Mid-Year Summary of U.S. Agricultural Export

An Expert's View about Agriculture and Animal Husbandry in China

Posted on: 28 Nov 2012

Although economists are forecasting slower macroeconomic growth for China in 2013, at worst, China will continue to purchase beyond the $21 billion-level in 2012.

THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT POLICY Voluntary Public - Date: 11/9/2012 GAIN Report Number: CH11846 China - Peoples Republic of Post: Guangzhou FY 2012 Mid-Year Summary of U.S. Agricultural Export to China Report Categories: Market Development Reports Approved By: Jorge Sanchez Prepared By: Jericho Li Report Highlights: Reminisce a few statistics. In 2011, U.S. agricultural exports to the world reached a record high of $137.4 billion, among which $19.9 billion (154 percent) was shipped to China (data source from USDA Foreign Agricultural Service). 2011 was a big year for many U.S. agriculture exports to Mainland China. Apart from record U.S. agricultural exports in select categories, the country witnessed record prices for many commodities as well as an increase in farm income. These inflationary pressures triggered specifically by high pork prices were due to low inventories and strong consumer demand in the first half of 2012. China will remain the top export destination for U.S. agricultural products in 2012. Based on the available Jan-Aug 2012 trade figures, we now know have a better understanding of how the 2012 calendar year will fair in comparison to 2011, and what trends will remain as we enter 2013. General Information: What drove U.S. agricultural export growth to China in Jan-Aug 2012? Although economists are forecasting slower macroeconomic growth for China in 2013, at worst, China will continue to purchase beyond the $21 billion-level in 2012. There are many key factors accounting for the growing demand of a number of U.S. agricultural exports to China, and this report sets out to discuss the most notable gains. First, China will continue to increase import volumes for certain bulk agricultural commodities to compensate weak grains output that impact dairy, livestock, and poultry husbandry production. From the central government perspective, in China a food crisis is triggered by a sharp increase in food prices. As a densely populated country, China has limited water and arable farmland resources and the priority is to ensure high yields for rice, wheat, and corn in order to guarantee self-reliance through an efficient use of environmental resources. For bulk grains (mostly referring to corn and DDGS), cotton and oil seeds (mainly soybean and rape seed), China will remain dependent on imports in the foreseeable future. To ease China’s food security pressures, imports of grains and oil seeds will likely increase as local consumer diets include a higher share of animal proteins over starch. In the case of cotton, China is moving towards higher cotton to man-made fiber ratios in many textile products destined for domestic retail. This dynamic sector is taking off with much of the industry already fully focused on promoting brand development geared toward domestic consumers and reducing their export dependency. China's textile sector has undergone several consolidation periods and will continue to scale up value production as branding campaigns help educate consumers and differentiate the market. According to China’s State Council Development Research Center, rising demand for imported food will be fueled by a growing number of local middle-class urban households. Roughly, 1 million local households penetrate China’s middle class segment each year. Greater opportunities that come with a growing economic development means a larger group of consumers will be able to enjoy a higher standard of living, and this consumer class demands a wider variety of safety, quality and tasty food items. This group will increase their collective purchases of meat, vegetable oils and dairy products. Another noteworthy development is that upper middle class and affluent consumers respond well to food items with healthier claims on ingredients used, and production methods (organics, low-fat, etc) and presentation. This ongoing consumer preference also contributes to the claim that growth in demand for imported food and drink items will remain strong throughout 2012 and 2013. The spur in the number of supermarkets, shopping malls, convenience stores, restaurants and international five-star hotels in urban China, also indicates a widening marketplace for higher-end imported foods. Hot and Cold: The outlook for U.S. agriculture