Boosting soya sector in China

With the inflationary impact of the Russia-Ukraine war and growing tensions with western trading partners, China has been pushing to boost soyabean output and increase food security.

Food security concerns have driven China’s Ministry of Agriculture and Rural Affairs to push Chinese soyabean output in the past two years as tension  grows with its main western trading partners and the country  deals with the inflationary impact of the invasion of Ukraine.

The ministry has run a “frenetic campaign” to boost soyabean output in 2022, according to agricultural analyst Darin Friedrichs, co-founder and market research director  at Shanghai-based Sitonia Consulting, an agri-focused research consultancy.

The result has been  national soyabean crop output surging 23.7% in volume, according to government statistics. Yet even though  generous subsidies boosted production to 20M tonnes for the first time, the volume is well short of the 91M tonnes China imported  in the 2022 calendar year.

China’s total output of oilseed crops in 2022 was 36.53M tonnes, an increase of 1.1% over the previous year: “Due to increased  supply and reduced consumption, the self-sufficiency rate of edible vegetable oil increased  by 1.6 percentage points,” noted  a ministry statement, albeit without elaborating on what the current self-sufficiency rate is.

According to ministry data, China – which accounts for 20% of global consumption of edible oils and 13% of production – is dependent on imports for 31% of total demand  of cooking oils. China imports 80% of its sunflower and 100% of its palm oil needs.  It also imports 5% of its peanut oil requirements. Soyabean  supply dictates  the margins and supply of soyabean oil. As a result, a slump in pig prices in recent months  – China’s meat of choice – has weakened demand for soya use as feed, which “by extension hurts soya oil production”, Friedrichs explains.

There is another complication: the domestic  crop, largely grown in north China, is proving high in oil but low in protein, yet is much more expensive  than imports – limiting its attraction for local crushers,  according to a Chinese Academy of Agricultural Sciences soyabean analyst quoted in the Xinjing Bao (Beijing News) newspaper in January.

Russia’s invasion of Ukraine was also “very disruptive” for China’s oilseeds procurement, according to Friedrichs, who said before Moscow attacked,  Ukraine had been a key supplier of corn and oilseeds. While Chinese buyers turned to Brazil for corn, “there is not an easy replacement for things like sunflower  meal and sunflower oil, which were big imports from Ukraine”.

Overland projects

China has already been working to diversify its import sources in parts of the former USSR, specifically northern Kazakhstan, where the Aiju Grain and Oil Industry Group has partnered with local firm Tayinsha-May to grow and refine rapeseed oil at a new US$19M plant. The project is “demonstrative of the China strategy to alleviate dependence on ocean imports by connecting inland provinces directly with the Eurasian source,” said Tristan Kenderdine, research director at Future Risk, a research consultancy focused on China and the Eurasia region.

The project has diversified farm production from wheat and sunflower oil, Kenderdine says. 

A similar rapeseed project is a US$70M plant planned  in Akmola, near the capital Astana, being built by Gansu Tianyuan Yangguang Agriculture Development Co Ltd and local Kazakh partner Sunshine Agro LLP.

Kenderdine sees Chinese oilseed projects in Kazakhstan as “integral to national strategy”.

“The hard reality for China is that it cannot  rely on self-sufficiency to feed itself. It’ll be dependent on international partners … China’s approach to food security is very much based  on a series of interlocking bilateral agreements with sovereign states,” says Kenderdine.

“Using the international markets system, China was conscious  of being over dependent on Canadian imports of rapeseed oil … thus the investment in Kazakhstan,” he adds.

China is likely to focus on more hedges to prevent reliance on any one source, predicts Kenderdine.

He sees a new emphasis  on sourcing food from Africa. However,  at the same time, underwhelming investment in Central Asia under the Belt and Road Initiative is a weakness of a strategy relying on these neighbouring countries.

Focus on health

On the consumer side, worsening economic conditions alongside higher import costs have only slightly dampened overall consumption of edible oils which hit 36.5M  tonnes last year – a rise of 0.5% on the previous year and well up on the 34.9M  tonnes figure recorded in 2019 and 33.4M tonnes in 2013,  according to the Chinese Agricultural Supply and Demand  Estimates (CASDE) published each month by China’s agriculture and rural affairs ministry.

Meanwhile, China’s growing preoccupation with health is driving buying oil-based food choices.

Anyone who visits an online or offline Chinese food store will note the ubiquity of terms such as EPA (eicosapentaenoic acid) and DHA (docosahexaenoic acid).

Supplements “rich in EPA and DHA fish oil … are in high demand  for direct human consumption and for animal feed,” explains Dr Enrico Bachis, director  of market research at the International Fishmeal and Fish Oil Organisation (IFFO), an umbrella body for fish oil and fish meal producers.

“China’s demographics are pointing towards  potentially larger demand for EPA and DHA and thus fish oil in the coming years. As the middle class grows, there  will be more and more demand  for healthier food products … the high number of one-person households will also lead to a higher number of pet owners. These pets will be treated like a member  of the family …,” and hence  eat human-grade oil-based supplements.

Another observer of China’s demand  for health-boosting oils sees growing demand for niche products such as krill and algae oils. Dimitri Sclabos, managing director of Tharos, a Chile-based and China-focused consultancy advising the krill industry explains: “Competitive EPA- and DHA-rich products like algae are taking the stage, also oils combining fish oil with other components like vitamins, fortified with ginseng for example, and flavoured or combined with antioxidants like lutein.”

