Coronavirus Hits Chinese Soy Supply Chain, Lowering Consumption and Import Needs

The outbreak of coronavirus (designated as Covid-19 by the WHO) will hit Chinese soy oil and soymeal consumption, primarily in Q1 and early Q2 2020. Barring an extreme escalation of the epidemic, both are expected to register a robust rebound in 2H 2020.

Due to weakened Chinese demand, strong competition from South America, and seasonal trade patterns, China’s import pace of US soybeans will remain slow in the coming months. Lower-than-previously-anticipated procurement of US soybeans, might run the risk of reigniting the trade war during the US election campaign.

This research is based on the information available to date. As the situation remains fluid, Rabobank is closely monitoring the developments and will provide updates as appropriate.

Chinese Soy Oil and Soymeal Consumption Is Hit Materially, Expected to Rebound in 2H 2020

The outbreak of coronavirus, coupled with extended work absences, temporary transportation controls and logistics delays, and lower consumption, has disrupted the supply chain of the Chinese soybean crushing industry. The situation appears to be on the mend in China, as major oilseed crushers are back online and able to operate at normal capacity again.

The negative impacts of coronavirus on the demand for soy oil and soymeal, the two major products derived from crushing, should be short term. However, uncertainty over the actual duration of the virus’s spread and psychological influences could potentially impede consumption for a longer period.

Soy Oil

Foodservice is bearing the brunt of coronavirus, as consumers avoid dining out. Thus, soy oil demand through this channel is declining substantially. In contrast, household consumption is more resilient and even registering positive growth, owing to an increase in at-home dining and the ‘panic stocking’ of food necessities. Nevertheless, foodservice usually accounts for 40% of edible oil consumption, while household occupies only 30%. The rest goes to processed food and other industry usage. Rising consumption of consumer-pack edible oil cannot compensate for the loss of bulk-pack oil in Q1 2020.

Falling demand for soy oil might even linger into early Q2, depending on the epidemic’s spread and consumer confidence. Barring any extreme escalation of the epidemic, Chinese soy oil consumption is expected to drop by 6% to 8% YOY in 1H 2020, followed by a rebound in 2H, driven by a recovery in foodservice and the potential substitution of low-priced soy oil for other oils, such as rapeseed oil and palm oil.

Figure 1: Chinese soy oil consumption based on sold volume, Q1 2015-Q2 2020f

Chinese-100-yuan-renminbi-bill-surrounded-with-soybeans_Fig1
Source: Cofeed, Rabobank 2020

Soymeal

The coronavirus outbreak has also severely affected the livestock industry in China. Among all species, poultry is being hit hardest in Q1, particularly yellow-feathered broilers, as a result of the closure of live bird markets. Moreover, the virus’s spread is also putting a drag on China’s hog herd rebuilding, although African swine fever’s impact is slowing down in the country. (For more information on the impacts of coronavirus on Chinese animal protein markets, please read the recent Rabobank article Coronavirus Impacts Chinese Animal Protein Markets).

Against the backdrop of stagnant feed demand, soymeal usage will decline in Q1 and likely also in early Q2. Maintaining a high inclusion of soymeal in feed rations helps offset some losses. Chinese soymeal consumption is projected to drop by 3% to 5% YOY in 1H 2020. However, a strong rebound is expected in 2H, boosted by high meat prices, production expansion of white-feather broilers and layers, hog herd restocking, and recovery demand in group dining/foodservice.

Figure 2: Chinese soymeal consumption based on sold volume, Q1 2015-Q2 2020f

Chinese-100-yuan-renminbi-bill-surrounded-with-soybeans_Fig2
Source: Cofeed, Rabobank 2020

Weak Demand and Seasonal Patterns Indicate a Low Procurement of US Soybeans in Q2 and Q3

On January 15, 2020, the US and China signed the ‘phase-one’ trade and investment agreement, which included the commitment of a substantial increase in US agricultural exports to China, including soybeans. However, subdued demand for soy oil and soymeal, following a slow recovery from the impacts of ASF and more recently the outbreak of coronavirus, is depressing China’s needs for imported soybeans, including those from the US. Rabobank projected its forecast for Chinese 2019/20 imports to 86m to 87m metric tons, compared to 82.6m metric tons in 2018/19.

Figure 3: Chinese soybean import volumes, Q1 2015-Q3 2020f

Chinese-100-yuan-renminbi-bill-surrounded-with-soybeans_Fig3
Source: China Customs, Rabobank 2020

Starting from March 2, 2020, Chinese crushers will be able to import US soybeans exempted from the high tariffs, after their applications are approved by the government. But the Chinese government also emphasized that the future procurement of US soybeans should be “under market-oriented principle” and “on a commercial basis.” Brazil is currently harvesting its soybeans, and cost & freight (CNF) prices for Brazilian soybeans delivered to China are still USD 10/metric ton lower than the US Gulf. Chinese private traders/crushers have little incentive to make a large purchase of US soybeans.

Figure 4: CNF prices for US Gulf and Brazil Paranaguá exports to Chinese ports, before tariffs

Chinese-100-yuan-renminbi-bill-surrounded-with-soybeans_Fig4
Note: CNF price equals FOB plus freight.
Source: Bloomberg, Rabobank 2020

Global soybean exports are seasonally shifting to South American supplies. Looking at seasonal trade patterns, imported US soybeans normally occupy a small share in Q2 and Q3, but a high share in Q1 and Q4. However, this pattern has been largely distorted by the trade war, and US soybeans have consistently lost share to Brazil since Q3 2019.

As trade tensions have eased, the US share has gone up in recent months, but is still well below the historic trend and ‘phase-one’ agreement needs. Even considering the state purchase initiatives from the Chinese government, like what happened in 2019, it will be challenging for the US share to exceed 25% during Q2 and Q3 2020. According to Rabobank’s initial projections, China’s procurement of US soybeans will be 22m to 27m metric tons in 2019/20, which is more than double the volume in 2018/19 (10.4m metric tons) but lower than 2017/18 (28.7m metric tons). Imports from the US will register a strong increase in 2020/21, starting from Q4 2020 when Chinese feed consumption rebounds and new US crop becomes available. But it remains uncertain whether the Trump administration will tolerate the slow pace of Chinese procurement and reignite the trade war during the presidential campaign.

Figure 5: Chinese soybean import share by origin, Q1 2015-Q4 2019

Chinese-100-yuan-renminbi-bill-surrounded-with-soybeans_Fig5
Source: China Customs, Rabobank 2020
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