Evaluating China's non-GMO soybean "advantage"

 "Non-GMO soybeans are our core competitive advantage"--so proclaimed the head of China's soybean industry association in a speech earlier this month.  

The speech on "The development and future outlook for China's soybean industry" presented at the Dalian Commodity Exchange's China International Oils and Oilseeds Conference cited the Russia-Ukraine war, "international epidemics," and "China-U.S. relations" as factors creating crises in food, energy, and "data security." The speaker said these crises validate China's obsession with food security and the necessity of maintaining "oilseed security." 

The speech was given by Yang Baolong, deputy Party secretary and general manager of Beidahuang Nongken Group, the commercial arm of the network of giant State Farms in Heilongjiang Province. The speech featured plenty of national jingoism and nods to Heilongjiang and Beidahuang as key players in China's soybean industry. 

Yang cited the Chinese origin of the soybean and its "5000 year history." He then recounted the more recent history of China's soaring imports from Brazil, America and Argentina. He was careful to refer to the imports as "genetically modified," and he cited the 100-million-ton of imports during calendar year 2020 as a watershed--round symbolic numbers like this often send Chinese policymakers into a tizzy. 

Yang sought to dispel what he called "deification" of genetically modified soybeans, claiming that the "American" GMO soybeans have no yield advantage nor superior oil content. He dismissed GMO soybeans' pest resistance and their tolerance of weed-killing chemicals. Citing Heilongjiang's 15 research institutes and seed brands, Yang claimed that Beidahuang's soybean yields had surpassed the Americans this year in concluding that China must stick to its non-GMO soybean "advantage." 

Statistics indicate this advantage is illusory. Comparing Chinese soybean yields with yields of U.S., Brazilian and Argentine soybeans shows that Chinese soybean yields are clearly lower than yields in exporting countries...and they have been falling further behind. U.S. soybean yields exceeded Chinese yields by about 50 percent in the early 2000s but the U.S. advantage increased to over 70 percent in recent years. 

Source: USDA production, supply and distribution database.

The Chinese data are questionable. The Chinese yield trend is suspiciously smooth from year to year. Unfiltered data from China's national cost of production survey indicate more year-to-year variation in yield and NO progress in soybean yields over the past decade. Detailed data from the production cost survey show that the two main inputs in Chinese soybean production have been declining: labor input plummeted over the years from about 110 days per hectare in the early 2000s to 35 days in 2020, and fertilizer input has fallen since reaching its peak in 2012. Soybean varieties would have to achieve big yield increases just to offset the decline in inputs used. 

Source: China National Bureau of Statistics and China National Development and Reform Commission.

Source: China National Development and Reform Commission production cost survey.

No competitive advantage is evident in China's soybean import-export performance. Chinese customs data for the calendar year so far (January-October 2022) show China exported 76,665 metric tons of non-GMO soybeans but that number paled in comparison to imports. The data indicate that China imported 1.5 million metric tons of non-GMO soybeans and 71.68 million tons of GMO soybeans in the first ten months of 2022.

China's soybeans are a lot more expensive than imported soybeans. According to customs data, imported GMO soybeans so far this year were valued at an average of 4,506 Chinese yuan per metric tons (these don't include tariffs and taxes; current estimated C&F import values are 5,224 yuan by one source and 5,580 yuan by another source). The customs data said China's exported non-GMO soybeans were valued at an average of 7,856 yuan per metric ton--74 percent more than imported GMO soybeans. According to the National Bureau of Statistics, the average price of soybeans in Chinese domestic rural markets was 7,775 yuan per metric ton over the first ten months of 2022. Farm gate prices for this year's soybean crop are currently about 5,900 yuan per ton (about $22.40 per bushel). Futures prices for non-GMO soybeans and GMO soybeans at China's Dalian Commodity Exchange indicate a 10.8-percent price premium for non-GMO beans. 

Source: average value of imports/exports and National Bureau of Statistics.

The customs data showed that Russia accounted for 38 percent of non-GMO soybean imports and the United States accounted for 33 percent. Canada and Benin each accounted for about 12 percent of non-GMO import volume, Ukraine accounted for 3.6 percent, and a combined 1 percent came from Tanzania and Ethiopia. All of them had much lower unit values than Chinese soybeans. 

In a separate article analyzing the customs data, the Heilongjiang Soybean Association mixed up values with quantities and omitted imports of U.S. "non-GMO" soybean imports. Maybe they know data is being misreported or maybe they just wanted to hide the inconvenient fact that non-GMO soybeans are being imported in large volumes from the United States. 

Yang's speech goes on the whine about why China's soybean industry lacks price-setting power despite being the world's largest buyer. He complains that Chinese soybean importers have no negotiating power. Is he concerned that the price of imported soybeans is too high when their prices are 40 percent cheaper than Chinese soybeans? Or does he think imported soybeans are artificially cheap and Chinese importers should insist on higher prices? It seems like Chinese consumers are the ones who lack negotiating power.

Yang also calls for higher direct subsidies for soybean farmers in China, subsidies for rotating corn with soybeans, and subsidies for leaving land fallow. In addition to the high price, this year the subsidy for soybeans is about 250 yuan per mu or 3750 yuan per hectare. At a yield of 2 metric tons per hectare that works out to 1,875 yuan per metric ton, equal to about 32 percent of the current farm gate price in China. 