exports to China is not entirely optimistic. China’s economy has been cooling down with the 2012 economic target for GDP growth set below 8 percent for the first time since 2005. And, although the slowdown trend is releasing some inflationary pressures with a 6-percent decrease in July 2012, some U.S. agricultural exports were adversely impacted by this slowdown. Nevertheless, unrelenting demand for certain commodities which cannot be met by China’s domestic production will continue to make modest gains in the coming five years. Such is the case for soybeans, wheat, whey, corn, DDGS and other feed ingredients which are expected to grow substantially due to strong consumer demand mainly in the animal feed production industry. Without imports of feedstock commodities, growth in the animal husbandry production will be both costly and limited. In the past four years profitability in this sector has performed poorly and the central government has not provided enough support to remedy this situation perhaps because the sector vastly remains segmented. Instead of the traditional remedy of subsidizing production costs, in the last three years, China has increased national pork stocks, to increase supplies, reduce price surges, and placate any fears of food insecurity. This section of the report is a comprehensive analysis of U.S. agricultural exports to China, though we will be using China's 2012 January to August import statics. We intend to highlight trends and contrast these with the previous years’ to level some predictions on what to expect in the coming two years in the China market. 2012 Winners and Losers: January to August 2012 China imports of U.S. Cotton, Yarn, and Fabric (HS52) reached $3.15 billion (a-22 percent increase) followed by Cereals (HS10), Hides and Skins(HS41) and Wood (HS44) at $1.3, $1 and $1.1 billion respectively. Other U.S. agricultural exports to China with a value above $200 million include Meat (HS02), Fish and Seafood (HS03), Edible Fruit and Nuts (HS08), as well as Dairy, Eggs, Honey (HS04). Meanwhile, Baking Related ingredients (HS19) saw a significant growth to $83 million compared with $27 million during the same period in 2011. Fats and Oils (HS15) had a tumultuous decrease from $238 to $59 million this year, as a result of China national quarantine and inspection bureau’s (AQSIQ) Directive #64 banning the importation of animal fats and oils, as well as Directive#1773 effective June 1, which excluded yellow grease from the Catalogue of Feedstock and Forage managed by the Ministry of Agriculture (MOA) (Detailed information please refer to ATO Guangzhou GAIN report: CH11820). World Trade Atlas China-Imports-Total-from United States Millions of US Dollars January-August HS/Description % Change 2010 2011 2012 - 12/11 - 52 Cotton+Yarn,Fabric $1,384.23 $2,575.66 $3,149.43 22.28 10 Cereals $190.69 $212.36 $1,335.20 528.75 41 Hides And Skins $718.06 $896.16 $1,012.57 12.99 44 Wood $695.83 $1,398.51 $1,080.65 -22.73 02 Meat $169.80 $645.78 $877.01 35.81 03 Fish And Seafood $360.95 $578.28 $665.30 15.05 08 Edible Fruit And Nuts $197.76 $280.54 $317.85 13.3 04 Dairy,Eggs,Honey,Etc $117.01 $163.13 $220.19 34.98 20 Preserved Food $101.76 $123.74 $138.87 12.23 21 Miscellaneous Food $85.61 $110.39 $133.46 20.9 19 Baking Related $16.62 $26.86 $82.84 208.45 15 Fats And Oils $37.89 $238.01 $59.65 -74.94 22 Beverages $31.44 $43.63 $59.10 35.45 09 Spices,Coffee And Tea $6.58 $8.55 $15.73 84.01 51 Animal Hair+Yarn,Fabrc $10.97 $9.63 $10.12 5.15 In South China, from January to August 2012, the top six U.S. agricultural export categories with the largest export value growth was in the Cereals, Baking related ingredients, Fish and Seafood, Edible Fruit and Nuts, Dairy, Eggs, Honey, Etc. as well as Hides and Skins category. The table below highlights the commodities by 4 digit or 6 digit HS codes which have a prominent growth in export value during this period. World Trade Atlas South China-Imports-Total-from United States Millions of US Dollars January-August Value HS/Description 2010 2011 2012 10 Cereal $141.49 $145.06 $760.63 1005 Corn (Maize) $111.36 $79.97 $647.52 1001 Wheat And Meslin $29.95 $65.09 $113.11 19 Baking Related $8.23 $11.69 $66.36 1901 Malt Ex; Prep of Flour: 190190 Malt Extract;Other $1.67 $0.34 $49.47 03 Fish And Seafood $10.06 $24.79 $51.97 0303 Frzn Fish, Not Fillets: 030390 Fish Livers And Roes, Frozen $0.00 $0.00 $18.62 0306 Crustaceans: 030621 O Sea Crawfsh,N Frz $0.03 $0.02 $8.17 0306 Crustaceans: 030622 Lobster, Not Frozen $0.00 $0.06 $9.89 08 Edible Fruit And Nuts $124.96 $170.61 $180.28 