china's feed grain market: development and prospects

China’s Feed Grain Market: Development and Prospects

Wei-Ming TianCollege of Economics and Management, China Agricultural University, Beijing,China. E-mail: [email protected]

John ChudleighAsian Agribusiness Research Centre, Orange Agricultural College, University of Sydney, Orange NSW, Australia 2800. E-mail:[email protected]

ABSTRACT

The future growth of demand for grains in China is expected to be driven mainly by the growth of feedgrain demand. Continued population growth and high incomes will lead to a sustained increase in con-sumption of animal products, while scarce land and water resources will limit expansion in grain pro-duction, leading to growing pressure for increasing grain imports. This article analyses feed grain andanimal product markets and policy options in China. The major conclusion is that the requirement forfeed grains will be determined by the quantity of animal products produced, the methods used, the priceof feed sources, the price of animal products, and government policy. © 1999 John Wiley & Sons, Inc.

1. INTRODUCTION

China’s rapid economic growth in the past two decades has increased consumption of live-stock products, which in turn has generated a growing demand for feed grains. Accordingto official statistics (SSB, 1997a), per capita direct consumption of cereals as food has de-clined, notably in the urban regions. While rural food grain consumption remains relative-ly stable, an eventual decline is expected. Consequently, the total demand for food grainsmay not grow at the same rate as the population. The future structure of China’s overallgrain market is thus likely to be determined primarily by the rate of growth in demand forfeed grains. China’s grain problem is, in this context, essentially a problem of feed grains.

Changes in the Chinese feed grain market may have important implications for the ma-jor players in the world market. A number of recent studies conducted by both Chinese andforeign researchers (e.g., Brown, 1995; Huang, Rozelle, & Rosegrant, 1995; USDA, 1997)suggest that China may have to import grains in large amounts to meet the domestic de-mand if the present trends continue into the next century. Such a development would gen-erate a significant impact on the world grain market.

The Chinese government has opposed these pessimistic views and stated time and againthat China will be able to solve its grain problem by its own effort (News Office of the StateCouncil of China, 1996). Such an endeavor has been clearly envisioned in China’s long-

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Agribusiness, Vol. 15, No. 3, 393–409 (1999)© 1999 John Wiley & Sons, Inc. CCC 0742-4477/99/030393-17

term development plan (Chen, Zhu, & Li, 1996) as well as in recent government measuresto encourage grain production. Achievement of basic self-sufficiency in grains is thoughtto be helpful not only to China’s national food security, but also to stability of the worldgrain market.

As a result of the reforms of the past two decades, the Chinese economy has been es-sentially transformed from a seller’s market to a buyer’s market. Consequently, market de-velopment is increasingly determined by the trend of demand change rather than by the ex-pansion of production capacity. Therefore, in order to answer questions as to how fastChina’s demand for feed grains will grow and how large China’s feed grain import is like-ly to be, the following issues must be considered:

1. How fast will the demand for livestock products grow in the future, under the ex-pected rates of income and population growth?

2. Will income growth result in a notable change in consumption preferences? 3. How will production techniques be altered in response to changed demand and pref-

erences?4. What is the likely demand for feed grains under the given circumstances?5. How large is the potential for China to increase feed grain production, taking into

account economic rationality and environmental sustainability? and6. How will animal product and feed grain markets be influenced by government poli-

cies?

This article is not intended to answer all of these questions, nor to forecast the feed grainmarket development. Instead, it only highlights some facts that help interpret the real mar-ket situation and provide a foundation for future assessments. Special focus is given to theanalysis of policy impacts on the livestock sector and feed grain markets.

2. CHINA’S FEED GRAIN MARKET

2.1 Supply and Demand of Feed Grains

Feed grains in China consist mainly of coarse grains, plus a small share of rice in southernChina and wheat in northern China. Induced by the growing demand for feed grains, pro-duction of coarse grains has increased more rapidly than that of food grains. During the pe-riod 1991–1996, coarse grain output rose at an average rate of 4.7% annually. In contrast,the annual growth rate of total cereals was only 2.7% over the same period (SSB, 1997a).Total coarse grain output reached 145.6 million tons in 1996, accounting for 32.3% of Chi-na’s total cereal output.

