CHINA: INTERNATIONAL AGRICULTURE AND TRADE--SUMMARY March 2000, ERS-WRS-99-4 March 16, 2000 Approved by the World Agricultural Outlook Board --------------------------------------------------------------------------- This SUMMARY is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. The complete text of CHINA: INTERNATIONAL AGRICULTURE & TRADE will be available electronically about 2 weeks following this summary release. --------------------------------------------------------------------------- Despite Generally Sluggish Economy, China's Manufactured Feed Industry Poised for Long-term Growth China's economic growth is slowing, primarily due to reduced demand for its products. Growth in China's gross domestic product dropped to 7.1 percent in 1999, the slowest since 1983. Exports, which had risen 21 percent in 1997 and an astonishing 15.5 percent a year on average during 1980-97, came to a near standstill in 1998 and rose only modestly in 1999. East and Southeast Asian countries, which formerly purchased about 60 percent of China's exports, were hurt severely by the Asian financial crisis. Besides cutting back on their own imports from China, many of these countries devalued their currencies, making their exports more competitive with similar products from China. China's economy is in a period of soft consumer demand for goods and services because consumer confidence has been shaken by government reform initiatives to eliminate housing subsidies, streamline government employment, and reduce benefits under the government-provided healthcare system. Domestic and foreign demand for China's products declined, and many of its rigid, state-run industries failed to adequately adjust their output mix. Excess supplies of unwanted goods led to almost 2 years of price deflation. In contrast to the slowdown in the general economy, China is expected to have a slightly larger grain harvest for the 1999/2000 crop year. USDA currently forecasts production of 115 million tons of wheat, 201 million tons of rough rice, and 128 million tons of corn. On the policy front, the "governor's grain bag policy" continues to pressure provincial officials to use economic incentives and their administrative powers to push farmers to grow more grain despite large stocks and low prices. The surplus of domestically produced grain led to sharply reduced grain imports in 1998/99, when China imported only 0.8 million tons of wheat-the least since 1960. Wheat imports are forecast to remain low in 1999/2000. Grain exports, on the other hand, have surged. Together, corn and rice exports are projected to increase 79 percent from 1998/99 to 10.9 million tons in 1999/2000. Starting in 2000, price supports have been reduced or eliminated for low quality grains. Previously, more uniform procurement prices encouraged farmers to produce unwanted low quality grain that accumulated in government warehouses. Seeking to capture the value added in oilseed crushing, China re-imposed the 13-percent value added tax on soymeal imports. This move is expected to shift import demand from soymeal to soybeans. China's soybean production is projected to fall to 14 million tons in 1999/2000. Imports of soybeans are estimated to increase 1.2 million tons to 5.0 million in 1999/2000, while soybean meal imports declined 900,000 tons to 0.5 million. Total protein meal available to the feed manufacturing industry is not expected to change, however, as meal produced from crushing the additional soybean imports will replace the decline in direct meal imports. Consecutive bumper grain harvests, the resulting low grain prices, and significant imports of protein meals contributed to continued growth in China's livestock product output in 1998. Meat production rose 6.5 percent. However, pork, poultry meat, and egg consumption slowed as income growth dampened and export demand remained limited to nearby Hong Kong, Japan, and Russia. Meat product prices fell sharply in 1998 and 1999. Over the 20-month period ending in August 1999, pork retail prices decreased 23 percent and live hog prices dropped 27 percent. The weakness in the livestock sector has contributed to reduced demand for manufactured feed, especially ready-to-use compound feed. As China's meat production shifts from a sideline to a full-time occupation, meat quality and feed efficiency are increasingly important goals for livestock producers. Based on a recent survey, about 80 percent of pork production comes from hogs raised as a sideline by traditional "backyard" producers, 15 percent comes from specialized farm households where hog production is the main occupation, and 5 percent comes from large-scale commercial operations. Specialized households and commercial operations rely on manufactured feeds and are responsive to changes in grain prices to a larger degree than backyard producers, who continue to use significant amounts of homegrown grains and farm byproducts. Using "free" household labor to feed animals largely with "free" farm byproducts can be done only on a very small scale-typically one or two hogs at a time (rarely more than five), or up to a few dozen chickens. Thus growth in China's animal product output will depend mostly on expansion of the specialized farms and large-scale commercial operations. China's feed manufacturing industry is now the world's second largest. Output totaled 66 million tons in 1998, after growing an average of 15 percent a year since 1990. In gradual steps from 1975 to 1985, the government reversed its strategy of central planning, largely privatizing agriculture and then embarking on a course of liberalizing the economy as a whole. Incomes began to rise rapidly. Demand for meat, fish, and eggs increased. In the early 1980s, China's leaders recognized that increased use of manufactured feed would support the livestock industry, which in turn would improve farm income, provide rural employment, and improve the nutritional level of consumers. Therefore the government provided important tax breaks to feed mills, fostered research and technology exchanges with foreign firms, and implemented long-term feed development plans. As a result, China went from virtually no modern feed mills in 1975 to its current prominent position. Economic difficulties at home and abroad reduced China's meat production and consumption in 1999, causing short-term uncertainty for the feed manufacturing industry. However, the industry is maturing, producing specialized compound feeds that provide complete nutrition for particular kinds of animals and fish, as well as significant amounts of premixes and concentrate feeds for farmers to mix on site with locally available grains, protein meals, and fiber. The inclusion rate of soybean meals and other protein meals has never been higher, because of low prices and abundant supplies. In the long run, prospects will remain positive for U.S. exporters of grains and oilseeds, as China's livestock and feed sectors respond to long-term growth in demand. Printed copies of the China: International Agriculture and Trade Report will be available in about 5 weeks. For more information, contact Hsin-Hui Hsu (202) 694-5224 or Michael Lopez (202) 694-5197. The full report will also be available electronically via the ERS web site at www.ers.usda.gov. --------- END_OF_FILE