Monday, June 11, 2018

China Chooses Feed Imports to Compete with Soymeal

China has waived inspection and quarantine requirements on a list of obscure animal feed ingredients, apparently as a strategy to reduce reliance on soybean meal as an ingredient in the country's feed industry. The move illustrates China's practice of manipulating such rules to manage trade.

China's Administration of Customs 2018 Bulletin No. 51 announced that inspection and quarantine certificates will no longer be required for a list of 71 items as of June 1, 2018. The list includes 18 items that are by-products of agricultural processing used as animal feed--all but a few of the items under the broad Harmonized System (HS) category 23. The items include rapeseed meal, peanut meal, cottonseed meal, palm and coconut meal, fish meal, sugar beet and bean pulp, the residual from sugar cane processing, wine dregs, and feed additives. Other products on the list are obscure types of fats, oils and fibers, also residual material from processing industries.

What is notable are the three categories under HS 23 NOT included: soybean meal, distillers dried grains, and wheat bran. Imports of these excluded items will still be subject to rigorous inspection and quarantine inspections at the border.

While the Customs notice claims that the items were selected on the basis of risk evaluation, the choice of items appears to be based on strategic considerations of protecting domestic industries and fostering alternatives to soybean meal. Imported soybean meal, distillers grains and wheat bran imports would compete with products of important domestic processing industries in China.

A commentary on the announcement interprets the Customs waivers as a strategic measure to diversify sources of high protein meal to reduce reliance on soybean meal--the dominant source of protein meal used in China's animal feed. The article quotes an unnamed industry analyst who notes that imports of alternative protein meals are currently very small and the analyst speculates that easing the way for imports of rapeseed, peanut, cottonseed, palm, and sugar-derived meals could diversify China's sources of high protein feeds.

The analyst also observes that distillers dried grains--the most popular alternative to soybean meal--was not included in the "liberalization." Last year China imposed antidumping duties of distillers dried grains. Its exclusion from the customs announcement appears to be another indication that Chinese authorities want to keep imported DDGS out of the market.

The commentary did not notice that wheat bran (HS 230230) was also one of the few items in the HS 23 category omitted from the customs announcement. The preservation of quarantine certificate requirements for wheat bran is likely intended to protect China's flour mills which derive significant supplementary revenue from selling bran (the by-product of milling wheat) for use in animal feed. Wheat bran prices have already been under downward pressure in China.

The customs announcement also appears to dovetail with China's strategy of promoting imports from "One Belt One Road" countries. Palm kernel and sugar cane residual products are imported mainly from Southeast Asia. China began importing peanut meal from Sudan and fish meal from Mauritania in 2016. Imports of sunflower seed meal from Kazakhstan began last year.

If challenged on the exclusion of soybean meal, DDGS, and wheat bran, China's Customs Administration will likely produce some sort of "risk analysis" that claims these three items pose a threat of introducing weeds or contaminants to China. It seems more likely that opening trade with new partners in Africa, Central and South Asia poses a risk of introducing foreign material, invasive weeds and pathogens, but customs authorities are welcoming this trade and likely rushing through approvals in the interest of promoting trade with "belt and road" countries.

This liberalization echoes another attempt to engineer trade using the same group of products two decades ago. During the 1990s China slashed tariffs on imports of items in HS 23 and waived the value added tax on imports of these items. That move was intended to fill deficits of protein in animal feeds without directly competing with grain products produced by China's farmers. It also represented a goodwill gesture of trade liberalization as China negotiated its accession to the WTO two decades ago.

The immediate result of the 1990s tariff cuts was a flood of soybean meal imports during a downturn in grain and pork markets that led to huge losses for Chinese soybean crushers. The VAT was reinstated for soybean meal to protect the crushers, and China has never been a major importer of soybean meal since then. But other items in HS 23 remained exempt.

Imports of DDGS from the United States was another unforeseen outcome of the 1990s liberalization but it took a decade to develop. Distillers dried grains were a fairly obscure commodity during the 1990s. After the U.S. ramped up its ethanol industry during the first decade of the 21st century, China's feed mills discovered imported DDGS could be a useful and cost-effective feed ingredient. Imports didn't get going until 2009, but China's imports of DDGS spiked at over 7 million metric tons and $2 billion during 2015.

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