China’s New Feed Standards May Bring Radical Changes to Soybeans, Feed, and Livestock-Farming

Amid the escalating US-China trade war, the Chinese government has started to implement a new standard which lowers crude protein content in swine and poultry feed. The new regulation will impact China’s soybean, feed, and livestock farming industries.

China is the world's largest livestock-farming and feed-consumption country. However, as a result of farmland constraints, China is heavily dependent on imports of feed raw material, especially soybeans. The lingering US-China trade war compounds the issues with soybean and soymeal supply.

On 26 October, China Feed Industry Association approved new (recommended) standards for swine and poultry feed, lowering the crude protein level by 1.5% and 1%, respectively. In our view, the purpose of this low-protein feed formula is to reduce the dependence on US soybeans.

New feed standards have varied impact on different types of livestock-farming

The new standards impact different types of farming differently:

● For smaller farms, Rabobank believes the impact will be limited, as many of them have are already flexible when it comes to feed formula, using alternative feed for farming.

● For large-scale farms in the north, soymeal is the conventional feed ingredient. So we expect the new standards to impact their productivity and operational efficiency. These farms need to find alternative protein ingredient at similar cost.

● For larger-sized farms located in the south where rapeseed meal is more accessible than their counterparts in the north, the impact is relatively small.

The major impact will be the cost. While reduction of soymeal usage is meant to lower the cost, the transition from soymeal to other ingredients may raise the cost in short term.

Maintaining a consistent farming performance is another challenge. Feed formula adjustment usually takes a while to get right, during which time performance is volatile. Despite this, we’ve seen some success stories in recent years. Some large-scale hog-farming players have already adjusted to low protein feed, which reduced the feed cost, creating strong cost advantages.

While in theory, low-protein feed is feasible, the fact that this policy coincides with African swine fever outbreaks and China’s antibiotics reduction campaign is complicating matters.

Feed production technology will have to improve, benefiting feed manufacturers

If the new standards take effect, the amino-acid level of low-protein feed must be equal to that of high-protein feed. So, extra amino acids are required to make up for the reduced soymeal content in the feed. This presents a good opportunity to boost amino acid and enzyme production.

Domestic manufacturers of lysine, threonine, and methionine will benefit from the rising demand as the production has been in overcapacity (see Figure 1). Enzyme application will also rise along with the promotion of various other meals (such as cottonseed and rapeseed meal), as these meals require more enzymes to improve nutrient absorption, due to the meals’ high crude fibre content.

Feed production technology should also upgrade accordingly. Feed manufacturers need to optimise raw material composition to ensure nutrition utilisation rate.

Figure 1: China's key amino acid industry has been in a state of overcapacity, 2016

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Background: Escalating US-China trade war triggers changes in feed standards

In China, soymeal is the most important meal in animal feed (see Figure 2). The US used to be an indispensable soybean supplier to China. However, since China slapped a 25% tariff on US soybeans, Chinese buyers now shun US beans almost completely. Without the US supply, it is difficult for Chinese feed mills to maintain the same feed ration. The supply shortage is also driving domestic soymeal prices up, putting heavy cost pressure on livestock farms. Starting in 2018, other protein meals are being used as substitutes for soymeal in feed ration, and the adoption ratio of soymeal is declining.

Figure 2: Soymeal used to have a high proportion in complete feed, 2007-2017

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However, the new feed standards add upper limits for crude protein in both swine and poultry feed for different lifecycle periods (see Table 1). According to the Ministry of Agriculture, the new standards, if fully implemented, could reduce China’s annual soymeal consumption by 11m tonnes, equal to 14m tonnes of soybeans. Theoretically, it could help eliminate the supply-demand gap, and reduce the dependence on US soybeans. With less demand for soymeal, China’s soybean import will see a YOY decline, and crushing margins are expected to drop due to lower capacity utilisation ratio.

Table 1: New feed standard adds upper limits for crude protein

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Looking ahead: Uncertainties surround upcoming US-China trade talks

Up to now, the new standards are recommended rather than compulsory. The industry players can adjust feed rations at their discretion. However, that could change after the upcoming US-China trade talks at the end of November.

If trade talks don’t go well and embargoes on US soybeans continue, the new feed standards are likely to be enforced in order to solve the 3-to-4-milliontonne supply-demand gap from December 2018 to February 2019. This would put a large dent in the consumption of protein meals, primarily soymeal.

However, if both parties could reach certain agreements, China might hold off on making the new standard mandatory. As a concession, China might even agree to import more agricultural products from the US, including soybeans. Soymeal could then maintain the high usage ratio in feed.

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