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Production
Estimates and Crop Assessment Division |
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Production
Estimates and Crop Assessment Division |
March 31, 2003
Chinese farmers face increasing exposure to world markets, but the Chinese government continues to protect them from the full effect of the world market with an assortment of strategies and policies. Expansion of China’s soybean production is seen as evidence that China is more open to market forces, but not fully open to world markets. USDA's current forecast is for China’s soybean production to expand to a record 16.4 million tons in 2002/03, up 6 percent from last year, and up 59 percent from 10 years ago.
When China acceded to the World Trade Organization (WTO) on December 11, 2001, it was widely believed that China would be slow to initiate policies and procedures to fully come into accord with standards of the WTO. Nevertheless, it was thought China had already taken some steps to increase the openness in its economy and that accession might facilitate the process. China’s farmers would have to become more efficient to compete with modern mechanized producers in other nations such as the United States, Brazil, and Europe. However, with three-quarters of the population living in the countryside, keeping the income of farmers stable is something the Chinese have taken into consideration.
World markets and government policies are affecting China’s internal soybean prices. Wholesale soybean prices rose last year from US$228 per ton in January 2002, to US$259 per ton in July, and to US$290 per ton in December. (China’s Renminbi Yuan is pegged at 8.28 Yuan per dollar.) Meanwhile, soybean prices, CIF Rotterdam, rose from US$188 per ton in January, to US$229 per ton in July, and to US$241 per ton in December. Price increases in the producing areas of China were attributed to a shortage of soybeans. The Dalian soybean futures market experienced its largest ever delivery volume of soybeans in history. Partly as a result of high world prices--but also due to an import blockage from March to June--the supply of soybeans in Northeast China was swiftly reduced to low levels.
Oil and meal prices have been affected by both world and domestic conditions. Wholesale prices for soybean oil stood at less than US$570 per ton in February 2002, 43 percent lower than in January 1999. Falling prices were partly attributed to the growth of China’s own crushing industry, which appears to have shifted trade permanently away from processed products and to oilseeds. Then, as world prices climbed, Chinese wholesale prices climbed, to US$621 in July 2002, and to US$713 in December. Similarly, soybean meal prices climbed from US$198 per ton in January to US$224 in July, and US$257 in December, as rising demand from China’s livestock industry absorbed increasing meal output.
Chinese farmers were not able to react to the rising prices by increasing plantings in 2002, because planting occurring in May and June. Farmers had already made planting decisions. Chinese farmers tend to make their planting decisions based on prices received when selling the previous crop, and not on market prices at planting. As a result, Chinese soybean area was almost unchanged in 2002/03, at 9.40 million hectares, compared with 9.48 million in 2001/02. Still, soybean area was relatively high, the fourth highest on record since 1963. Chinese farmers did benefit from the relatively higher prices with this autumn’s harvest, and may react by increasing area in 2003/04.
Though farmers didn’t get the price signal in time to plant more soybean area in 2002, production increased due to good weather in key growing regions and an better yields than in 2001. Relatively high temperatures during spring sowing in northeast China slightly advanced planting times. In the Yellow-Huai regions of north China, germination and growth of soybean crops were favorable. China’s yield is showing a significant positive trend. The linear trend yield for 2003/04 is about 1.81 tons per hectare compared with 1.74 tons per hectare estimated yield for 2002/03. The 1.81 tons per hectare would be a record yield if realized.
Soybean expansion is being aided by a reduction in spring wheat area. China’s spring wheat area fell to 2 million hectares in 2002/03, 8.7 percent less than in 2001/02, as the central government ended guaranteed minimum prices for the crop and encouraged farmers to grow more soybeans. Spring wheat purchased by the government had been generally low quality and had gone into storage. China has reduced its wheat stock levels sharply from 103 million tons at the end of 1999/2000 (nearly as large as production that year which was at 114 million tons), to an estimated 62 million at the end of 2001/02. This decline comes from the much larger winter wheat crop that declined in area from 29 million hectares in 1999/2000 to an estimated 25 million hectares in 2002/03.
