In Desha County in southeastern Arkansas, Jason Smith farms 5,000 acres of land – with soybeans accounting for almost half that area.
“There’s more beans around here this year than I have ever seen in my life,” said Smith. “I used to look out and I’d see cotton fields all around me everywhere. Now, it’s all soybeans.”
In boosting soybean production, however, Smith may find himself caught up in a controversy a half a world away.
A good number of the beans farmed in Arkansas could end up in Chinese kitchens, feedlots and factories. China imports 45% of the world’s traded soybeans, and imported beans comprise 71% of the country’s total soybean consumption, said Brady Sidwell, a Hong Kong-based analyst at agriculture research and advisory firm Rabobank.
Beyond imports, a significant portion of the domestic bean-processing industry is in the hands of foreign companies like Singapore-listed Wilmar International and US firms Cargill and Bunge. In a sign of unhappiness with this state of affairs, Beijing has begun limiting foreign involvement in the industry. This wins the government points with local agriculture firms, but rapidly increasing demand means that the economics don’t add up.
“There are some behind-the-scenes efforts by local players to discredit foreigners in order to create an advantaged position,” said one industry participant, speaking on condition of anonymity.
The soybean is a politically sensitive commodity because it is the only staple crop in which China is not self-sufficient, said Steven Zhu, an analyst at Evolution Securities in Shanghai. A reliance on imports means the domestic market is exposed to global price fluctuations.
Soybeans are used in food products like tofu, soy sauce and cooking oil, and in the production of adhesives, fuels and lubricants. High-protein soy meal, produced by a crushing and toasting process, is a major part of animal feed.
Almost all of China’s soybean imports, and half the domestic crop, are crushed and processed into oil and meal, according to Song Baohui, a researcher at California State University, Chico.
As China has more soybean crushing facilities than it needs, some plants are operating below full capacity. This is not so much of a problem for the foreign companies that control 60% of China’s soybean crushing market – smaller domestic competitors are the ones who suffer.
Concern over foreign domination led the National Development and Reform Commission (NDRC) to restrict foreign companies to minority shares in new crushing facilities late last year. Then, in April, an NDRC official announced a ban on building new crushing facilities. The announcement, however, was not accompanied by official regulations.
Beijing has also been discussing ways to reduce dependence on foreign supplies. New government subsidies have been introduced to encourage farmers to plant soybeans. These have helped to boost production by about 18% this year – the first increase in three years. But Rabobank’s Bidwell raises doubts about China’s ability to significantly reduce its reliance on imported beans.
“If you look at China’s production of soybeans, it’s been increasing … it’s just that demand is increasing so much more than supply,” he said.
Local farms aren’t helped by their limited size and chronic inefficiency. In contrast to Smith’s crop of 2,400 acres of soybeans, a Chinese farmer typically oversees less than 2.4 acres, or a hectare, of land.
As demand continues to increase, foreign firms are likely to come under more regulatory pressure. The perception is that the foreigners are profiting from higher prices at the expense of China’s agricultural sector. But a significant portion of price rises are directly caused by higher demand and fuel costs, Bidwell said.
Futures speculation increases volatility and magnifies the rises. Smith described a system in which companies like Bunge must borrow to defend futures positions, and then pass interest and input costs on to farmers.
So, while the Arkansas farmer has his worries about soybeans, so does China. But as Beijing pursues protectionist policies in the face of rising demand, it may find raw economics standing in the way.