0802 Other Nut,Fresh, Dried: 080251 Pistachios, In Shell, Fresh Or $0.00 $0.00 $51.88 0809 Various Fresh Fruit: 080929 Cherries, Fresh, Nesoi $0.00 $0.00 $20.95 04 Dairy,Eggs,Honey,Etc $24.78 $35.73 $47.39 040410 Whey $22.89 $28.80 $43.05 41 Hides And Skins $252.39 $333.59 $354.67 China Remains the Largest Market for U.S. Hides and Skins: The total value of U.S. hides and skins exports to China during January to August increased by 13 percent in 2012, and South China accounts for about a 1/3 of the total at $355 million. Fujian is the major market for these raw materials. According to the U.S. Hides, Skins and Leather Association (USHSLA), 50 percent of all U.S. hides are exported to China. A recent ATO Guangzhou GAIN report (CH11836) provides details into Fujian Province’s transforming tannery industry and continued growth of U.S. hides sales in China. In short, the growth in U.S. hides exports to South China was due to the U.S. market price appreciation. According to USHSLA, although the import volumes in 2010-2012 all declined, there was an increase 30 to 50 percent in value. Thanks to the healthier U.S. retail market in 2012 and a moderate increase in China’s domestic leather apparel and furniture sales, U.S. hides exports to South China are expected to grow slightly in 2013. As Fujian Province’s tanners undergo greater consolidation, it is likely that these enterprises will continue to have access to loans from State-owned banks to support business operations when cash flows run dry. Efforts to re-direct production destined for the export market into China’s domestic market remain weak. With valued-added tax export rebate policies still in place, it appears government and industry leaders are not so serious about developing internal sales capacity by exploring the domestic retail sector. U.S. Feed Ingredients take the Gold in South China: Corn: A key factor contributing to the precipitous increase in U.S. corn exports to China is the U.S. drought’s impact and a late South American harvest driving U.S. corn prices in South China to record level highs. In 2012, China imported $648 million-worth in U.S. corn compared to $80 million for the entire 2011 calendar year. Local importers worry that with an estimated 10-15 percent decline in U.S. corn supplies, China will have to rely on its own production in the first quarter of 2013. The major growing area is located in the Northeast and the North China Plain. Jilin Province is the largest corn producing province in China, followed by Shandong. Altogether, they account for 26 percent of the country’s corn total production. According to Food and Agriculture Organization’s estimates, China will have a record 197.5 million-ton corn harvest this year. Local corn demand in the Northeast only represents less than 30 percent of the area’s corn production. South China is a domestic corn processing base and a net importer of corn even though South Central produces a sizeable amount of corn. The problem is that China’s corn processing industry developed faster than the infrastructure to support its marketing, which makes it difficult and costly to move corn from the oversupplied North to the corn- deficient South. While coal enjoys priority through rail shipments, trucks are in short supply as water transportation is vulnerable due to seasonal price sways. All these factors have created costly bottlenecks for the South to purchase Northern corn, and leave the South no better affordable options than to continue relying on imports. According to the U.S. Grains Council (USGS) because of a growing demand for meat from the wealthier urban middle-class, China manages corn stocks that form part of a strategic national grain reserve instead of exporting livestock (mostly hogs and poultry) products. USGS predicts modest increases in China’s corn imports in the coming year mostly to maintain reserve levels. If China does in fact have a favorable corn harvest this year, it will ease the mounting pressure on South China’s purchasing prices for U.S. feed grains as a result of tight global supplies and unrelenting consumer demand in China. China may import at least 8 million tons of corn in 2012-2013 with the lion’s share destined for livestock feed mills and the remaining percentage used to replenish depleted national grains reserves for corn. South China’s large-scale, modern, and integrated livestock husbandry operations and feed mills are driving demand for U.S. feed grains. Wheat/Baking related: Although China is regarded as the world’s top wheat producer and consumer, a decline in domestic wheat