Corn is the major cereal crop used as feed, accounting for nearly 90% of coarse grain out-put in recent years (SSB, 1997a). Major corn-producing provinces include Heilongjiang,Jilin, Liaoning, Inner Mongolia, Hebei, Henan, Shandong, and Sichuan. They together pro-duce over 70% of the national corn output. Geographically, these major producing regionsare distributed from the northeast to the southwest, an area known as China’s “Corn Belt”(see Figure 1). The climatic conditions in the southeast and southern China are not favor-able for corn growth and barley is often planted as a major winter crop. Sorghum and mil-lets are also produced mainly in the north. The share of corn in total cereal output has tend-ed to increase over time due to the fact that corn can be cheaply produced with a relativelyhigh yield and that it is a preferred cereal for feeding animals. Production of sorghum and

394 TIAN AND CHUDLEIGH

millets has declined since 1983; their market tends to be shrinking as people eat more finegrains.

According to official statistics, yields of coarse grains have improved significantly since1980. Taking corn as an example, during the period 1980–1996, its yield grew at 3.3% an-nually. This improvement has resulted from adoption of new technologies, such as usinghybrid varieties, coating the land with a plastic membrane and from increased use of mod-ern inputs. Extension of these new technologies is particularly important to corn yield im-provement in some northern provinces, such as Inner Mongolia, Heilongjiang, Gansu,Ningxia, and Xinjiang, where corn production was once confined by the low temperatureand limited supply of irrigation water. As a result, coarse grain production tends to be in-creasingly concentrated in northern China.

China does not have a comparative advantage in coarse grain production in general.While the production cost is still relatively low in comparison with the price,1 it is risingquite rapidly. Domestic prices in the past 3 years were higher than world prices as a resultof import restriction and government protection of producers with guaranteed procurementat the state-set protection prices (see Figure 2).

To ensure an appropriate growth of feed grain supply, the Chinese government has as-sisted research and extension of new technologies in coarse grain production. Major efforts

CHINA’S FEED GRAIN MARKET 395

Figure 1 Location of China’s provinces.

1The present method of calculating production costs in China is flawed by missing some cost items and inap-propriate pricing of non-cash inputs.

include breeding new varieties with higher nutritional value and improving the supply sys-tem of commercial seeds. In order to increase local supply of feed grains, the regional gov-ernments in the grain-surplus southern provinces, such as Hunan, have also taken measuresto promote corn production by reforming the rice-based farming systems. Emphasis has alsobeen given to a full use of the winter-fallow land for coarse grain production.

The strong growth of per capita income in China in the past two decades has resulted ina gradual shift of food consumption from grain to nongrain food, such as livestock and fish-ery products. According to the household survey information (SSB, 1997b), per capita foodgrain consumption2 in the urban sector declined from 145 kg in 1981 to 95 kg in 1996. Al-though rural food grain consumption changed a little over the period, per capita consump-tion of coarse grains as food declined from 125 kg in 1978 to 49 kg in 1985 and then sta-bilized. Consequently, with a continued growth of output, such a change in consumptionpatterns has made more and more grain available for livestock production. An additionalfactor is that people tend to consume more intensively processed grain products when theirincome increases. This leaves more by-products from food grain processing, and thus in-creases the supply of feed resources.

Coarse grains are major inputs in alcoholic beverage production. While the total outputof alcoholic beverages has been increasing at an extraordinary rate since 1980, the indus-try has moved towards producing more products with low alcohol content, such as beer.This change tends to slow down the growth of grain usage in the industry. Furthermore, inChina, the distiller’s grains are always fully utilized for livestock production.

Estimates on the amount of feed grain usage varies greatly, depending on adopted defi-nitions of grains and the parameters used. The Ministry of Agriculture (1997) reported thatin 1996 China used 245 million tonnes of grains for feeding animals in combination withother feed resources (see Figure 3). If the figures were believable, about three-fifths of Chi-na’s grain output were used for animal production, a much higher figure than the other avail-able estimates (e.g., USDA, 1998).


