China’s agricultural activities are vital to ensuring food security for its 1.4 billion people and the country plays a major role in shaping international grain markets. The Asian country is expected to see stable grain production this year. However, diminishing arable land, shifting demographics, and natural disasters present food security challenges to China.
China is the world’s most populous country and the second largest economy. China’s economy is larger than those of the next four economies - Japan, Germany, the United Kingdom, and India – combined. In 2020, its gross domestic product (GDP) was valued at US$14.7 trillion according to the World Bank. Following real GDP growth of 8.1 percent in 2021, growth is projected to slow to 5.0 percent in 2022. The forecast reflects rising headwinds: Domestic demand has slowed, and the global economic environment has worsened significantly with the war in Ukraine. In addition, COVID incursions have become more frequent and widespread.
China is the world’s largest agricultural producer by volume and the world’s second-largest agricultural importer by value. The Asian country is a global producer of rice, cotton, pork, fish, wheat, tea, potatoes, corn, peanuts, millet, barley, apples, cotton, oilseed, pork, fish and more.
China’s agricultural imports, exports, and production have expanded greatly since acceding to the WTO in 2001. China’s rapid economic growth and large population make it a major consumer of food products. For example, in 2020 China’s soybean imports accounted for 85 percent of its domestic consumption.
Food security and the wellbeing of China's rural populations are of paramount importance to the Chinese government. China’s domestic agricultural activities are vital to ensuring food security for its 1.4 billion people and – as the world’s largest wheat producer – the country plays a major role in shaping international markets.
China, the world's top grains market, feeds nearly 20% of the world's population with less than 9% of the world's arable land. China has seen its grain production capacity steadily increase with the support of a series of policies and measures, including the red line of farmland protection, the establishment of well-facilitated farmland, the establishment of functional grain production zones and major agricultural product production reserves, and the construction of farmland water conservation projects. However, fast-paced socio-economic transformation has been accompanied by diets shifting towards higher shares of non-starchy foods, resulting in a growing demand for feed grain.
China faces growing demands on its agricultural production that it seeks to address through policy, technology, and economic activities. In 2021, China imported a record amount of corn at 28.35 million metric tons (mmt), 152 percent more than in 2020 and more than 10 percent of China’s Ministry of Agriculture and Rural Affairs (MARA) estimate for the country’s total corn consumption. The China Academy of Social Sciences’ 2020 Rural Development Institute report claimed “there is likely to be a grain shortfall of about 130 mmt, including about 25 mmt of staple food grain” by the end of 2025.
China relies heavily on corn and soy imports from countries like the United States and Brazil, which supply more than 80 percent of global soybean exports. About 60 percent of global soybean exports go to China. The deficits were compounded by logistics challenges resulting from China’s response to COVID-19, including port closures. In 2019, 86.4 percent of China’s corn imports came from Ukraine, meaning Russia’s invasion of Ukraine may prolong the challenges to China’s food security even as the effects of the COVID-19 pandemic subside.
Diminishing arable land, shifting demographics, and natural disasters present food security challenges to China’s leaders. In response, China has introduced domestic policies to promote food security and lessen food waste, both of which have been a priority of General Secretary of the Chinese Communist Party (CCP) Xi Jinping since he assumed power. Under his rule, the government has also established policies to expand domestic farmland and harness innovations in agricultural technologies, such as genetically modified (GM) seed lines, all in an effort to bolster food security.
Recognizing its challenges, China has also gone abroad to address its needs through investments and acquisitions of farmland, animal husbandry, agricultural equipment, and intellectual property (IP), particularly of GM seeds.
NEW GRAIN PRODUCTION SUPPORT POLICY SYSTEM
Despite the profound transformation in the agriculture sector over the past forty years, China’s agricultural production and operations still rely extensively on smallholders’ participation. It is estimated that there are still more than 200 million smallholder farmers in China. Although the increasing costs of production and the lack of sufficient scale to be competitive make the smallholder model unviable, and certainly unsustainable, in the long-term, it is likely that a full transition to a large-scale and mechanized agriculture will take some time, and that smallholder production will remain an important feature of China’s agriculture sector for still some time. At the same time, the rising demand for high-value agricultural products from an expanding urban middle-class, the rapid transformation of the agrifood value chains, and the spread out of technological innovations open up opportunities for smallholders, as high-value products are more labor-intensive to produce and generate a higher return per hectare.
