Asian market share battle

by Michael King
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Urbanization, changing dietary demands and a thriving middle class will continue to drive Asian demand for agricultural products for many years to come. That was the message heard in May by delegates attending the 7th Asia Grain Transportation Conference hosted in Bali, Indonesia, by a range of grain organizations including the U.S. Department of Agriculture and U.S. Grains Council.

Amid much talk about congestion at Brazilian ports and the impact poor planting conditions may have on this year’s U.S. soybean and grain export availability, a succession of speakers emphasized that future growth in international demand for exports from the Americas would be firmly focused on Asia, but competition for market share would be fierce from suppliers in the Black Sea and Australia in many segments.

Randy Mann, chairman of the U.S. Soybean Export Council and Secretary of the American Soybean Association, said North Asia and Southeast Asia had accounted for 32% and 11%, respectively, of global soymeal consumption in the 2012-13 marketing year.

Imports by Southeast Asia of soybean and soymeal increased from 5.1 million tonnes in 2000-01 to 11.4 million tonnes in 2012-13, according to USDA. Mann said demand would continue to rise across Asia in the years ahead which would see U.S. soybean crop exports grow by two-thirds through 2020.

Five of the top 10 markets for U.S. wheat are now in Asia, led by Japan, the Philippines, Korea, Taiwan and Indonesia, with Thailand just outside the top 10, according to Michael Spier, vice-president at U.S. Wheat Associates. He said demand for wheat imports in Southeast Asia reached 16 million tonnes in 2011-12, with Australia the dominant supplier, followed by the U.S. and Canada.

“In Southeast Asia there has been big growth in consumption with milling capacity added and a rapid expansion of the baking industry to keep up with demand,” he explained. “This is because of growing prosperity and a more populous middle class creating a shift in diet toward more wheat foods such as noodles.

“The U.S. has seen very good wheat export growth to Southeast Asia over the last decade and this will continue. Indonesia, for example, has added seven flour mills in the last five years and more are coming.”

Spier forecast that total U.S wheat exports in 2012-13 would subside slightly to 28 million tonnes compared to 29 million tonnes a year earlier, despite production rising to 62 million tonnes from 54 million tonnes in 2011-12.

Ali Abdi, agricultural counselor, FAS/USDA in Indonesia, said agricultural products had come to represent a substantial share of bilateral trade between the U.S. and Indonesia, and demand for U.S. products was growing. However, he said Indonesian policies which favored self-sufficiency were at times in conflict with its commitments to international trade rules.

“There are lots of restrictions on imports, but growth is there,” he added.

China: the driving force

Of course, the biggest driver of demand in Asia is China, now the largest consumer and importer of agricultural products in the world.

“This trend is likely to accelerate due to increasing urbanization and income levels combining with declining arable land per capita, threats to water supply and slowing crop yield productivity growth,” said Macquarie analyst Bradley Wheaton. “As a result, China’s dependence on imports from countries like the U.S., Brazil, Australia, Canada and India is likely to continue to grow.”

Australia recently announced plans to boost the value of its agriculture and food-related exports to China by some 45% by 2025.

“The rise of Asia is transforming the world,” Australia Agriculture Minister Joe Ludwig said. “By 2050 world food consumption is expected to be 75 percent higher than in 2007, and almost half of this increased demand will come from China alone.”

China’s imports of soybeans used for livestock feed and as oil for cooking hit a record 58.4 million tonnes in 2012, up over 11% year-on-year, and representing some 80% of Chinese consumption. As drought hit U.S. crops last year, Brazil became the largest supplier to China for the first time.

According to the USDA’s long-term forecasts, China will account for 90% of the growth in world soybean demand over the next decade and will import 103 million tonnes by 2023.

“Due to its capacity to increase its planted area, yields and production, Brazil will continue to be the main supplier of soybeans to China,” Wheaton said. “Exports are expected to increase from 38.4 million tonnes in 2012 to 63.8 million tonnes in 2023.