output due to droughts in key wheat growing areas in 2012 as well as widespread disease cutting into yields has forced China to witness a seven-year continuous drop in total wheat production. In fact, China just recently downgraded the country’s 2012 winter wheat output estimate to 111.7 million tons from the previously forecast 114 million tons. On June 14, China purchased 110,000 tons of U.S. soft red winter wheat, which marked the country’s largest single purchase of that class of wheat in eight years. As a result of more favorable prices for U.S. wheat in 2012, demand for U.S. wheat in South China came from livestock feed and wheat milling sectors. According a report from investment bank, Rabobank, there are over 40,000 flour mills in China, although most of which are extremely small and represent the village milling model of the past. South China, particularly Guangdong Province, has been in the process of transitioning its flour milling sector into a modern large-scale industrial platform and continues to play a major role as the top national flour supplier. Since there is no local wheat production in South China, Guangdong Province has managed its wheat consumption needs by becoming China’s largest wheat importer. In 2012, however, mills in South China holding wheat purchasing quota were able to fill the role of brokers to feed manufacturers as well as flour mills. China’s National Development and Reform Commission just released the 2013 import quotas for grains, with the wheat import quota at 9.6 million tons. This means greater sales of U.S. wheat can be expected in 2013, since China’s year-on-year yield and productivity increases in wheat output are minimal. South China has already imported a total of $113 million-worth in U.S. wheat during the first eight months of 2012, which is almost twice as much as in 2011. At the same time, South China’ blossoming food processing industry also strengthened its importation of other baking related ingredients, especially malt extracts/preparation of flour. U.S. wheat’s net import value during the first eight months of 2012 soared to nearly $50 million, while that for the entire 2011 calendar year were just below $1 million. South China’s Whey Imports Soar: Demand for U.S. whey protein, especially high value-added whey products is constantly increasing in China thanks to the rapid development of the economy and a higher consumer requirement for food nutrition and baby formula manufacturing. Feed manufactures also increased purchases of imported whey in 2012 as a substitute for high protein soy meal in livestock feed mixes. In discussion with several feed ingredients importers and the largest feed millers in South China, growing demand for U.S. whey will remain strong in 2013 as the higher soybean meal costs will be the main driver behind these purchases. There are also a number of applications for whey products in multiple food processing industries. ATO Guangzhou has illustrated some of these opportunities in GAIN report (CH11825) China’s strong potential for baby food. One of the world’s largest infant formula manufacturers, Mead Johnson, has a production base in South China with raw whey protein imported and repackaged in order to fit into consumers’ stringent requirements for food safety. In fact, the total value of U.S. whey imported by China reached over $43 million during the first three quarters of 2012. South China, a gateway for U.S. Seafood and Fresh Fruit exports to China: U.S. Fresh Fruit: South China has been a traditional entryway for the importation and consumption of many U.S. fresh fruits and high value seafood over the last three decades, with Guangzhou, Shenzhen and Fuzhou as the major entry ports. Though the pace of China’s economic growth slowed down in 2012, demand for high quality imported fresh fruit was not significantly impacted. In the first nine months of 2012, the import value of fresh fruit imports from the world was on a steady rise, approximately up 33 percent up from the same period in 2011. The consumption of imported table grapes was up 26 percent, while the value of imported apples decreased 10 percent. However, U.S. table grape imports increased 44 percent, while U.S. apple imports were up 2 percent despite a 19 percent decrease from the lack of direct shipments to Shanghai as a result of stricter inspection procedures. Record high retail prices for several U.S. fruit and new China’s inspection procedures might limit further prospects of U.S. fresh fruit exports in 2013. U.S. fresh fruit sales in Shenzhen and Dongguan, are climbing at a brisk pace