USDA: Tariffs could direct China’s ag investments towards soy

Recent trade tensions could shape China’s overseas agricultural acquisition drive, with Russia, Ukraine and Kazakhstan among likely targets, says Economic Research Service economist Fred Gale.

Following recent trade tensions with the US, soybeans could emerge as a clearer focus of China’s outbound agricultural investments, according to an author of a recent US Department of Agriculture report.

While Chinese agricultural investment rose from $300 million in 2009 to $3.3 billion in 2016, according to the report, Ministry of Agriculture statistics including processing and trading companies put the 2016 figure at $26 billion.

USDA economist and report co-author Fred Gale told Agri Investor that China has been trying to diversify input supply.

“The prospect of tariffs on US soybeans negatively impacting Chinese importers and processors, in particular, may motivate China to make further explorations of soybean investments to further reduce its reliance on US soybeans,” Gale said. “China has already made moves to nurture Russia, Ukraine and Kazakhstan as prospective sources of soybeans and other edible oils.”

From crops to corporates

In the report, Gale and co-author Elizabeth Gooch say China’s overseas agricultural investments have evolved from an early focus on crop production, largely in Asia, between 2004 and 2012, to more recent acquisitions of established agribusinesses in developed countries. The research also describes the ways in which central government investment promotion policies, including recently the Belt and Road Initiative, have been used to guide and shape agricultural investments, which it said often focused on small companies in possession of unexploited land.

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“The Chinese government seeks to steer investors toward ventures that achieve national goals by offering various incentives, arranging deals and setting up strategic plans,” Gale and Gooch wrote. “The strategy encourages Chinese companies to engage each link in the supply chain for imported commodities to earn profits and gain influence over prices.”

Soybeans are among the key commodities that have driven China’s increasing reliance on agricultural imports, from $17 billion in 2007 to $125 billion last year, according to the report. A USDA analysis of private sector and official Chinese statistics showed soybeans – along with sorghum, cassava, palm and olive oil – to be the agricultural commodities for which China is most dependent on imports.

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Last month, former US Secretary of Agriculture Tom Vilsack told Agri Investor how Chinese leaders’ perspective on the country’s reliance on imported soybeans has evolved over his decades of high level talks with government leaders.

Imports of soybeans were negligible until recent years, according to the ERS report, when the US and Brazil emerged as China’s dominant suppliers. China has also invested in soybean production in eastern Russia, and Chinese farmers operating in that region have lobbied the central government to be excluded from recent import tariffs.

Risk and opportunity

Asked to comment on Rabobank analyst Ruud Schers’ November suggestion to Agri Investor that private companies explore ways to collaborate with China’s state-driven agricultural inputs investments, Gale said a lack of preparation and due diligence on the behalf of some of China’s state-owned enterprises has shown there is a mix of opportunity and risk in such a strategy.

“COFCO had difficulty integrating the companies it purchased and lost several prominent executives,” Gale wrote. “Several of the big Chinese companies discovered irregularities in companies they purchased, and Bright Foods’ purchase of Weetabix does not appear to have worked out well since Chinese consumers are not receptive to British breakfast cereals.”