Agricultural production will continue to face import pressure this year

Affected by the combined factors of growing domestic demand, a widening price gap between domestic and international markets, and the international market being at a cyclical low, China's imports of agricultural products continued to grow at a high level in 2014. Looking at specific products, grain imports grew substantially, oilseed and vegetable oil imports remained generally stable, cotton and sugar imports decreased but still remained at a high level, beef and mutton imports grew slightly, milk powder imports increased substantially, and competitive export products grew relatively quickly overall. In 2015, under the influence of multiple factors such as growing domestic demand, ample international market supply and falling prices, and price-gap-driven imports, the development of the agricultural industry faces considerable import pressure.

Domestic demand and a widening price gap between domestic and international markets drive high import growth

Growing domestic demand for feed grain has become the main driver of the substantial growth in grain imports. As China's population grows and its food consumption structure changes, demand for livestock and poultry products such as meat, eggs and milk continues to rise rigidly, and demand for feed grain is strong. Soybean meal from crushed soybeans and rapeseed meal from crushed rapeseed are both important raw materials for feed products. China's imported barley and sorghum were traditionally used mainly for brewing, with total imports stable at around 3 million tonnes. In 2014, because corn imports were brought under control, imports of barley and sorghum as substitutes surged, with the year-on-year increase of 7.78 million tonnes used mainly as feed grain. In addition, imports of corn distillers dried grains (DDGs), a corn product, increased substantially.

Ample supply and persistently weak prices on the international market are the main driving force behind large volumes of agricultural imports. In recent years, consumer demand for bulk agricultural products such as grain and cotton has been relatively stable, and combined with a favourable production situation on the international market, supply and demand have been relatively loose. In 2014, the global grain stock-to-use ratio reached 25.5%, and the global cotton stock-to-use ratio remained above 90%. International agricultural prices were weak, falling to their lowest point since 2010, which pushed large volumes of bulk agricultural products into the domestic market and led to large stockpiles. With the growing linkage between domestic and international agricultural prices and limited room for domestic policy support, ensuring the safety of domestic industries and farmers' livelihoods faces major challenges.

China's border protection measures are limited, and the persistent price gap between domestic and international markets is an important driver of agricultural imports. China's agricultural imports lack effective border protection measures. Taking grain as an example, the in-quota tariff on the three major staple grains is only 1%, and the tariffs on barley and sorghum are only 3% and 2%. The after-tax price of imported grain is still lower than the domestic price, giving enterprises a strong incentive to import. Domestically, driven by rising costs in recent years, domestic prices have continued to rise, and the price gap between domestic and international markets has continued to widen. From January to December 2014, the average price gap between Chinese and Thai rice was 818 yuan/tonne, the average domestic-international corn price gap was 646 yuan/tonne, and the average domestic-international wheat price gap was 434 yuan/tonne, all substantially wider than in 2013. Although grain imports in 2014 included reasonable demand such as variety adjustment and domestic shortages, a considerable portion of imports was driven by the price gap. The problem of insufficient storage capacity caused by excessive imports has become prominent, and ensuring moderate grain imports faces challenges.

The “floor effect” of grain production and the “ceiling effect” of import prices are constantly strengthening

The global economy is recovering slowly. In recent years, the global economic outlook has been uncertain and the recovery has been weak. Developed economies have been dragged down by legacy issues (including debt overhangs and high unemployment) as well as low potential growth rates. The potential growth rate of emerging economies is 1.5% lower than in 2011, and the downside risks to the economy are clear. According to the International Monetary Fund's October 2014 World Economic Outlook forecast, because global economic activity in the first half of 2014 was weaker than expected, the 2014 economic growth forecast was revised down to 3.3%. The 2015 global growth forecast was revised down to 3.8%, with developed economies growing at 2.3%, of which the United States rises from 2.2% in 2014 to 3.1%, the euro area rises from 0.8% to 1.3%, and Japan falls from 0.9% to 0.8%; emerging economies rise from 4.4% to 5.0%. Overall, the global economic recovery process remains slow.

International market supply is abundant and prices are weak. Global supply of bulk agricultural products is abundant, production expectations are optimistic, and combined with relatively stable consumer demand and adequate stocks, the supply-demand relationship is relatively loose. According to forecasts by the Food and Agriculture Organization of the United Nations and other institutions, grain production in 2014/15 is 2.532 billion tonnes, expected to increase by 0.007 billion tonnes; consumption is 2.465 billion tonnes, ending stocks are 628 million tonnes, and the stock-to-use ratio reaches 25.5%. The International Cotton Advisory Committee (ICAC) forecasts global cotton production in 2014/15 at 26.082 million tonnes, with a stock-to-use ratio of 87.1%. Supply and demand fundamentals can hardly support agricultural prices, and prices of bulk agricultural products have been running at low levels for a long time, falling in 2014 to their lowest level since 2010.

Moderate imports of agricultural products face challenges. On the one hand, import growth has played a positive role in increasing domestic supply; on the other hand, it has also had a negative impact on the industry. Looking at the import factors, the high import growth has both reasonable demand-driven causes and the problem of excessive imports. For some time to come, China's agricultural production costs will rise rapidly, the “floor effect” of grain production and the “ceiling effect” of import prices will constantly strengthen, and given the low level of agricultural tariffs and limited room for policy support, agricultural production will continue to face import pressure. Protecting and making good use of existing policy space, genuinely strengthening domestic support for agriculture, and effectively strengthening import regulation to ensure the safety of domestic industries is a major challenge facing China's agriculture under open conditions.