as a result of strong consumer demand. Shenzhen has one of the highest per capita GDP in Mainland China. Increasing disposal incomes as well as growing number of middle class families are fueling a new wave of demand as sales in Guangzhou plateau. ATO Guangzhou and U.S. producer associations’ continued promotions and marketing efforts with local retail stores and supermarkets have also stimulated sales during peak consumption periods. U.S. Seafood: Just as U.S. fresh fruit, U.S. seafood will maintain steady growth in the coming years, especially when more international five star hotels and high level chain restaurants featuring imported seafood on their menus. Though local imported seafood consumption is not new in South China; however, the recent spike in sales represents new demand spawned by a widening middle class willingness to pay for premium imported lobster and crab. This new demand can be characterized as a combination of an affinity to quality and safety as well as a prestige-factor associated with the consumption of high-end wild caught seafood. It remains uncertain how strong consumer demand will be met as China tightens quarantine and inspection procedures. It is estimated that 65 percent of South China’s imported seafood is transshipped through Hong Kong via the grey channel. Prices for high-end Boston lobster and Alaska crabs will increase in the coming years as demand expands and supplies remain fairly stable due to U.S. fishing quota regulations. Conclusion: South China is an ideal market for many U.S. agricultural commodities. Namely, ideal geographic location on the East, advanced transportation and logistics infrastructure, the highest population and ranking in per capita GDP in China, consolidated dairy, livestock and poultry operations, and a booming middle class. All of these factors have enormously contributed to the many opportunities for U.S. agricultural exports. ATO prioritizes the growth of high value products such as organic produce, wine, grocery-ready products and foresees a greater future for them in the coming years. As more U.S. trade missions and industrial groups to explore market opportunities in China, South China will continue to play a key role in contributing to the country’s overall agricultural imports to meet with the growing demand. One area in the past two years experiencing staggering growth has been in online retail sales, television shopping and group purchasing. With no clear dominant national player and fairly stable sales in first tier cities (Beijing, Shanghai, Guangzhou and Shenzhen), it remains to be seen how these online retailer evolve and compete for greater market share. Specialized wine, candy, and fresh fruit chain stores in major cities are also expanding quickly and offer privately designed gift packages to consumers that in terms of quality go beyond what supermarkets and convenience stores offer consumers. Along with these new chains are delivery services and payments options (payment upon delivery) providing convenience to urban customers. Of course in order to preserve the integrity and safety of perishable imported food items, many food retailers are increasing their use of cold storage management technologies and proper handling techniques. There is also a range of central government policies supporting the development for new investments in refrigerated transportation and cold storage facilities. These supports come in the form of grants, preferential loans and tax credits. In an effort reduce the role of intermediaries in China’s agricultural supply and distribution channels; the central government on repeated occasions has encouraged supermarkets to purchase products directly from farmers. Requests for ATO Guangzhou to arrange direct farm purchasing meetings with U.S. fruit growers remains high. Professional wholesale markets have traditionally handled a large portion of imported fruits and frozen meats, while distributors collect various products and arrange for the distribution to retailers and end-users. Some retailers indicate an interest in buying directly, although it is questionable if they have the capacity (“relationships” at ports and know-how) to handle this complex business. According to the Ministry of Commerce website, by the end of 2011, more than 800 retail enterprises have entered into direct purchase contracts with over 15,000 farm cooperatives, involving more than one million farmers. The report adds that food cost have reduced by 10-20 percent as a result.
Posted: 28 November 2012

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