Sclabos expects new launches in China of marine oils products promising to “combat eye fatigue, cardiovascular and brain health.” However,  he expects COVID-19 pandemic-era demand for health boosters to cool in 2023 as China transitions out of lockdown.

COVID also served as a dampener of demand for other edible oils in 2022 as the country’s catering sector and consumer confidence struggled.

“During the COVID period, lockdowns and uncertainty about the pandemic stimulated in-home cooking as well as stockpiling, boosting consumers’ usage of cooking oils,” says Joy Yin, senior research analyst in food and drink at the Chinese offices of research agency Mintel. She pointed to Mintel’s Chinese consumer monthly tracker data – May 2022 which showed 46% of surveyed consumers claimed they had stocked up on cooking oils and sauces.

This could mean slower sales in the post-pandemic era.

“As in-home  cooking declines, retail sales of cooking oils are predicted to grow at a lower rate than [during] the pandemic period,” Yin explains. The pandemic  also undermined consumers’ financial confidence but as cooking oils are considered essential  in-home foods, they  are not very sensitive  to economic cycles,” Yin says.

While the inflation rate has been relatively low in China (2.1% year-on- year in January) compared with western economies, it has impacted  edible oil sales, according to an analyst at the Chinese offices of market researcher Euromonitor International.

“We observed a higher retail market growth of edible oil in 2022 compared with 2021 … mainly driven by the increase of the unit price caused  by inflation,” explains Elisa Lin, a Euromonitor senior analyst. “Categories featuring convenience such as quick recipe kits and ready meals, as well as food service delivery, all benefited during COVID in 2022,” she adds.

Key Chinese consumer edible oils brands are ‘Arawana’ by Yihai Kerry Arawana Holdings Co Ltd; ‘Fortune’ by China National Cereals, Oils & Foodstuffs Import & Export Corporation (COFCO); and ‘Luhua’ by Shandong  Luhua Aromatic Peanut  Oil Ltd, according to Euromonitor.

As for future  drivers of demand,  Lin says increased consumer health awareness will remain a key influence on the development of edible oils, leading to a shift towards  more premium types, for example from soyabean oil to peanut oil and sunflower  oil, and the emergence of niche types such as avocado oil.

Chinese consumers have an increasing awareness of fat intake, explains Lin, “partly due to the government’s national health campaign promoting  a reduced fat diet.” She also sees growth for new packaging formats, such as spray edible oils. “This is becoming  a trendy packaging format especially for premium types of oil, such as olive oil and avocado oil.”

Yin, at Mintel, meanwhile agrees that health values are trumping other factors like price and food safety in consumers’ buying preferences.

“While consumers do care about food safety and price, they are not the biggest drivers. According to our latest survey results, nutrients like vitamins and oleic acid, as well as functional benefits – for example it’s good for cardiovascular  health – are two key factors  for consumers buying edible oils.” Another of the three  top demand  factors  cited by consumers is whether the oil is derived from non-GMO  (genetically modified) oilseeds, says Lin.

As for differences in the buying choices of high- and lower- income Chinese consumers, Lin notes that “high earners are more interested in niche oils like wheat germ and coconut oil and more likely to seek nutrient  supplements while consuming cooking oils. They are also more willing to pay a higher price for products with organic claims and high levels of unsaturated fat.”

Economic outlook

Weakening  demand  in southeast Asia should mean lower prices in 2023 for China’s imports of palm oil, which comprise 40% of China’s total edible oils imports, according to the China General Administration of Customs  and the China Agriculture and Rural Affairs Ministry.

Certainly, 2022 was a tricky year for imports. COVID-related restrictions slowed port operations, which scared off some importers from making orders with foreign suppliers. In addition, Indonesia curbed  palm oil exports, while the Ukraine war squeezed supply of sunflowerseed and oil and pushed up their prices.

Domestic supply in 2022 was also complicated by extreme weather including a drought that hit central and southern China particularly badly.

It is not yet clear how an uncertain economic outlook will impact Chinese demand for edible oils. A series of indexes kept by CKGSB, China’s leading independent business school, shows a weak employment situation.  In December 2022,  the unemployment rate of young people aged between 16 and 24 years in urban areas of China stood at 16.7%, according to the National Bureau of Statistics. The labour cost index was down to its lowest point in a decade, at 67.5 compared to 100 in September 2011, says CKGSB.

Not since the 1970s has the Chinese economy grown so slowly. China is projected to return a total GDP growth of 3% for 2022, well below the 5% targeted by the Xi administration. The World Bank has projected growth of 2.7% in 2022 and 4.3% in 2023.

China’s total exports dropped by 8.7% and 9.9% year-on-year in November and December 2022,  largely due to a mix of inflationary pressure in key markets but also because of political tensions, notably the protests that sparked an end to China’s zero-COVID policy, according to the China General Administration of Customs.

The country’s ability to drive growth with credit-fuelled infrastructure projects  also appears to have waned  due to the increasingly feeble pay-off in growth  terms from infrastructure, while the country’s debt-fuelled real estate sector  has cooled due to a combination  of debt  and weak consumer demand  for housing.

In the longer term, the ageing of China’s society means  there is unlikely to be the conditions  for growth  in its oils and fats consumption during the 2030s.

China’s avenue to a consumption-driven growth  rebound also looks complicated  by the paucity of welfare coverage,  meaning workers will not have the savings glut of their western counterparts and will face significant COVID care bills given the threadbare nature of the country’s healthcare system.

The article appeared in the March/April 2023 Issue of Oil & Fats International here. (subscription required)

Leave a Reply

Your email address will not be published. Required fields are marked *