Corn is the principal crop that competes with soybeans in northeast China. China’s relatively large soybean harvested area in 2002/03, however, did not come from decreased corn area. Corn harvested area for 2002/03 is estimated at 24.5 million hectares, essentially equal to the 5-year average. In the new, more open economy, excessive stock levels for corn have been reduced, not by reduced area, but by a combination of increasing domestic consumption and increasing exports.
Travel observations show that some marginal land is being abandoned. In some areas, steep slopes had been carved into terraces at a time when food shortages were more common. Some of this land is being reforested. Yields on better land are increasing more than enough to offset the loss of area. Soybean yields in particular have shown a significant upward trend over the last twenty years. The Agriculture Department of Heilongjiang Province recently stated that 290,000 hectares of cultivated land will be returned to forests, 60 percent more than in 2002. At the same time, the province will attempt to limit corn acreage and increase soybean acreage.
Agricultural land tenure arrangements have been made flexible enough so that surplus agricultural labor can seek non-farm employment while they maintain their land rights. Land tenure arrangements vary widely from village to village, but the Household Responsibility System broke up collectivized agriculture and restored the farm household as the primary unit of production. First implemented in poor areas as a local anti-poverty program, it was so successful that by 1984, when it was officially sanctioned, nearly all of China’s countryside had adopted the system. Under the Household Responsibility System, family members can seek employment in towns or large cities, provided someone in the family remains resident in the local village. Additionally, neighbors and “contract labor” are allowed to work the land for someone else in the village. This is allowing larger functional farms to develop and facilitates the adoption of new technology and mechanization. As evidence of this, John Deere Corporation is involved in a joint venture operation to build 50, 60, and 75 horsepower tractors in China.
China’s Ministry of Agriculture has adopted what is referred to in press reports as the Soybean Recovery Plan to boost national soybean production. China has recognized publicly that, in the face of challenges after China’s entry into World Trade Organization, it needs to make an effort to improve its competitiveness in international markets. The Ministry’s goal is to achieve yields similar to averages seen across the globe within 5 years. That seems optimistic: world soybean yield for 2002/03 is estimated at 2.38 tons per hectare versus China’s 1.74 tons. As part of the Soybean Recovery Plan, officials at the Ministry of Agriculture and Jilin provincial government have announced their intention to raise soybean planted area in Jilin to as much as 1 million hectares from the 2002/03 level of 560,000 hectares during the next 5 years.
China currently has a rapidly growing economy. Investment in infrastructure construction surged 25 percent to US$126 billion year-on-year in the first three quarters of 2002. Investment in real estate increased by 30 percent in the first 10 months of 2002. The growth in wholesale sales was 10 percent. With the booming economy, China is better able to invest in agriculture and the infrastructure that supports agriculture.
China is investing in soybean crush capacity. Current soybean processing capacity has been estimated at 45 million metric tons per year. An additional 6 million tons will be added with the inclusion of ongoing projects and approved projects. The crushing industry benefited when the 2001/02 crop was purchased at relatively low prices, but meal and oil prices increased, first from the temporary import stoppage related to GMO import permit requirements, and then from a rise in world prices for oil and meal.
The Ministry of Agriculture has stated publicly that it is committed to improving the transportation and marketing infrastructure, though plans for accomplishing this appear to be undefined. Despite transporting record volumes of soybeans in recent years, the Chinese rail system is inadequate for transporting the large volume of commodities available, at low cost, from the interior northeast states to markets in coastal cities. Added to transportation difficulties is the lack of an organized marketing system. With no system of local silos to do the consolidating, the task is most often carried out by independent buying agents. The agents generally have little or no ability to separate or grade soybeans. Enforcement of contract terms is difficult under these circumstances, and crushers report serious problems with variations in quality or delivery time for domestic soybeans.
With accession to the WTO, China must abide by its commitments to maintain low tariff rates. The tariff rate on soybeans is 3 percent, 5 percent on soybean meal, and 9 percent on soybean oil. The over-quota tariff in 2003 is 35 percent for meal and oil. Soybeans have no tariff rate quota. Chinese soybean producers remain inefficient, with low yields and a poor farm-to-market transportation system. China has, however, an assortment of non-tariff barriers to imports, which are giving its producers some additional protection.