“Corn imports to China over the last three years exceeded those recorded for the previous 50 years, while imports of cereals, including wheat, rice and corn, more than doubled last year to 14 million tonnes.”

U.S. challenges

Kevin Roepke, manager of global trade at the U.S Grains Council, warned delegates that U.S. farmers should not assume they will be first among equals in Asia’s growth markets. He pointed out that 2012 had been a year of firsts for U.S agriculture. While it would be the first the time the U.S. exported more soybeans than corn, it was also the first time Brazilian soybean exports exceeded those of the U.S, and could also prove to be the first year that Brazil exported more corn than the U.S.

“We hope this isn’t repeated,” he said. “Lots of this was due to drought, but we also need to be as competitive as we can be.”

He pointed out that Brazil and Argentina have increased their harvest area for soybeans over the last two decades at far faster rates than the U.S., where corn has been given precedence.

Roepke said improving the efficiency of corn export systems and avoiding strikes by longshoremen would be paramount to the competitiveness of the U.S. agricultural industry.

This was a point hammered home by Ken Eriksen, senior vice-president of Informa Economics. He said industries dependent on soybeans, grains and related products now accounted for some 1.5 million jobs and more than $352 billion in U.S. economic output. He pointed out that such is the productivity of U.S. farmers that in one week in May they planted more corn than ever before. However, when those crops are harvested, farmers will be forced to use decaying infrastructure, much of which has not been upgraded for decades.

“Farmers are highly efficient and productive, but most river locks and dams are 70 years old and they are not aging well,” he said. “For U.S. farmers, transport is very important; it can help determine their investments and what they grow.”

He argued that major investment was now needed and warned the failure to commit resources would see the U.S. fall behind its international competitors, increasing transport costs and decreasing farmer returns.

“We are in desperate need of investment, and the failure to make these commitments is resulting in supply chain inefficiencies,” he added. “Just maintaining rivers at authorized depths for dredging is difficult.”

In the future, U.S. farmers would have to compete against rivals that are making upgrades to transport systems, said Eriksen. Proposed infrastructure projects would make Brazilian soybeans export corridors, which are already shifting to barge and rail and away from trucks, increasingly efficient in the years ahead. This would reduce freight costs by 20% to 30%, depending on the origin.

“Accounting for wait times between transportation events and export movement, the estimated cost savings could exceed 50 percent,” he said.

This translates into $55 to more than $60 per tonne of soy.

“Such potential improvements bring Brazil nearly on par with the United States in terms of inland transport costs, effectively bolstering its farm industry.”

He said major channel dredging by the Army Corps of Engineers is needed at Galveston, Texas; Mobile, Alabama; New Orleans, Louisiana; and Portland, Oregon and would cost more than $4 billion. Major inland navigation improvements at locks and dams on the Mississippi, Ohio and Illinois Rivers were also required and would cost around $3 billion. However, despite their cost, completing these upgrades would create huge value for the U.S. economy in terms of employment, output and earnings.

He also said with the demise of the Canadian Wheat Board, greater volumes of grain are moving between and through the U.S. and Canada, creating a North American market.

“Canada is becoming a very important outlet for grain and will become more important,” he said. “Between the U.S. PNW and Vancouver, British Columbia, these have become and will remain important port areas. There has been massive expansion of grain elevator capacity so there is more grain moving to the Pacific Northwest for export, so we’re seeing new export patterns. And rail is getting more efficient with longer trains, although high rail rates remain an issue.”

With proper dredging of the Mississippi River System, Eriksen said the U.S. could make huge gains on economies of scale shipping agricultural products into Asia once the Panama locks are widened and deepened in 2015.

“This is a big opportunity for farmers to save on transport costs,” he said. “This will extend the reach of rivers and make railroads serving the Pacific Northwest waterway routes by offering more competitive prices against the next best transport option,” he added.

“But we can’t take advantage of this unless we upgrade our infrastructure. Reliable infrastructure offers huge savings.”