Wednesday, April 14, 2010

The Strategy Behind China's Rejection of Soy Oil

This month, Chinese officials began blocking imports of soybean oil from Argentina, claiming that the residues of solvents used in the oil-extraction process exceeded safe levels. This is a major problem for Argentina’s fragile economy which relies on revenue from an export tax on soy oil, one of its main exports.

Articles in the Chinese press reveal that the blockage of soy oil is actually the first step in a calculated strategy to build a Chinese “national team” in the vegetable oil industry—thinly disguised protectionism. [China’s rejection of rapeseed imports due to sudden discovery of ‘black leg’ fungus could be connected to the same strategy since it encompasses all oils and oilseeds.]

An April 6 article from the China Grain and Oils Food Information Net links new soy oil standards to a “Oils and Oilseed Industry Development Plan (2009-2020)” that the National Development and Reform Commission (NDRC) delivered to China’s State Council in late March. The main point of the plan is help beleaguered domestic vegetable oil producers compete with foreign companies and increase China’s self-sufficiency in vegetable oil from less than 50% at present to 60% by 2020.

The article says that a meeting [presumably held by government officials] with about a dozen companies was held on March 31 to discuss the tightening of standards in order to cut off soy oil imports. Industry insider was quoted as saying “limiting soy oil imports is probably the first shot fired in the counterattack to protect soybeans.”

According to one individual from a large futures trading company, the Commerce Ministry meeting already decided that the quasi-government Food and Agricultural Import and Export Association will tighten the standard for residual solvents in imported soy oil from 300 ppm to 100 ppm.

A manager at COFCO’s Zhangjiagang edible oil refinery said, “Since the solvent residues in this range basically have no effect on humans, the country hasn’t [previously] stressed this standard for imported soy oil.”

Moreover, beginning April 1 new applications for import licenses for soy oil from Argentina must use a new method issued by the central government’s Commerce Ministry. Each province must stop using their own methods for approving the licenses.
An unnamed individual from Jiusan Co. [a large domestic oil processor in Heilongjiang Province] said this could be the first step in a strategy for protecting the domestic oil processing industry. He explains that the limiting of oil imports is aimed at increasing use of domestic soybeans. He also speculates that protection could be extended to soybeans:“In the future it’s very possible that soybean imports will be limited.” The article adds the caveat that this limit could be localized [i.e. southern provinces that don’t grow soybeans may be exempt].

A March 27 article from the Economic Observer explains that the NDRC oils and oilseeds plan “…is a response to the threat of foreign companies in the grain and oil industry.” The Economic Observer reports that experts familiar with the plan say a group of pillar oil-processing companies must be nurtured to achieve the targeted 60% self-sufficiency rate by 2020.

China imports unrefined soy, palm, and rapeseed oils, large quantities of soybeans which are crushed to make oil and animal feed, and some rapeseed (canola). In 2009, China imported 8.16 mmt of vegetable oil and 42.55 mmt of soybeans and over 1 mmt of rapeseed oil. These imports of oils and oilseeds are the equivalent of 560 million mu (37 million hectares).

An individual from the China Grain Industry Association quoted by the Economic Observer points out that China simply doesn’t have enough land to be self-sufficient in vegetable oils: “We would need [33 million hectares] of land plus more water resources to achieve self-sufficiency in oils and oilseeds.”

The Grain Industry Association guy acknowledges that China’s strategy has been to import vegetable oils so the country can focus its land resources of growing grains like wheat, corn, and rice that are considered more strategic: “This is an impossible task, as to some extent the reliance on edible oil imports is a strategy for preserving security in the main grains.”

The NDRC plan reportedly stresses the diversity of vegetable oils. An NDRC official who participated in putting together the plan said soybean, palm and rapeseed oil made up 82.5% of China’s edible oil supply in 2008, but soybean oil alone accounted for over 54%. He says the crux of China’s low self-sufficiency rate in edible oils is “overdependence on soybeans.”

The plan aims to promote production of other oilseeds. Economic Observer quotes from the plan: “non-GMO soybean planting area [will be] stabilized at [10 million hectares] and the supply of peanut, tea oil [shan cha or ‘mountain tea’], sesame, cottonseed, sunflower oils will be increased through measures like policy-style subsidized loans and comprehensive subsidies.”

Expert opinion is described as “cautiously optimistic.” The China Grain Industry official points out that peanut meal cannot replace the huge amount of soymeal co-product from soy oil processing which is an important feed ingredient for meat, egg, milk, and fish production.

Officials envision boosting companies like COFCO and Sinograin as a sort of “National Team.”

The Economic Observer explains, “From the long-term view, China must seek a stronger voice in the international grain and oils market and improve domestic industry development, a set of globally competitive large edible oils companies are needed. Such large companies are an essential part of China’s unique approach to macro adjustment.”

Another participant in formulating the plan told the reporter, the most substantial support given to these companies will be “Loans to the companies at subsidized interest rates for 5%-8% of approved investment.”

One industry insider observes a contradiction in the plan’s other major target—to reduce “backward” excess production capacity by 20%. He notes that many large edible oils companies were closely involved in the plan’s formulation. While actively lobbying for their own interests, these companies were traveling around the country looking for places to build new factories and “capture more territory.” At the same time COFCO and Sinograin were offering advice on eliminating excess capacity they were building large factories in Zhenjiang, Dongguan, and Tianjin. Meanwhile the medium and small oil-processors are branded as the “sinners” responsible for “backward” excess capacity.

Will this turn out any better than China's efforts to build a "national team" in soccer?

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