Figure 2 Trend of corn price movement by category.

2The reported grain consumption is in raw weight for rural residents and processed weight for urban consumers.

China began to establish its modern feed industry after introducing economic reform in1978. The production of manufactured feed products grew rapidly and reached 50.5 mil-lion tons by 1996. The development of the feed industry has been assisted greatly by intro-ducing foreign capital, technologies and managerial skills. By entering joint ventures, for-eign firms are able to expand their market for feed and livestock products both in China andoverseas.

While the feed industry produces mainly complete feed used by large-scale feedlots,household producers do benefit from increased availability of condensed and premixed feedproducts and additives. By mixing such commercial feed products with household feedresources, which are often nutritionally deficient, improvement of feeding efficiency isachieved.

2.2 Feed Grain Marketing

Marketing of grains in China has been subject to continuous government intervention, al-though some minor coarse grains were excluded from state procurement as early as in themid 1980s. At present, corn is still subject to state procurement in major producing regionsand accounts for a significant portion of the state grain reserve. Import and export of coarsegrains is managed under the state trading system, but the control is less stringent than thatapplied to wheat.

China was a net exporter of coarse grains in most years during the past two decades. How-ever, the trade volumes varied greatly with changes in the domestic market situation (seeFigure 4). Exports increased sharply after bumper harvests in 1984, 1990, and 1996, but fellwhen domestic grain prices rose in 1989 and 1994, indicating the Chinese government’stendency to increasingly use foreign trade as a means of stabilizing the domestic grainmarket.

Because China’s regional distribution of coarse grain production differs significantlyfrom that of consumption, inter-regional shipment is of great importance. For instance, thenortheast is a region with a large surplus in coarse grains (mainly corn) and its products areshipped not only to northern cities like Beijing and Tianjin via railway, but also to the coastalsouthern provinces like Fujian and Guangdong by vessel. Even Sichuan, the largest porkproducer in China, acquired supply from the northeast in some years to cope with a tem-porary shortage of feed grains there.

This geographic aspect is important to the development of the feed market and the livestocksector. China is a vast country with a relatively underdeveloped infrastructure, thus long-dis-


Figure 3 Inputs of feed resources in 1996 (million tons).

tance shipment of bulk commodities such as coarse grains is quite expensive and resource de-manding. On the other hand, the regions with huge feed grain deficits are the southeast coastalprovinces. While enjoying rapid economic growth, these provinces suffer from the problemof resource diversion away from grain production. They need to import grains from externalsources to meet local demand for both food and feed grains. In recent years, the pattern of in-ter-regional movement of grains in China has changed from shipping southern rice to thenorthern cities to transporting northern corn to southern regions for animal production.

Because of their location, those southern provinces could acquire supply from the worldmarket easily and perhaps also cheaply. However, with restrictions on import, the deficitprovinces must rely on domestic supply by either promoting local production at high costsor purchasing from remote northern provinces. As a result, the regional price gaps becomevery large. As shown in Figure 5, the price margin between Guangdong (a deficit province)and Jilin (a surplus province) ranged from 510 yuan in December ( just after harvest in Jilin)to 400 yuan in the summer season. The December corn price in Guangdong was estimatedto be 30% higher than the c.i.f. price in Guangzhou, indicating significant financial costs tothe livestock producers there. Besides, under the “provincial governor grain bag responsi-bility system”, grain transactions between regions are often subject to irregular intervention


Figure 4 China’s coarse grain trade.

Figure 5 Comparison of corn prices in selected regions.

by local governments, which creates additional risks to both the grain producers in the northand the livestock producers in the south.

3. MAJOR ISSUES RELATED TO DEMAND FOR FEED GRAINS

Several recent studies (e.g., Crompton & Phillips, 1993; Crook & Colby, 1996; Garnaut &Ma, 1992; USDA, 1997) predict that China may have to import either meats or feed grainsin the long-term because the demand for meat products may outstrip domestic supplies dueto income and population growth. Such forecasts are commonly based on the observed trendsof supply and demand changes in the 1980s, or are inferred from a reference population suchas the overseas Chinese communities. The reliability of those forecasts relies critically onwhether such studies are based on a solid information base. This section will highlight cer-tain important issues related to the development of China’s livestock and feed grain markets.

