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Inside China’s strategy in the soybean trade war

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A farmer eats some of the soy beans in his field to check if they are ready for harvest. Reuters

BEIJING/CHICAGO (Reuters) – The executive from one of China’s biggest soybean crushers sat on a panel at a Kansas City agricultural exports conference, listening to an expert beside him explain why China would remain dependent on US soybeans to feed its massive hog herds.

When his turn to speak came, Mu Yan Kui told the international audience of soy traders that everything they just heard was wrong. Then Mr Mu ticked off a six-part strategy to slash Chinese consumption and tap alternate supplies with little financial pain.

“Many foreign business people and politicians have underestimated the determination of Chinese people to support the government in a trade war,” said Mr Mu, vice chairman of Yihai Kerry, owned by Singapore-based Wilmar International.

The comments echo a growing confidence within China’s soybean industry and government that the world’s largest pork-producing nation can wean itself off US soy exports – a prospect that would decimate US farmers, upend a 36-year-old trading relationship worth $12.7 billion last year, and radically remap global trade flows.

Just one prong of the strategy Mr Mu detailed – to slash soymeal content in pig feed – could obliterate Chinese demand for US soybeans if broadly adopted, according to Reuters calculations.

Cutting the soy ration for hogs from the typical 20 percent to 12 percent would equate to a demand reduction of up to 27 million tonnes of soybeans per year – an amount equal to 82 percent of Chinese soy imports from the United States last year. Chinese farmers could cut soymeal rations by nearly half without harming hogs’ growth, experts and academics said.

Soy meal provides the protein and amino acids that pigs need to thrive, but reducing their use will be easier in China than elsewhere because farmers here have long included more soy than needed to keep their hogs healthy, according to industry experts in China and the United States.

The standard 20 percent ration dates to a recipe promoted by US soybean industry advocates in the 1980s as they entered what was then a newly opened market for foreign investment.

Most Chinese pig farmers have continued to use high levels of soymeal even as their US counterparts reduced soy content after advancing the science of optimizing feed ingredients to provide the best nutrition at the lowest cost.

Major Chinese agriculture firms have recently started adopting the same tactics, but the nation’s pork sector remains dominated by smaller operations that – until now – didn’t have a strong financial incentive to justify the time and expense required to overhaul feeding systems and formulas, industry experts said.

Now, China’s 25-percent tariff on US soybeans – a retaliation against levies by US President Donald Trump on a wide range of Chinese imports – is accelerating the push to slash soymeal rations.

“The Sino-US trade tensions will inevitably promote the wider application of this know-how,” said Yin Jingdong, professor in animal nutrition at China Agricultural University.

A feed mill owned by Beijing Dabeinong Technology Group Co for instance, plans to eliminate imported US soybeans from its feed mix by October, said Zhang Wei, a manager at the mill, one of China’s top farmers and feed makers. The firm will replace soy imports with more cornmeal and alternative protein sources, including domestically produced soymeal, which has typically been grown for human consumption.

At the Kansas City conference, held by the US Soybean Export Council, Mr Mu highlighted reduced soymeal rations as part of a broader strategy, including seeking alternative protein sources such as rapeseed or cotton seed; tapping surplus soybean stocks, including a government reserve, and domestically grown soybeans; and continuing to boost soybean imports from Brazil and Argentina.

Mr Mu’s presentation reflects the line of thinking now broadly accepted by China’s government and its state-run agriculture firms – and marks a shift since the onset of the trade war. When Beijing threatened soybean tariffs in April, Chinese feedmakers and agriculture experts worried the move would inflict more pain on the domestic industry than its top trading partner because China would struggle to replace US supplies.

Seated to Mr Mu’s right at the panel table was Wallace Tyner, a Purdue University economist who had moments earlier argued that the United States and China would suffer about equal financial damage from the soybean trade war.

He called Mr Mu’s remarks a “political speech.” The tenants of the China strategy Mr Mu outlined were achievable, Mr Tyner said in a later interview, “but each one of them cost money.”

USDA spokesman Tim Murtaugh downplayed the threat of China displacing US soybean supplies. The Trump administration, he said, is analyzing import demand and ultimately aims to win back access to the China market under better terms.

“It’s not surprising that China would float this idea, given the trade dispute,” he said.

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