China's import demand for soybeans and cotton has breathed fresh optimism into the markets and pushed prices higher. The question is, can it continue?
Analyst Rich Pottorff, Doane Ag Services, said this will depend to some degree on whether or not China is able to bring back lost grain acreage to bump up its production capacity and, of course, how South America responds to China's import demand.
“The growth in the soybean trade over the last decade has been driven almost totally by the growth in the Chinese market,” Pottorff said, speaking at the National Alliance of Independent Crop Consultants annual meeting in New Orleans. “We've also sent a huge amount of our cotton crop there. So far, China remains a competitor in the corn market and is basically self-sufficient in wheat.”
The result is that the outlook for U.S. agriculture is more positive than it's been in the last 25 years, according to Pottorff. “Chinese consumption of soybeans exploded in the mid-1990s and the country has now doubled its consumption over the last 10 years. All of the increase has been made up by imports, with a substantial portion of that coming from the United States.
Economic growth — and China's citizens moving from grain-based diets to livestock diets — explains some of the burgeoning market. But the Chinese market today is being driven from the supply side, primarily from the loss of about 35 million grain acres which have gone out of production since 1999.
“Most of the information out there says that the land is gone and not a lot of it will come back. It's gone into industrial development, housing, roads and fruits and vegetables.”
One reason for the loss of acreage is that China is starting to have significant water problems, according to Pottorff. “Irrigation has taxed the water supply in China, and they've had to not only cut back on acreage but on their double-cropping and triple-cropping.”
This also means that the Chinese, already in the market for U.S. cotton and soybeans, could soon be a market for corn as well. “Throughout the 1980s and 1990s, China built grain stocks to a little over 300 million metric tons in 1999. Since that time, stocks have plunged down to about 100 million metric tons. Either they have to bring land back into production or they have to go into the world market and buy grain.
“China has the money to do (the latter), with the help of a $120 billion trade surplus with the United States. So if they decide that importing is what they want to do, money will not be an issue. Obviously, the one caveat is that we don't know if the data is accurate.
“We think China will import some wheat this year, up to 4 million to 6 million metric tons over the next few years,” Pottorff added. “We think they'll cut corn exports to about 7.5 million metric tons this year. Last year, they exported 15 million metric tons plus. As a result, the United States should pick up some significant marketshare. We think that by mid-decade, China could be importing both corn and wheat.”
The big wrench in the machinery, of course, is export competition from South America, especially in soybeans, noted Pottorff. “Soybean output in South America is rising rapidly. Brazil could bring another 100 million acres or more into production. They will continue to be an extremely important competitor.”
Pottorff stressed that if China doesn't import as many soybeans as projected, world production could outpace demand, which would result in a buildup of stocks.
Pottorff added that fertilizer prices will likely remain high as spring approaches and could go higher. “The cold weather in the East is drawing down natural gas supplies and prices will continue to strengthen. That has pushed the cost of nitrogen fertilizer up. In the past, when we had high nitrogen prices, we were able to import significant amounts of urea. That's not going to be nearly as easy to do this time around because production of nitrogen fertilizer is down in several key countries.”
Here's a synopsis of Pottorff's outlook for U.S. commodities:
Corn — The demand side of the corn market is strong, with exports expected to be up about 400 million bushels, feed use up about 100 million bushels and other uses up 180 million bushels. “Total demand is about 10.2 billion bushels. We generally produce a 10 billion bushel crop. So we'll need another big crop in 2004 to meet this demand, if it holds up.”
Soybeans — The outlook is also bullish. “We need to cut 160 million bushels out of crush and 150 million bushels out of exports to keep stocks around 100 million bushels. So far, export sales are up, so a huge change has to take place in the export market. So far, crush is down only 10 million bushels.”
Cotton — “Domestic mill use is going away. It's at 6 million bales this year and at the end of 2004, all the quotas on textile imports will go away and the industry will probably continue to decline. On the other hand, we have had very good success exporting to China.
“This year, total U.S. cotton use will turn out around 19 million to 19.5 million bales on a production of about 18.2 million bales. Clearly, the cotton situation will encourage people to plant more cotton. But these kinds of prices are going to bring cotton acreage up in most cotton producing countries. As a result of that, we should have a little bit of a decline in our exports next year.”
Wheat — The United States has new competitors in the world wheat market, noted Pottorff. “Russia and the former Soviet Union countries finally seem to be getting their agricultural act together. In fact, last year, they exported over 25 million metric tons of wheat.”
Exports dropped this year due to a short crop, “but it looks like they will be bigger exporters and bigger producers (in the future).”
Meanwhile, the European Union will cut back on set-asides this year, “so next year they should have a bigger crop. A lot of this wheat is lower quality and may actually compete with corn. But if we don't get China to import more wheat, the outlook for the feed market will be much less optimistic.”