3.1 Discrepancy between Production and Consumption of Livestock Products

It has been observed that there are significant discrepancies between China’s official sta-tistics on animal production and consumption. For instance, between 1985 and 1996, percapita output of pork, beef and mutton rose from 16.6 kg to 39 kg in carcass weight. In con-trast, the household survey information indicates that the levels of per capita consumptionin retail weight rose only from 18.7 kg to 20.4 kg in the urban sector and from 11 kg to 12.9kg in the rural sector (SSB, 1997b, p. 295 and p. 321). Given that China’s export of thesemeat products did not increase, the discrepancies seem too large to be explained by the dif-ference between carcass retail weighing systems or by omission of away-from-home con-sumption. Besides, such a growth in livestock production could not be supported by the in-crease in feed grain availability. It is felt that the official statistics of the livestock productiongrowth have been exaggerated significantly (He & Tian, 1996; Zhong, 1997).

The Chinese government admitted the problem indirectly after receiving the results ofthe first national agricultural census, which was conducted in January 1997. In the 1997 Na-tional Economic and Social Development Statistical Communique released in March 1998,the China State Statistical Bureau (SSB, 1998) reported that the output of total meat prod-ucts and that of pork, beef, and mutton in 1997 were 53.54 and 41.21 million tons respec-tively and they represented a growth of 8% over the previous year. A simple calculationbased on these numbers implies that the outputs in 1996 were 49.57 million tons of all meatsand 38.16 million tons of pork, beef, and mutton, down by 16% and 20%respectively fromthe previous official statistics.3

This downward adjustment of the livestock output has important implications for esti-mating China’s market balance of feed grains and total grains. Under an assumed feed grainconversion ratio of 3.5:1, the above change suggested a reduction of feed grain requirementby 33.5 million tons in 1996. The immediate outcome is that either the actual consumptionof feed grains might be lower than previously thought or the feeding efficiency might beover-estimated. If the former case is true, prediction of China’s future demand for feedgrains will be calculated from a lower base. Otherwise, the potential to save grains by im-proving feeding practice would be significantly large. Both cases imply that the previousforecasts for a rapid increase of feed demand are likely to be overstated.


3While this downward adjustment is broadly based on the result of the national agricultural census, the com-plete report of collected information is yet to come.

3.2 Income Growth and Demand Change

Income elasticity is a key parameter in predicting demand for livestock products. The ear-ly studies (a summary, see He & Tian, 1996) on China’s food consumption commonly ob-tained high-income elasticity estimates. These parameters were then used in predicting de-mand for livestock products, from which the demand for feed grains was eventually derived.Since it was commonly assumed that China would be able to maintain high-income growthin the future, substantial increase of demand for feed, and therefore for grains, was pre-dicted. The potential for increasing supply was thought to be limited in China and conse-quently it was expected that an enlarged deficit, and thus an increased volume of imports,would push up world market prices.

The relevance of such predictions depends critically on income-induced changes in theconsumption pattern. It was observed from the household survey information that per capi-ta consumption of meats declined in recent years in the urban sector, while consumption ofeggs and seafood remained stable or increased. Similar phenomena were also seen fromchanges in the rural meat consumption pattern, although poultry consumption was anexception (see Table 1). It should be noted that the declines occurred when both rural andurban income continued to grow at high rates.

