China has risen from a severely impoverished nation just a little more than 40 years ago to the second-largest economy in the world today. With the world’s largest population, it is also the world’s largest consumer of agricultural products. The country’s agricultural imports surpassed both the U.S. and the EU last year, topping more than +$133 billion. Obviously, China’s growing global economic influence and the economic and trade policies it maintains have significant implications for American producers. The USDA’s Foreign Agricultural Service (FSA) recently released a new report that takes a deep dive into China’s evolving demand and the implications for U.S. agriculture. The full report, titled “China: Evolving Demand in the World’s Largest Agricultural Import Market” is available HERE. It’s worth the time to read and fully digest.
FSA also identifies the biggest challenges moving forward, which may not be what you think. While implementation of the U.S.-China Economic and Trade (Phase One) Agreement and the economic response to Covid-19 currently overshadows the trade landscape, FSA says the biggest challenges facing U.S. agricultural exports in China are more competition from other suppliers and U.S. agriculture’s ability to meet increasingly diverse Chinese import needs. Below are a few of the details and key points the FSA touches upon:
China’s Recent Import History: Spurred by a combination of rising income and living standards, increased urbanization, concerns about food safety, and China’s entry into the World Trade Organization in 2001, the average Chinese diet has changed dramatically. Between 2000 and 2019, per capita consumption of poultry increased +32%, soybean oil consumption more than quadrupled, and fluid milk intake more than tripled. With per capita arable land less than one-fifth that of the U.S., China’s import growth at the start of the 2000s was driven by land-intensive commodities like soybeans in cotton.
Import growth for bulk commodities as well as intermediate products stalled in 2012 when China’s meteoric economic growth of the previous decade began to slow. U.S. agricultural exports to China peaked that year at $25.9 billion with a market share of 25%. Both figures have been in decline since then. A strong U.S. dollar, lagging compliance with China’s import requirements, especially for value-added products, and China’s effort to diversify its agricultural suppliers have all been contributing to the decline. More recently, trade tensions and retaliatory tariffs have led to further slides in market share. U.S market share dropped -9 percentage points between 2017 and 2019 to 10%, the lowest in 20 years based on available data.
China’s grain imports have rebounded in 2020, in part due to the country’s efforts to rebuild its hog herd after being decimated by African Swine Fever (ASF), as well as to make good on trade pledges made under the U.S.-China Phase One Agreement. Feed ingredients destined for the livestock and poultry industries dominate U.S. exports to China. Below is a closer look at those and other U.S. bulk commodities exports:
- Soybeans: On average, soybeans have accounted for over half of U.S. agricultural shipments to China since 2001. U.S. soybean exports have lost ground to Brazilian supplies as the latter expands production and maintains price competitiveness on a favorable exchange rate. Brazil surpassed the United States as the largest soybean supplier to China in 2013. Since 2018, ASF has flattened soybean demand growth in China. The combined impact of increased competition and slower demand growth has reduced U.S. soybean exports below where they would have been if ASF and a weak real were not present.
- Other Feed Grains: Other feed ingredients, such as coarse grains, DDGs, and feeds and fodders were important drivers of U.S. agricultural exports to China between 2012 and 2016 but waned during 2017 through 2019 as China drew down its large corn stocks and discouraged imports of corn substitutes, including imposing high tariffs on U.S. DDGs and sorghum. U.S. sorghum exports started to rebound in 2020 after China waived tariffs on the grain as part of the Phase One Agreement.
- Cotton: Cotton and hides used to account for a significant portion of U.S. exports to China, with the world’s largest textile and leather product industries. However, China’s import demand for both input materials has declined along with world demand for cotton and leather products. Cotton imports also dropped off precipitously as China engaged in a period of stockpiling in order to support domestic producers, which carried over to wheat, rice, and corn in state reserves as well.
