There is no doubt that China’s entry into capitalism in 1978 has been increasingly beneficial for the U.S. soybean farmer. China’s wealth soared at an annualized 11.7% growth rate (compared to the U.S. at 5%). This has made meat far more affordable for more people in China and, completely unsurprisingly, has driven the need to import more soybeans. You only need to look at the charts (in addition to the emergence of renewable diesel as discussed in last month’s Special Report) to see that it appears the sky’s the limit for soybeans over the foreseeable future.

 

Source: GDP (current US$) – China | Data (worldbank.org)

 

Source: Our World  in Data using UN Food and Agricultural  Organization (FAO) data

 

In the near to mid-term, your priority is to capitalize on the high demand for soybeans. As to the longer-term demand? The following discussion on China’s long-term demand for soybeans isn’t likely to be important to upcoming business decisions. However, this is an example of exactly the kind of topics that we like to keep an eye on at TFM to make sure we—and you—are prepared as the future unfolds. China is a particularly interesting case study, because it appears decisions they have made also set up the case for a major economic setback and drop in meat and soybean demand. To give you a flavor of what we’re thinking about, let’s dive into strategic decisions China has made and looming repercussions to them—and you.

 

Setting up a Policy to Launch an Economy—and Ultimately to Stifle It

 

One of China’s key resources as it embarked on capitalism in 1978 was its immense access to labor. Of course, to rearrange the economy, China needed to actually move people to the cities to support a rapid transition from a rural to urban economy. Apparently enacted to manage food insecurity, China forcibly controlled and changed the family structure from many children (which traditionally supports farming) to a one-child policy, which limited most families to one child.

Take a moment and let this sink it. China transformed its economy by enacting a social change that capitalized on a huge labor force, and at the same time ensured that, in the future, the number of people entering the workforce—that huge competitive advantage—would plummet year after year.

The outcomes have been catastrophic. Per McGill Policy Association, October 27, 2021:

• By 2020, China’s total fertility rate had fallen to 1.3 births per woman rather than the 2.1 births per woman required to maintain population replacement, leading to fewer and fewer new entrants into the economy AND an increasingly expensive aging population to support.
• At the same time, the one-child policy effectively over-produced boys in a culture that traditionally favored boys, further contributing to a declining population. Indeed, by 2020, the number of marriage-aged men outpaced the number of marriage-aged women by 1.2 million per year.

Seeing the potential for an upcoming crisis, in 2016 the Chinese government loosened the policy to allow for two children per family and for three in 2021. Nonetheless, without major intervention, China’s population has peaked, which has big implications for worldwide demand of soybeans:

• An aging population in decline implicitly leads to a lower demand for Chinese Population food overall.
• A resulting economy in decline is correlated to lower meat consumption, as wealthier economies tend to eat more meat.

 

Source: Macrotrends, including United Nations projections

 

 

India to the Rescue?

Don’t count on India taking up the slack for U.S. producers as its population continues to soar:

1. India has more land conducive to cultivation than China (395 million acres vs. 254 million acres), so it can handle more of its food and feed production.
2. Culturally, the majority Hindu population avoids beef and the Muslim population avoids pork, thus limiting its need for feed.
3. Much of the population remains in poverty. Because meat consumption is correlated with higher incomes, the potential for meat consumption (regardless of religious preferences) is lower.

Source: The Western Producer, May 18, 2023

 

 

China Is Looking for a Return on Its Investment

 

As we see the potential for a consistent decline in demand for soybeans in China, at the same time, China has taken clear steps to shore up its supply needs for all sorts of inputs outside of the U.S. through its investment in Brazil. Since 2015, China has made clear its intent to invest in Latin America, and the bulk of its investment—almost half—has gone to Brazil. According to an article released by Springer in 2022, China’s Growing Presence in Brazil and Latin America, China has invested about $66 million USD to Brazil; about threequarters of that investment has gone to the energy sector, while the rest has gone to other sectors, notably infrastructure and agriculture. While China has been the recipient of commodities such as minerals, oils, gas and agriproducts, Brazil has benefited in industrial products and inputs.

 

Source: China Global Investment Tracker| Prepared by CEBC

 

From a Chinese perspective, it appears that the investments are made with strategic intent clearly to the benefit of China. According to BNamericas in their report “China’s role in Brazilian infrastructure projects not shared by everyone,” the Brazilian government is pleased with the investment. However, other players in the industry are concerned about the price Brazil is paying for that investment. For instance, infrastructure projects have progressed with equipment that can only be purchased from China, and China has required Chinese executive presence in other industries, such as banking. From a Chinese perspective, these investments that counter U.S. interests offer a way to assert their own dominance on the world stage. Investment and buying soybean products from Brazil clearly extend these goals.

 

Brazil Has Ample Motivation to Meet China’s Needs

 

Just as China is looking to Brazil to be a major supplier of soybeans, Brazil is well poised to meet that need. As we noted in a TFM Insight from March of 2022, the strength of the U.S. dollar relative to the Brazilian real has given Brazil incentive to compete in the soybean markets. As we noted, “The Brazilian soybean 2020/21 crop, for example, produced the highest profits in the nation’s history because of low domestic supplies and the depreciation of the Brazilian real relative to the U.S. dollar.”

The good news for Brazil is that it has vast resources to capitalize on Chinese demand and the dollar differential. In comparison to the U.S. according to farmdoc daily (Illinois.edu) in “Brazil Likely to Remain World Leader in Soybean Production,” Brazil soybean acreage is expected to grow 27% from 2021 through 2030, in contrast to 8.3% in the U.S. Unlike the U.S., which is getting close to using all arable land, Brazil is expected to expand land through a variety of strategies, including converting underutilized land to farmland, increasing irrigation, replacing other crops, and utilizing new agricultural frontiers.

 

Implications to the U.S. Farmer

 

Luckily, as we discussed in May 2023’s Special Report “Crushing Expectations,” the emergence of the renewable diesel is opening up a new market for domestic uses of soybeans. This has the potential of transforming the current model (which is focused on co-ops and exports) to a mixed model with a bigger emphasis on inland crusher/ethanol markets. We at Total Farm Marketing will be keeping an eye on the potential for lower world demand over the upcoming decades, and we’ll help you stay on top of longer-term trends. As in all industries, keeping on top of the broad trends that affect your industry put you in a far better position to act in your and your businesses’ best interests.

 

Look to Total Farm Marketing to Help Keep You on Top

 

At TFM, we’ve been around for almost 40 years through many market disruptions, both good and bad. Through it all, we’ve prided ourselves on helping our clients be prepared and prosper, no matter what the markets may bring.

 

If you have questions on how we can help, reach out to one of our consultants at 800.334.9779 or visit us at TotalFarmMarketing.com.

 

 

 

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