Yang calls for strengthening "food safety consciousness" and placing the non-GMO concept of domestic soybeans "deep in the hearts of consumers," code for telling consumers scary things about GMOs. (Heilongjiang's soybean association has for many years been China's chief purveyor of misinformation about GMOs and cancer.) Yang insists that the government must carefully monitor soybean markets to prohibit GMO soybeans from entering food use. 

In 2016 Heilongjiang banned production of GMO soybeans, corn, and rice in the province. Heilongjiang produces 40 percent of the country's soybeans, so this ban effectively rules out commercialization of GMO soybeans in China. 

Puzzling Grain-Steel State-owned Tie-up

A puzzling tie-up between COFCO and Baowu Steel--Chinese state-owned food-trading and steel-making behemoths--was featured at a signing ceremony for 11 collaborative agreements between 15 central state-owned companies and 5 local state-owned companies held October 31. Short English summary here.

The ceremony, held immediately after the conclusion of the 20th communist party congress, is apparently a signal that newly-minted dictator-for-life Xi Jinping has endorsed state-owned companies as the core of his approach to economic management. 

The chairman of the State-owned asset supervision committee presiding over the ceremony promised formation of new enterprises that would "serve the new requirements of national strategic goals." The description of the ceremony emphasized interconnections between state-owned companies, including plenty of language about "collaboration," "linkages," "integration," and "industry chains."

The tie-up between COFCO and Baowu Steel is puzzling since the companies' businesses do not seem to overlap at all. It's not obvious what synergy is possible.

COFCO is China's premier state-owned food conglomerate that includes assets in grain, cotton and sugar-trading, edible oil processing, corn manufacturing, flour- and rice-milling, biofuels, milk, pork, wine, an e-commerce platform, and a joint venture with Coca Cola. Baowu Steel is a giant steel-maker based in Shanghai, a place that has virtually no agriculture.

COFCO has a history of absorbing other state-owned companies in cotton-trading, animal husbandry, and grain logistics in recent years. The party's decision to ramp up farm commodity imports in 2020 was a license to print money for COFCO since it controls most of the import quotas for grains, cotton, and sugar, allowing it to import at world prices and resell at high prices in China. 

Baowu Steel has a history of taking over under-performing steel companies from all over the country. In 2016, Shanghai's Baoshan Steel absorbed Wuhan Iron and Steel to become Baowu. Ten years ago Wuhan Iron and Steel famously made its own weird announcement that it was starting up a pig-farming venture.

COFCO's party secretary and chairman's comments about the "strategic cooperation" with Baowu Steel were limited to vague jargon about "professional integration projects," and "optimizing resource allocation." His promise to "focus on the core business of grain, oil, sugar, cotton, meat, and milk" seems at odds with this cooperation with a company that has absolutely nothing to do with these core businesses. Baowu Steel's party secretary/chairman spouted similar meaningless jargon about "integration."  

A different version of the article contained similarly vague jargon about "synergy", "joint development force," "industrial ecosystem," "low-carbon," "green" to build a world-class enterprise through the COFCO-Baowu collaboration.

A collaboration between China Rare Earth Group and Rising Holdings Group announced at the October 31 ceremony made more sense. Another strategy featured was integration of central-government-owned companies like Aviation Industry Group with provincial or local companies like Shenyang Aviation Industry Group (to focus on intelligent manufacturing). Another agricultural tie-up featured Yunnan Province's State Farm Group and China Southern Power Grid, also described as a model of "integration of central and provincial governments." 

The article on the October 31 signing ceremony quoted a report from the just-completed Party Congress promising to "deepen the reform of state-owned companies" to make state-owned enterprises bigger and stronger. The asset commission chairman said the 20th Party Congress had given state-owned enterprises new missions and tasks, including a focus on "strategic security, industrial leadership, national economy, peoples' livelihood, and public services" to serve national strategic goals. He reiterated the mantra of focusing on the core business.

Another official commenting on the ceremony said the main goal for upcoming state-owned enterprise reform is to establish a dominant position in the relevant industry chain. 

An essay on state-owned enterprise reform posted on COFCO's web site in September promised to focus on core business and highlighted the company's jettisoning of non-core businesses (like hotels and golf courses). 

The ascendance of COFCO was evident in state news media coverage of last week's 5th Shanghai Import Expo. Its eagerness to make purchase deals with other countries at the expo was played up by describing COFCO as the "world's shopping cart." COFCO promised to use the expo to make friends up and down the supply chain and to diversify China's imports. China Daily said COFCO signed $10 billion worth of purchase agreements with foreign partners at the November 5-11 expo in Shanghai. COFCO also reported an agreement with the U.S. Soybean Export Council to establish a Collaborative Soybean Innovation Center was signed at the expo.

No rationale was given for the link-up between COFCO and Baowu Steel. A link to the state media article on the agreement is the only mention of the deal evident on the COFCO web site.

Perhaps Baowu wants to take advantage of COFCO's port and logistics facilities acquired in its purchase of grain traders Nidera and Noble Agri six years ago to import raw materials. Or maybe the apparatchiks controlling one of the two companies are too closely affiliated with one of the communist party factions that are Xi's enemies and need to be watched carefully.