China’s soybean imports for 2001/02 (Oct.–Sep) are estimated at 10.4 million tons, down from 13.2 million in 2000/01. The reduction in imports has been attributed to new biotech safety certification requirements that went into effect on March 20, 2002. According to the regulations, all biotech products entering China would have needed safety certificates issued by China’s Ministry of Agriculture (MOA). Because of uncertainty about regulations, international traders were unwilling to ship soybeans to China for fear of having their cargoes rejected at Chinese ports. On June 12, 2002, after a two-month hiatus, the first cargo of foreign soybeans was imported into China using interim biotech safety certificates. The expiration date for the interim rules has been extended to April 20, 2004 after intensive government-to-government negotiations. The extended time is needed to accommodate field trials that are necessary to satisfy requirements for obtaining biotech safety certification. Continuing uncertainty about the regulations, and the bureaucratic headache of filing applications is undoubtedly raising the cost of importing soybeans into China.
On January 10, 2003, Beijing said it had rejected Brazil’s application to export soybeans to China under the interim rules. China’s rejection stems from Brazil’s prohibition against the growing of GMO soybeans, even while it is forced to acknowledge that some of its soybean exports contain GMO seed. Technically, this violates the idea that exports to China must be acceptable in their country of origin. On January 27, 2003, after negotiations between Brazil and China, China said it had given approval to Brazil soybean imports. Traders announced on March 19, 2003, well into Brazil’s 2003 harvest, that they had begun receiving permits allowing imports of Brazilian soybeans.
China has also proposed a new food safety law that would require biotech companies to show that their products are safe for human consumption. Biotech companies believe the testing costs would be significant. Contrary to international norms, MOA insists the tests be conducted in China even though, in the case of Round-up Ready Soybeans, the tests would yield data similar to what has already been submitted to MOA.
China has been slow to implement market opening TRQs for soybean oil and other agricultural items as it had agreed to in its WTO accession agreement. Under China’s agreement, the import tariff for soybean oil would be 9 percent within a quota of 2.5 million tons in 2002. The quota would rise to 3.58 million tons in 2005, and it would be eliminated in 2006. However, TRQ allocations to end-users have been managed in a non-transparent manner, effectively limiting potential purchases.
China uses Value Added Taxes (VAT) exemptions and differing VAT rates as a policy tool to encourage production and export of certain products. The VAT on soybeans is 13 percent, less than for most non-agricultural commodities. The VAT is not assessed on a sale from a farmer to a trader or mill; however, a purchase VAT must be determined for the trader’s sale. In calculating the purchase VAT, it has been argued that the effective VAT for domestically provided soybeans is less than the full 13 percent applied to imports.
By reclassifying soybean meal exports, China mitigated a growing problem of excess soybean meal supplies, helping to maintain domestic soybean prices. Large volumes of meal, available from the rising levels of soybean imports, were driving down the domestic price of soybean meal. In 2001, the State Administration of Taxation was classifying soybean meal as a farm product, under which there was a 5-percent tariff refund for exported soybean meal. However, in the second half of 2001, the supply of soybean meal in China began to exceed demand, and market prices begin to drop. In 2002, China reclassified soybean meal as an industrial product that is produced from farm products, giving soybean meal a 13 percent tariff refund. This still does not cover the 3 percent import tariff plus the 13 percent VAT charged on the imported soybeans. Other mechanisms to refund tariffs and taxes when soybean meal is exported have been proposed, but are not yet finalized.
China also favors soybeans with reduced transportation fees. The Chinese government stipulated that, from April 1, 2002 to the end of 2005, soybeans and certain other agricultural commodities would be exempt from the Railway Construction Fund. The Railway Construction Fund is being funded through the collection of a fairly heavy fee from shippers to pay for upgrading the nation’s railway system. Discussions have been underway within the Chinese government to decide if the exemption will be extended to soybean meal.
The economic environment for producing soybeans in China is complex, with risks inherent in an increasingly freer market, but also improving agricultural marketing infrastructure, transportation price breaks, import restrictions, and other forms of economic support. One year after China’s accession to the WTO, the mix of factors appears to favor continued importance and possibly even expansion of soybean production in China.
