China Food & Agribusiness Quarterly - Q1 2022

Hard lockdowns in regions where local Covid cases have been identified have brought about ongoing disruptions to the distribution of daily necessities, the normal course of business and the operation of food services. In particular, despite China being the first country going into a recovery phase, China’s foodservice sector has not really broken above 2019 levels in a sustained manner. With no immediate lift of the strict “zero Covid tolerance” policy in sight, consumption will continue to be overshadowed.

Yet, the Covid policy may not be the only uncertainty over consumption. Rising concerns over the employment situation in China, are leading to a cautious consumer sentiment in the months ahead.

As with many food manufacturers around the world, Chinese players have also been caught by rising input costs due to a global supply chain dislocation. With a weakened consumer sentiment, the Chinese F&A sector has generally been challenged by the inability to raise product prices meaningfully. While headline PPI eased off in December 2021, input costs are likely to stay at elevated levels going forward.

The main highlights include:

Farm Inputs. Demand for the upcoming spring application season will be underpinning domestic fertilizer prices. Meanwhile, local distributors, assigned by the Chinese government, are building up summer fertilizer reserves until the end of February. Meanwhile, China’s new potash supply contracts are still pending, but negotiations might occur in Q1. 

Grains & Oilseeds. La Niña weather patterns are threatening soybean production in South America. Even though a possible bumper harvest depresses the price, the downside potential will be limited due to low inventory levels. Strong fundamentals are likely to underpin domestic prices of feed grains, protein meals and edible oil in Q1 2022.  

Animal Protein. Pork prices turned soft entering 2022. Omicron-induced strict measures on human movement have resulted in weak demand in foodservice and event-driven consumption. Local production will continue to increase in 1H, imposing downward pressure on imports. Poultry prices have been steadily weak due to the Covid situation. Poultry imports are expected to decline further in 1H 2022. 

Dairy. Milk prices have failed to hold up in December 2021 and a cyclical downturn is very likely to occur as early as 1H 2022 due to strong supply momentum. China’s dairy import should decline significantly in 2022 to rebalance the market. 

Consumer Foods. China’s foodservice sector declined by 2.2% in December 2021, reaching value sales of CNY 484.1bn. We expect weak foodservice demand will continue in Q1 2022, as a result of mixed factors, such as economic uncertainties and an ongoing crisis of the property market. In December 2021, total retail sales of consumer goods missed expectations, growing at only 2.3% YOY. Food-and-beverage-related retail sales also registered slower value growth rate of 8.5% YOY, 5% lower than November figures.

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