FAS says trade data suggest that the biggest challenge facing U.S. agricultural trade with China thus far in 2020 is strong competition, especially from Brazil which has enjoyed a more favorable exchange rate and helping it to ship record amounts of soybeans. FAS also says it is unlikely that U.S. soybean exports will recapture its past dominance in the Chinese market anytime soon. The challenge for U.S. agricultural exports is finding a way to evolve and grow along with China’s import demand. The pandemic notwithstanding, China projects to have one of the fastest economic growth rates in the world, and the country expects to add 189 million middle-class households in the coming decade, which means rising demand for meat, dairy, and other food and beverages.
The shifting patterns of China’s agricultural imports in recent years already point to a dynamic growth market. Compared to bulk and intermediate commodities, U.S. exports of consumer-oriented products to China have maintained a growing trend, especially for meat, tree nuts, and prepared food. Additionally, rising demand, slow growth in domestic supply, and growing costs of feed, labor, and land are pushing domestic meat and dairy prices higher, which makes imported meats more competitive in China. The fallout from ASF has also fueled higher meat imports.
- Beef: Beef and beef product imports have grown exponentially since 2012, with an annual trend of +48%, propelling China past the United States to become the world’s largest beef market in 2019 with imports at $8.4 billion. Top suppliers are Brazil, Australia, and Argentina, with market shares of 25%, 21%, and 21%, respectively. Since regaining access to the Chinese market in 2017 (after the shut-out due to Bovine Spongiform Encephalopathy), U.S. beef exports have grown steadily.
- Pork:China is the world’s largest pork market with imports of $6.4 billion in 2019. The EU and the United States are the top suppliers, with market share of 63% and 16% in trade value, respectively. Brazil, which did not start shipping substantial quantities of pork products to China until 2016, quickly rose as the third-largest pork supplier with a 9% market share. While both the EU and the United States have captured some of the growth in China’s pork market, Brazil managed to expand its market share from 3% in 2017 to 10% currently. China has periodically rejected U.S. pork exports from animals treated with ractopamine, a feed additive that promotes lean muscle growth in swine. In recent years, volatility in the Chinese pork industry, due to disease outbreaks and environmental regulations, has led to higher domestic prices and expansion in U.S. exports.
- Dairy:China is also the world’s top market for dairy imports, valued at $12.0 billion in 2019. The country’s consumption of dairy products is growing rapidly from a historically low base, making China the most dynamic segment of the global dairy market.4 Estimated per capita consumption is currently 35 kilograms per year, compared to 300 kilograms in Western Europe. Ultra-High Temperature (UHT) prepackaged milk and whole milk powder are major components of China’s dairy imports, but the real driver of import expansion in recent years has been infant formula. In 2008, infant formula accounted for 28% of China’s dairy imports. That share rose to 45% in 2019. Top dairy suppliers to China are the EU and New Zealand. The EU dominates China’s infant formula market, with an overall dairy market share of 45%. New Zealand has expanded sales under its free trade agreement with China and now enjoys a 40% market share. The U.S., however, has experienced several notable setbacks in recent years, including retaliatory tariffs the last two years that reduced U.S. dairy market share from 7% in 2017 to 4% in 2019. Compared to 10 years ago, however, U.S. dairy exports in 2019 were still up +58% in value.
- Fruit and Nuts:Increasing demand for healthy foods is driving higher fruit and tree nut sales. China is the world’s third-largest fresh fruit importer, with imports valued at $8.6 billion in 2019. Durians, cherries, and bananas account for nearly half of all fresh fruit imports. Thailand, Chile, and Vietnam are the largest suppliers. Consumers are increasingly aware of the health benefits of tree nuts and, according to importers in China, consider them an “honest” food that is difficult to adulterate. China’s tree nut imports have sustained a +26% annual trend growth since 2001, reaching $2.8 billion in 2019. The United States is the largest supplier with a market share of 30%, followed by Australia (14%), and Vietnam (12%). U.S. tree nut exports to China have expanded over +300% since 2010, with pistachios and almonds leading the growth.