shellfish and $735 million for animal feed.

Last month China announced it was shifting its policy on corn price supports as a way to get rid of its high corn stocks and eventually putting much cheaper corn on the market for its farmers to feed. While there may be a lot of questions about the quality of those corn stocks, the move by the Chinese government also translates into a lot of questions about what that means for Chinese crop production this year.

Jim Sutter, chief executive officer for the U.S. Soybean Export Council, has been in China for more than a week. He said in a phone interview from Beijing that nobody has a good understanding of the ripple effects that will come from China's policy shift.

"There is indeed a lot of questions in the market here about what the change in the corn policy is going to mean and I think people don't know for sure," Sutter said. "It will clearly mean a difference in the price structure for corn, but we don't know what that will mean for planting changes."

Overall, Sutter said he picked up that the corn situation shouldn't translate into a huge shift to soybean acres for Chinese farmers. The Chinese government earlier this week released its expectations for crop production and indicated a slight increase for soybeans. "But that will be exclusively aimed at the domestic market with those soybeans being non-GM (genetically modified) beans that they produce for use in the edible market," Sutter said. "I don't think that will impact the importation of U.S. soybeans, or soybeans in general."

CHINA INCREASING SOYBEAN PRODUCTION

Yet, the Chinese government also indicated this week that it wants to increase soybean production 60% by 2020, moving from 12 million metric tons in 2015 to 19 mmt.

"China's current yield of 1.8 tons per hectare equates to 27 bushels an acre so we see that they have room to improve and probably still need time to learn," said DTN Market Analyst Todd Hultman. "I doubt that any increased soybean planting in China in 2016 will make much difference to the world situation and even if they see marginal improvement in the next five years, they will still need U.S. and South American beans."

China imported just over 80 mmt of soybeans in 2015. Projections are those imports will grow to 100 mmt by 2020. "We continue to hear that we should continue to expect slight increases year on year," Sutter said.

As Hultman noted, "The growing trend of increased prosperity in China continues to force them to reach out beyond their own borders for solutions. In the past, corn and wheat production were given priority as they were willing to import soybeans. Now, the pendulum has changed direction as China sees a need to expand their sources of protein. It seems that no matter which direction they turn domestically, they will have to continue to depend on the outside world for at least some of their needs and the continued cooperation of good growing weather is essential."

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SOUTH AMERICA FILLS NEED

Lately, China has increasingly turned to South America to fill more bean demand. The U.S. has exported 26.74 mmt of soybeans to China so far in the 2015-16 marketing year. During the same period, U.S. soybean exports to China are down about 2.74 mmt from a year ago, but Brazil's exports to China are up 5 mmt and Argentina's soybean exports to China are up 1.8 mmt from a year ago, according to Informa Economics.

"Brazil's currency is such that Brazil's farmers are selling everything they have got and U.S. producers are holding on to their beans waiting on higher prices," Sutter said.

Sutter said he continues to be pleased by the demand situation in China. After years of thinning the sow herd over there, hog producers are seeing higher margins and getting signals to expand.

"We expect slow, steady increases in demand to continue," Sutter said.

Sutter has been on a mission in China with the International Soy Growers Alliance, which includes growers from the U.S., Brazil, Argentina, Canada, Paraguay and Uruguay. The group of competing exporters has a mutual interest in trying to convince China to improve its process for biotechnology approvals.

"It's always slow progress with the Chinese, but I believe we are building the relationship," Sutter said. "One of the things we're trying to get them to understand is why growers need new technology. By having farmers from all of these countries to interact with Chinese authorities, it helps them to understand why we need new varieties approved."

BULLISH ON PORK

As reports come out of China about rising food costs for staples such as pork, U.S. pork exports to China were up for the first two months of the year by 86% in volume and up 50% in value. That was due partly to China recertifying 14 U.S. packing plants for export.

The increase in imported pork is also partly due to higher demand in China where authorities have essentially culled out part of the Chinese sow herd. That corn stockpiling that went on for years had caused Chinese livestock producers to pay significantly more for corn. It caused thousands of smaller Chinese hog producers to quit. The sow herd in China has gone from 50 million sows to 37 million sows over the last two years. That change in the size of the industry is the same as if the entire Canadian, Mexican and U.S. hog industries disappeared.

"That's how much change has happened in China in just the last two years," said Will Sawyer, executive director of protein research for Rabobank in the U.S. "The government has been forcing out these small-scale backyard, inefficient, poor-for-the-environment producers."

The problem, however, is that Chinese leaders can't afford to drive up food prices in a country where nearly 40% of disposable income is spent on food. "Any indication of food inflation in China is a bad idea," Sawyer said.

The U.S. pork industry will be counting on China to stay open for business as five new pork packing plants are potentially coming on line in the U.S. Chandler Keys, a meat industry lobbyist, said the pork industry is "very bullish" on China, which is reflected in the packing plant expansion going on now.

