Will the "soybean turmoil" repeat itself in the grain industry?

“If you control oil, you control all nations; if you control food, you control all people.” Just as former U.S. Secretary of State Kissinger said, the issue of food security is not only a major topic of concern in the halls of power, but also an unavoidable question of whether villagers in the countryside can have enough to eat and drink.

Just as drought ravages the land, with autumn grain, especially corn, badly damaged by drought in some areas and breeding hidden concerns about food, a set of data from the General Administration of Customs of China more directly reflects the fact that “foreign grain” is accelerating its flow into the domestic market. As domestic and international prices become more closely linked, concerns over whether the “soybean” turmoil will repeat itself in the grain industry have made industry insiders feel that the “long-term concern” about grain seems to be gradually becoming a “near-term worry.”

Widening domestic-international price gap, “foreign” grain accelerating its influx

Data from the General Administration of Customs of China show that in the first 7 months of this year, China imported a cumulative total of 11.34 million tons of cereals and cereal flour, surging 80.7% compared with the same period last year.

Since the beginning of this year, China's grain imports, especially wheat imports, have clearly accelerated. Although China's grain output has achieved eleven consecutive years of growth, and imports of “foreign grain” account for less than 5% of domestic output, the growth rate of “foreign grain” imports has rebounded sharply. Moreover, since 2008, China has changed from a major net grain exporter to a major net grain importer, drawing attention to the issue of food security.

Regarding the reasons for the relatively rapid growth of agricultural imports since the beginning of this year, an analysis article published on the official website of the General Administration of Customs of China pointed out, first, domestic demand is strong. Taking soybeans as an example, currently imported soybeans in China are mainly used for oil extraction, and the main products of soybean processing are soybean oil and soybean meal. At present, the proportion of large-scale farming in China is increasing, demand for feed such as soybean meal continues to rise, and the economic benefits for enterprises exporting soybean meal are relatively high. Second, international market prices for agricultural products are at a low level. According to the cereal price index released by the United Nations Food and Agriculture Organization, the average index in May this year was 204.4 points, down 13% year-on-year and down 1.2% month-on-month. From January to May, the cereal price index fell 15.9% year-on-year.

“China is currently fully capable of achieving self-sufficiency in staple grains. If the enormous volume of purchased and stored grain is added, the overall supply can be described as loose. The sharp increase in China's staple grain imports is not because the domestic supply and demand structure is unbalanced.” Fan Jingya, an analyst at COFCO Futures, pointed out that for different varieties, the increase in imports has different reasons.

As for wheat, because of China's traditional smallholder farming methods, wheat sowing is relatively scattered and its quality is inferior to imported wheat. Imported wheat mainly plays the role of being added in appropriate amounts during milling to improve flour quality. As for corn, most imported corn is mainly used as feed. From the end of 2013 to the beginning of 2014, China Customs returned large quantities of U.S. corn containing genetically modified components and its downstream product DDGS. In addition, corn prices are relatively high——this has led to an increase in imported sorghum in recent years. Sorghum is relatively cheap and is also a good energy feed. As for rice, because domestic rice prices are supported by policy, the domestic-international price gap is very obvious, and cross-border smuggling trade is active. Imported rice is mostly lower-priced ordinary white rice and broken rice, mainly to meet industrial rather than staple food demand.

“The relatively rapid growth of grain imports also lies in the gradual widening of the domestic-international price gap. At present, after adding various costs such as freight, insurance, tariffs, import value-added tax, and loading and unloading fees to the international wheat FOB price, it is still about 10% cheaper after entering the country than the domestic wheat market price.” Han Yijun, a professor at China Agricultural University, pointed out that since joining the WTO, as industrialization has accelerated domestically, grain production costs have been in a period of rigid and rapid growth. Coupled with related purchase-and-storage market-support policies, domestic grain prices have remained high, and the price gap with international prices has gradually widened, accelerating the trend of domestic imports.

A surge in imports does not equal a domestic “grain shortage”

“From a series of data analyses, the net import volume of China's staple grains is actually very limited, and this phenomenon does not mean that China has experienced a ‘grain shortage.’” Fan Jingya pointed out.

According to a document from the National Development and Reform Commission, China's grain import quotas in 2014 were as follows: wheat 9.636 million tons, with the state trading proportion at 90%; corn 7.2 million tons, with the state trading proportion at 60%; rice 5.32 million tons, with the state trading proportion at 50%. According to data in the July supply and demand balance sheet of the National Grain and Oils Information Center, China's grain output in 2014 was as follows: wheat 123 million tons, corn 223 million tons, and rice 207 million tons. Looking at import volumes in recent years, even though import volumes have increased, they still have not reached the total quota. Even the total quota accounts for less than 8% of the output of various staple grains. Therefore, imported grain is not enough to change the overall supply and demand balance pattern of China's grain market.

However, although the quantity is limited, the impact of imported grain on China's grain policy should not be underestimated. Fan Jingya believes that China's agricultural workforce has a large base and a low level of development, with inherent disadvantages, and cannot be mentioned in the same breath as the farm economies of developed countries. However, if development is not pursued, merely sheltering from a policy perspective is ultimately not a long-term solution. Especially since the beginning of this year, as the volume of wheat purchased and stored has reached a record level, the problem of insufficient state treasury storage capacity has become further apparent. The high quality and low price of imported grain will, to a certain extent, force China's agricultural protection policies to reform.

⟦NL> Tight domestic-international linkage, price risks surge

“The continuous increase in import volumes has further strengthened the linkage between domestic and international grain prices.” Chai Ning of China Grain Network believes that the challenges posed by sharp rises in international grain prices to domestic prices and food security cannot be ignored.

Relevant personnel said that for China, there is no near-term worry, but there should be long-term concern. Years of consecutive bumper harvests have provided a solid foundation for ensuring food security. But based on domestic safeguards, grain supply must not be relaxed for a single moment. Food crises, which used to occur only once every dozen years, are showing an increasingly obvious trend toward normalization as global extreme weather becomes more frequent.

“In the last 4 years, global food crises or sharp rises in grain prices broke out three times, in 2008, 2011, and 2012 respectively. With three global food crises or sharp grain price rises in four years, China should attach great importance to this and must adhere to its own basic principle, namely relying on domestic production to ensure China's food security.” Han Yijun emphasized that the practice of the past four years has repeatedly proved and warned us that for China, with a population of 1.34 billion, we must never place our rice bowl in the hands of others.

To solve this problem, Han Yijun suggested gradually adjusting the existing various support policies for agriculture, such as subsidies and temporary purchase and storage, toward a target price subsidy policy, but the adjustment should not be too rapid.

Fan Jingya pointed out that food security is highly important and involves a wide range of areas. While reforming policies, careful weighing is necessary and the interests of all parties must be taken into account. Since 2014, the policy on cotton has changed from purchase and storage to pilot direct subsidies, which can be described as a new approach to policy reform. However, cotton is, after all, a cash crop, and the effects of its policy changes remain to be seen, and whether they can be applied to the staple grain market remains to be considered. In addition to policy reform, drawing on the experience of the United States to advance agricultural modernization and improve the agricultural insurance system is also a feasible path.