China Soybeans and Products:

The policy and market environment for trade in 1998/99

The following notes are the result of a recent USDA visit to China to study the soybean economy. During meetings held in Beijing and in the major port areas of Dalian, Shanghai, and Guangzhou, the Team attempted to understand the policies and market environment that determined the relative mix and quantities of imported soy products. China's imports of soybeans, meal and oil have been large enough, and volatile enough in recent years to capture the attention of the entire oilseed industry. The fundamental problem is that the policy and market environment are struggling to balance supply and demand, resulting in large surpluses of meal and extensive smuggling of vegetable oil.

1998 Policy Environment:

Soybeans

Soybeans are importable subject to a 3 percent tariff and 13 percent value added tax (VAT). The VAT is calculated using the CIF value of the soybeans, tariff included. Although soybeans appear in the 1998 customs report as a 'Tariff Rate Quota' (TRQ) commodity, there is currently no active quota system for imported soybeans. In addition to COFCO, there are a limited number of trading agents and processing companies that have import rights. Some foreign-owned and joint-venture processing facilities have a license to import soybeans directly, provided that 100 percent of soybeans are processed at the plant. The majority of soybean crushers do not have a license to import directly, and must procure imported soybeans through trading agents. Officially, a VAT exemption is granted to processors only if both the meal and oil are exported. Other sources indicated that the VAT was refundable for state-owned companies that imported soybeans, or that partial reimbursements of the VAT were possible. (Note: It was indicated that processors, in principle, pay the VAT on domestically procured soybeans, as part of the procurement price).

Soybean meal

Soybean meal is freely importable at a 5 percent tariff. There is no active quota system or VAT applied to soybean meal imports. Again, importing companies must obtain a license in order to import the meal. While the group was told that these licenses are relatively easy to obtain, they must be obtained each time a buyer intends to import, and the quantity is specified in each case. It was suggested by officials in Beijing and elsewhere that the VAT exemption for soybean meal imports is intended to provide 'support' for feed and livestock producers.

Soybean oil

Soybean oil is subject to a quota system, a 13 percent tariff and a 13 percent VAT. In addition to COFCO, there are only five other trading companies that have the authorization to import. It was determined in discussions with officials and state trading companies in Beijing that there is no formal system (procedures or deadline) for announcing quota levels. In other words, the actual quota levels do not become public knowledge. The State Planning Commission, through centralized decision making, determines the appropriate level of imports, and provides end-users with the quota certificates. There seems to be a mechanism to request, or petition for these quotas, although the procedure and timing are not clear. Once the end-users (oil mills, trading companies) receive the quotas, they approach one of the authorized importers, who typically aggregate the quotas before purchasing the oil on the international market for import.

1998 Market Environment:

Soybeans

Current import policy and practice favors the imports of the products. This has created a very difficult situation for the soybean crushers, most of whom are currently losing money (so we were told). Crushers that the team visited were holding very large stocks of meal. All other things being equal, crushers prefer imported (U.S.) soybeans as they contain a higher oil content and less foreign material than domestic soybeans. While Brazilian soybeans were also reported to have a high oil content, U.S. soybeans are still preferred since they do not have the reddish soil color which is noticeable in Brazilian soybeans. (End-users of commercial feed do not appreciate the reddish color which Brazilian soymeal adds to the feed). Rapeseed imports are becoming more prevalent, although they are disadvantaged relative to soybean imports by a 13 percent tariff and 13 percent VAT. It is likely that China will import approximately 1 million tons of rapeseed in 1998/99 to offset reductions in the domestic crop.

Soybean meal

The current policy environment favors imports of soymeal over soybeans. As soybean meal is freely importable, and has been profitable, a large number of speculators have imported soybean meal during the first six months of 1998, creating a surplus environment. The large influx of speculators in the market revealed the vulnerability of China's contract enforcement system. For example, traders received larger orders for soymeal during the second half of 1997. In early 1998, as the world price of soymeal fell dramatically, many of the buyers defaulted on their original contracts, either exiting the market or seeking alternative supplies of inexpensive meal. There is a very significant contract enforcement problem in this area, as buyers 'walk away' from contracts, fail to open L/Cs, or delay payment if market conditions become unfavorable. There have also been isolated reports of quality problems associated with the fall in prices. Waning demand as a result of stagnation in the pork industry and a slow-down in poultry exports has magnified the impact on soymeal trade. In short, soybean crushers and soymeal traders have each reported large losses in the first half of 1998 due to the soymeal market conditions. Traders and end-users were hopeful that the second half of 1998 would bring a revival of livestock production and commercial feed demand.

Soybean oil

The demand for soybean oil remains the strongest in the soy complex. It is also the most heavily regulated, as soyoil; 1) is a "Tariff Rate Quota" (TRQ) commodity - for which quotas are difficult to obtain, and in aggregate, fall short of national demand, 2) is subject to a 13 percent tariff, 3) is subject to a 13 percent VAT and 4) is only importable by six authorized importing agents. As a result of these controls and taxation structure, the domestic price of soyoil is substantially above the world price. This has encouraged rampant and well organized smuggling of soyoil which is estimated to be between 1.3-1.5 million tons. Some sources indicated that smuggling of all vegetable oils was at least 2 million tons. Currently the Government of China is committed to stopping smuggling. What is unclear, is if the government has actually recognized the high level of demand for vegetable oils. While the smuggling has occurred, domestic prices have not fallen. An end to the smuggling could lead to a further appreciation of domestic vegetable oil prices, and a call for the government to issue more (and larger) quotas. Traders in Guangzhou and Hong Kong indicated that they believed vegetable oil stocks in China had fallen over the course of the summer due to the impact of efforts to stop smuggling.

1998 Trade and the 1998/99 USDA forecast:

Based on the current economic uncertainties in China and the rest of Asia and SE Asia, the import forecasts for soybeans and products have been reduced, although slight growth is still expected year-to-year. Current trade and 1998/99 official USDA forecasts are included in the following table.

The data in the first two columns represent Chinese official customs data.

Other Trade Policy Issues:

Johnson Grass Seed (Sorghum Halepense)

Importers of soybeans (crushers) noted another costly impediment to trade in soybeans. The customs officials are currently enforcing zero tolerance for Johnson Grass in shipments of soybeans. This regulation is apparently in disagreement with officially published regulations for soybean imports. Importers have reported that customs officials have shown them specifications that differ from those available to APHIS, USDA. While shipments are not blocked or returned, fines are levied and shipments are quarantined and must be processed within the confines of the plant. It appears that these fines and quarantines are only being enforced on U.S. shipments of soybeans and soymeal (one trader noted that fines were paid due to the presence of sorghum halepense in soymeal). Fines were reported to be as high as $10,000 per shipment.

TCK

U.S. shippers, and China's importers are hesitant to import (ship) soybeans from the PNW due to the TCK issue, which is currently blocking U.S. wheat shipments to China. Even soybean shipments that do not contain TCK can pose a problem for importers, resulting in little if any shipments of soybeans from the PNW in recent years.

Limitations of processing investments

The 1998 soybean team confirmed that there is an effort to limit future investments in China's crushing industry. Currently, MOFTEC must approve any oilseed processing projects larger than $13 million. The policy is also intent on discouraging construction of new state-owned crushing plants. As there is an interest in increasing refining capacity, it seems possible for existing plants to obtain permission to increase investments in this area. In appears that a procedure does exist to get special approval for investments in the oilseed processing industry.

For more informatino contact the author, Robert Hanson at (202) 690-2581

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Last modified: Tuesday, September 14, 2004