"China's still the factor," Keys said. "They are going to have to export more and more just because we're not going to grow a lot of demand domestically. We already eat a lot of pork."

POULTRY BAN

Last year's highly pathogenic avian influenza outbreak caused China to ban U.S. poultry in January 2015. There have been no signs China intends to lift that ban anytime soon.

The poultry ban came even after USDA approved importing processed chicken from China. That USDA rule had a caveat though. Any chicken strips, buffalo wings and the like coming from China first had to come from chicken meat originally exported from the United States into China. The idea has proven controversial among U.S. consumers and Congress.

Still, neither is happening. Since the U.S. isn't allowed to send any chickens to China, China isn't shipping any processed chicken back into the U.S.

Once again, the U.S. farmer's loss turns into South America's gain. Before China banned U.S. poultry, the U.S. accounted for 40% of poultry exports to China in 2014 while Brazil accounted for 50%. Last year, Brazil accounted for 75% of poultry exports to China while Argentina, Chile and Poland all saw their market shares boosted as well.

While exports from the U.S. are blocked, USDA's Foreign Agriculture Service projected China will continue to import higher volumes of poultry from the rest of the world. USDA revised its projection in February and estimated China will import 400,000 tons of all poultry products, which is 140,000 higher than USDA's initial forecast.

Until the U.S. export ban, the U.S. also was responsible for providing 90% of the grandparent stock Chinese producers used to raise white broiler meat. Those live breeding poultry exports have been lost as well. Much of that market has now been ceded to New Zealand and a few other smaller suppliers, USDA stated.

Tom Super, vice president of communications for the National Chicken Council, said the council and the USA Poultry and Egg Export Council continue working with USDA and the U.S. Trade Representative's office to get China to lift the ban.

BEEF BLOCK CONTINUES

China banned U.S. beef in 2003 because of bovine spongiform encephalopathy and hasn't reopened the market despite alluding to the prospect. Nonetheless, there are constant reports that U.S. beef is being smuggled into the country from Vietnam or Hong Kong, which allows U.S. beef under its own rules. The U.S. exported just under 121,000 metric tons of beef to Hong Kong in 2015 valued at $800 million. That export value to Hong Kong was down about 30% from 2014 figures.

The key hang-up for getting legitimate beef exports into mainland China is the lack of traceability among the U.S. cattle herd.

Again, the U.S. is missing out. Rabobank noted in a report late last month that, "Despite a slowing economy, official Chinese imports of beef continue to increase." Rabobank stated China's official beef imports surged by 60% in 2015, reaching 473,000 mt.

Rabobank also cited that Brazilian beef producers were the big gainers. Rabobank stated Brazil expects to double its beef exports to China this year.

Phil Seng, president and CEO of the U.S. Meat Export Federation, noted in column last year that being shut out of China has a serious ripple effect on the U.S. cattle industry.

"While the U.S. industry remains on the sidelines, Australia, Uruguay, New Zealand, Argentina and Canada are all gaining a strong foothold in China," Seng wrote. "Being shut out of the Chinese market also affects the prices U.S. beef cuts command in other Asian destinations, as China has begun to exert significant influence on global beef trade. For the U.S. beef industry, the lost opportunity due to our lack of access to China is currently estimated at more than $100 per head."

DOTTING THE 'I's AND CROSSING THE 'T's

Bonnie Geray is a warehouse manager for PCC Logistics in Tacoma, Washington; her main job is make sure any food items moving from the port will clear inspection in China. Pork is one of the biggest items moving through the refrigerated warehouses. Geray said inspections became more complicated last fall when Chinese officials began cracking down on the smallest details. It began when China stopped accepting minor shipping invoice changes called "in-lieu-of certificates." Those certificates were often used at Chinese ports to sign off on paperwork problems, but can no longer be used. That was a game changer, Geray said.

"They stopped accepting the in-lieu-of certificates last fall and it really created some big expenses for companies that had to completely re-inspect their loads," Geray said.

In at least one case, an entire shipment of pork was rejected by Chinese inspectors at a port because the company did not have the letters "Co." after the company name. Geray said the entire shipment was sent back to the U.S.

"It had to be brought back to the facility, unloaded, re-inspected and USDA had to go through it, labels had to be changed, new health certificates issued and it was 100% re-inspected because the paper work was wrong," Geray said. "It was based 100% on a clerical error and now we have to do a full re-inspection on it just so they can export it."

Geray said the situation was an eye-opener for her, the client shipper and others working logistics to move food products to China. But she speculated it was China's way of sending a message that they expect higher standards now than in the past.

**

Editor's Note: This is the fifth and last article in this series looking at the growing influence of China on American agriculture.

Chris Clayton can be reached at Chris.Clayton@dtn.com.

Follow him on Twitter @ChrisClaytonDTN.

(CZ/ES)

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Chris Clayton