Ensuring high grain production and a high self-sufficiency rate has long been the primary objective of China’s agricultural policy, and the focus of its regulatory objectives and domestic agricultural support policies. The grain price support policy has been among the important and effective policy tools in China’s agricultural policy system over the past decade. However, as the integration of domestic and international markets has deepened in recent years, the pressure for “non-essential imports” of grain has intensified. The price support policy has not only posed certain challenges to the effective operation of the domestic grain market, but has also left room for other countries to question, or even sue, China for distorting the international market. In order to adjust and improve its “amber box” measures and expand the application of “green box” measures, China has been implementing a series of initiatives since 2016 to explore the construction of a new grain production support policy system. These pilots include “market-oriented purchase” plus “direct subsidies” under its corn policy; adjusting the minimum purchase price policy for rice and wheat; and transforming and upgrading policy-oriented agricultural insurance. As the world’s most populous developing country, the current exploration of China’s agricultural support policies, while adapting to international rules, including whether they can safeguard the interests of domestic farmers and balance grain supply and demand and what adjustments and improvements will be needed in the future are important issues that deserve an in-depth analysis.
China is expected to see stable grain production this year, despite challenges including rare autumn floods last year, sporadic resurgences of COVID-19 cases and drastic fluctuations in the global farm produce market.
Corn is China's most produced grain and the country is the largest importer of the crop in the world. It is estimated that 75% of China's corn is used for animal feed. In its latest report released on 7th July, the U.S. Department of Agriculture’s (USDA) Foreign Agricultural Service (FAS) post in Beijing forecasts China’s corn production in MY2022/23 at 270 MMT, 1 percent less than last year, due to lower planted area. “The lower area for corn is the result of farmers reacting to the higher soybean subsidies vis-à-vis corn, which increases corn-soybean intercropping.” Specifically for 2022, the soybean subsidy was 3 times the corn subsidy. MARA also predicts a reduction of MY2022/23 corn planting area at 42.5 million hectares, down 800,000 hectares. However, MARA forecasts an increase of 1.9 percent in corn production over MY 2021/22 due to favorable weather, better seed, and advanced technology. “ Industry forecasts MY 2022/23 production will decline 8-10 MMT, or 3 percent, from last year's levels.”
Total corn consumption in MY2022/23 is forecast at 297 MMT, up 5 MMT from MY2021/22, as corn usage in feed rations increases to more normal levels and feed demand recovers. The forecast for MY 2022/23 feed and residual use is 216 MMT. “The corn-wheat price differential has returned to traditional levels, with corn prices $75.8 per ton cheaper than wheat in May, compared with $45.5 per ton more expensive than wheat in May last year. Many feed mills have reportedly stopped substituting wheat for corn. According to the China Feed Industry Association, corn usage in compound feed increased from 35.3 to 40.8 percent during the first four months of this year,” the report said.
Since the beginning of the calendar year 2022, corn prices have remained stable but at high levels. The industry consensus is that the gap between China's corn demand and supply will persist for the foreseeable future. The availability of substitutes and imports is an important determinant of corn feed consumption.
The processing sector (which includes ethanol, corn gluten meal, corn gluten feed, starch, and other processed products) is expected to remain stable in MY2022/23. China's total corn processing capacity in the Northeast provinces is approximately 65 MMT per year, but operation rates have averaged 60 to 70 percent over the past year. Starch industry operation rates continue to decline, and the operation rate in April 2022 was down by 14.5 percent from April 2021 and 9.3 percent from March 2022. 1Industry sources said that grain processors in Shandong, Jilin, and Heilongjiang chose to lower or suspend production because of high corn prices, low demand, hindered logistics, and increased inventory.”
USDA’s Beijing post forecasts MY 2022/23 corn imports at 18 mmt, 2 mmt lower than the prior estimate. MY2021/22 corn imports are estimated at 24 mmt, 1 mmt higher than USDA's official forecast.
China has turned to the United States to close its 2-4 mmt corn supply gap in MY2021/22 due to the war in Ukraine. In April alone, China purchased 4.5 mmt of U.S. corn with more than 2.6 MMT for MY2021/22 and close to 2 MMT for MY2022/23. It's projected over 1.3 mmt of U.S. corn will arrive in China in June, mainly in Zhejiang, Guangdong, and Shandong provinces.
In April, China and Brazil signed an updated Protocol on Phytosanitary Requirements for exporting Brazilian corn to China. Industry sources speculate that China might have already purchased between 250,000 to 400,000 tons of corn from Brazil. Brazilian corn's after-tariff price is RMB 200 per ton lower than U.S. corn. It will take two to three months for corn from Brazil to reach ports in China, and it might go into the national reserves instead of being distributed to the market. In the past, most Chinese enterprises moved away from Brazilian corn due to the extended shipping times and high freight costs. The lack of relevant government approvals for genetically modified corn also added to the difficulty of importing from Brazil.
Ending Stocks in MY2022/23 are forecast at 208.2 mmt, down 9 mmt from MY2021/22, with higher feed use and lower imports. With food security as a policy priority, the government has shown its willingness to utilize multiple tools to stabilize grain prices and increase stock levels.
