The impact of the Chinese transition on global food and agri markets

Many developments in China, including the economic slowdown, have an impact on the global markets for agricultural products. Experts from Rabobank’s Food & Agribusiness Research department provide their view.

'The stock market developments have led the prices for commodities which are imported in China, to decrease substantially. Financial investors are shifting money around and financial investors are looking for opportunities in other categories than equity. They are keen to take positions in agri commodities. But there are no immediate changes in soft commodity fundamentals', comments Stefan Vogel, global strategist for grains and oilseeds at Rabobank Food & Agribusiness Research, on the developments on the Chinese stock markets.

Downward pressure

One of the fundamentals is that a slowdown of the economy will affect the demand for modern and added value goods and foods. 'We have been forecasting slower economic growth and increasing pressure on Chinese food and agri sectors for some time. The economic growth rate now seems to be lower than estimated, and the wealth and confidence effects from the equity market slump could add further downward pressure', says Ping Chew, head of Rabobank Food & Agribusiness Research Asia. The economic slowdown has already caused a decrease in the demand for dairy, pork and beef.

High demand for soy

On the other hand, Stefan Vogel says: 'People have to eat.' And China doesn't produce enough food domestically to sustain all inhabitants. That's why China accounts for more than 60 percent of the global soybean imports. The US and Brazil are the main suppliers of the 86.5 million tonnes of soy which the Chinese use annually. Soy oil is mainly used for human consumption and soy meal is an important ingredient for animal feed.

The devaluation of the Chinese currency (renminbi) makes soy imports more expensive for the Chinese. Vogel: 'Yet, the 3 percent price increase which the Chinese pay for imported soy beans from the US, caused by the renminbi depreciation, is more than offset by the global price decrease for soy of 10 percent in August, which is mainly caused by good global harvests.'

Transition into modern farming

Important is the transition from so-called backyard farming in China into modern farming. Traditionally, many Chinese people in rural regions had some pigs and some chickens and fed them with available materials and food waste. Modern farms feed animals with modern processed animal feed, for which soy is an important ingredient. The Chinese soybean import volume in July 2015 was the highest in history.

'The vast majority of the animal proteins which are consumed by Chinese people, are produced in China. More than 80% of the beef is produced in China. The Chinese consume well over 50 million tonnes of pork annually, of which only two million tonnes are imported', says Justin Sherrard, global strategist animal proteins at Rabobank Food and Agribusiness Research.

Sherrard states that the slowing demand in China for animal products can impact prices for producers in other countries. 'For most animal proteins the bulk of production is geared to local markets. That means that a relative small quantity is traded between countries.' However despite this, for most animal products, a lower demand in any significant export market, such as China, affects the global demand/supply balance. Suppliers which export to China themselves can be hurt, because they experience pressure on volumes and prices, and this can have knock on effects in other export markets where the displaced products are sent.