GROWING DEMAND FOR WHEAT
China produces about 120 million tons of wheat each year – on approximately 24 million hectares of land. Wheat makes up 40 percent of grain consumption in China and about 60 percent of the country’s population eats the grain daily. Cultivated wheat is the second most important food crop in China after rice. It is the dominant staple food in the northern part of the country where it is used mainly to produce noodles and steamed bread.
In China, more than 95 percent of wheat is sown in the autumn. A double cropping system is used in the Yellow River and Huai River valleys in which wheat is rotated with maize. In the Yangtze Valley it is rotated with rice.
Demand for wheat in China is growing due to population increase and rising living standards, but production is challenged by water scarcity, environmental contamination, rising temperatures, droughts, labor shortages and land-use shifts from grain production to cash crops.
Wheat production in 2022/23 is forecast at 135 mmt. “Based on an industry field trip to the six major production provinces in mid-May, Henan's wheat growing conditions and quality are similar to last year. The field trip concluded that the total national wheat growing area was stable, and the overall quality was better than MY2021/22,” USDA said.
The concept of grain security in China has shifted from "feeding people" to "feeding people and livestock/poultry when needed" over the past two years. But skyrocketing wheat prices have prevented feed mills from replacing corn with wheat this year.
Chinese wheat prices soared 15 percent in the first half of 2022. Industry sources believe the rising prices were attributed to international factors such as the Ukraine war and the COVID pandemic. At home, planting costs increased significantly, and farmers are reluctant to sell because of continuing price increases. At the same time, wheat end users have concerns over the future wheat supply and want to build stocks, causing speculation in the market. While large flour mills are struggling to maintain their dominant market positions, all flour mills face higher costs, poor sales, overcapacity, and industry consolidation.
On April 13, China suspended wheat auctions one month earlier than last year. The Minimum Support Program (MSP) was not launched last year and is not expected to be launched this year. Last year saw more than 27 million tons of MSP wheat sold from January until sales were halted before the new harvest in mid-May. But this year, the country released only around 500,000 tons of wheat from the reserves in weekly auctions, compared with 4 million tons per week offered in 2021. Industry sources believe MSP stocks are no longer plentiful and demand is not as strong.
MY2022/23 wheat imports are forecast at 9 mmt, 500,000 tons lower than USDA's June estimates due to high prices. International wheat prices have soared by over 40 percent in the past four months. Because of the COVID pandemic, the war in Ukraine, export bans, higher freight and insurance costs, inflation, and speculation, international wheat prices are expected to remain high. In the first five months of 2022, wheat imports were down by 4.1 percent year-over-year. Imported prices of wheat landed in May were lower than domestic corn prices. But most of the imported wheat is destined for flour production, and only a small percentage goes to feed mills.
MY2022/23 ending stocks are forecast at 145.8 mmt. “The industry believes China only has about 40 MMT MSP wheat reserves, but overall, government reserves held by various entities are sufficient,” USDA said.
Milled rice production in MY2022/23 is forecast at 149 mmt. MY2022/23 and MY 2021/22 rice consumption estimates are both 5-6 MMT higher than MY2020/21 as price advantages give rice more opportunities for feed use. And USDA’s rice import estimate for MY 2022/23 is 6.0 mmt due to animal feed demand. From January to May 2022, rice imports increased by 30 percent to 2.9 MMT, of which 1.6 mmt was broken rice. Imports of Indian broken rice jumped by 300 percent in 2021. The country's imports of Indian broken rice almost tripled in 2021. The first five months of 2022 also witnessed Pakistani broken rice imports increase by 125 percent over the same period in 2021.
China is the second largest market for baked goods after the United States and USDA predicts this market will reach $53 billion by 2025. China’s bakery sector is regarded for its dynamic innovation on distribution and products. Primary imported ingredients include wheat, dried fruits, nuts, dairy, and preservatives. The sector is currently evolving in two ways – central factory supply and boutique bakeries. Central factories produce more standard recipes in volume for several different retailers and outlets, while boutique bakeries produce more specialized products. Even boutique bakeries chains though, may often have a central headquarters and an ingredient supplier. These formats provide companies with volume purchasing power. Following the e-Commerce trend, many bakery chains, including boutique ones, are seeing significant growth using online platforms to sell to customers. These companies utilize the inexpensive and improved logistics infrastructure to get baked good direct to consumers.
The baking industry is more established and with a higher customer base in 1st and 2nd tier cities (Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu, and Xiamen). Consumers, ever curious to try something new, seek new recipes and novel products. Companies continue to innovate new recipes to grab these opinion leaders’ attention but are quickly copied by competitors. Pastries and sweet pies constitute the largest segment of bakery products and are in growing demand. Like bakeries, food processing companies also face strong competition. Many look to differentiate themselves with innovative products and packaging that will grab customers' visual attention and taste