While the declines in meat consumption in recent years are partially the result of sharprises in prices, it is expected that the income elasticities of demand for livestock productsmight have declined. There is some evidence to support such a judgement. Firstly, the in-come elasticity of demand for food products tends to decline when consumption grows toa fairly high level, which also applies to the livestock products as manifested in the urbanconsumption data grouped by income levels (SSB, 1997b). Secondly, the Chinese people,particularly the wealthier urban consumers, have become increasingly health-conscious andare tending to change their diet towards consuming food products perceived as morehealthy, such as fishery products and fresh fruits and vegetables. Thirdly, the recent drastic


TABLE 1. Per Capita Consumption (kg) of Major Livestock Products (1981–1996)

Urban Residents Rural Residents

Beef & Beef &Year Pork Mutton Poultry Eggs Seafood Pork Mutton Poultry Eggs Seafood

1981 16.92 1.68 1.92 5.22 7.26 8.17 0.53 0.70 1.25 1.281982 16.85 1.81 2.26 5.88 7.67 8.36 0.69 0.78 1.42 1.321983 18.00 1.86 2.58 6.90 8.10 9.29 0.67 0.82 1.57 1.581984 17.10 2.76 2.88 7.62 7.80 9.93 0.69 0.94 1.84 1.741985 16.68 2.64 3.24 6.84 7.08 10.32 0.65 1.03 2.05 1.641986 18.96 2.64 3.72 7.08 8.16 11.14 0.65 1.14 2.08 1.871987 18.85 3.05 3.40 6.56 7.88 10.98 0.67 1.15 2.25 1.961988 16.94 2.81 4.00 6.87 7.07 10.05 0.66 1.25 2.28 1.911989 17.53 2.73 3.65 7.05 7.61 10.28 0.72 1.28 2.41 2.101990 18.46 3.28 3.42 7.25 7.69 10.54 0.80 1.26 2.41 2.131991 18.52 3.52 4.77 9.40 8.40 11.19 0.96 1.34 2.73 2.211992 17.70 3.71 5.08 9.45 8.19 10.88 0.95 1.49 2.85 2.251993 17.40 3.36 3.70 8.86 8.02 10.86 0.82 1.62 2.88 2.471994 17.12 3.10 4.13 9.68 8.53 10.23 0.77 1.63 3.03 2.681995 17.24 2.44 3.97 9.74 9.20 10.58 0.72 1.83 3.22 3.061996 17.07 3.29 3.97 9.64 9.25 12.09 0.81 1.93 3.35 3.37

Source: SSB, 1997b.

reforms of the economic system and social welfare policies, which lead to transfer of theresponsibility of education, health services and housing to individuals, have resulted in di-version of expenditure from consumer goods to services and from present consumption tosaving against future uncertainties. All these factors imply that the parameters estimatedwith data in the 1980s and even early 1990s may not be appropriate for predicting income-induced demand growth into the future.

3.3 Animal Production Systems and Feed Resource Utilization

Feed conversion ratios are important parameters used in assessing feed efficiency and inpredicting feed demand. However, the ratios vary notably in different production systems.

Traditionally, livestock production in China has been integrated into the crop-based farm-ing systems in various ways. Apart from growing crops, a household usually raises a fewdomestic animals, such as pigs, chickens, horses, and cattle. While the large animals pro-vide the draft power required for farm production, the other animals are raised to providelivestock products either for household consumption or for sale. The scale of livestock pro-duction is often confined by available feed resources on the farms, including surplus grains,fodder crops, by-products of farming and food processing and edible household wastes. Theexcrement is applied to land as manure.

At present, while traditional backyard production is still dominant, intensive feedlotshave been developing. Such specialized livestock firms are often located in areas with goodaccess to feed grain supply and to major consumption markets. They rely on external sup-ply of feed materials or manufactured feed products. Many firms operate their own feedmills to produce formula feed.

Between these two types of production systems are specialized animal-raising house-holds. Their production is market-oriented, but the scale is often confined by household re-sources and managerial ability. Such production units tend to rely mainly on household pro-duced or locally purchased feed grains and by-products, with premix or additives includedto produce nutritionally more balanced feed (see Table 2).

Due to the differences in production technologies and in the mixture of different kindsof feed resources, these production systems show notable variations in feeding efficiency.Under the backyard system, animals need to be kept for a long time before they grow to


TABLE 2. Composition of Feed Materials Used in Pig Raising by DifferentProduction Systems

Specialised BackyardHouseholds (%) Raising

Fine feedsGrains 39.1 52.2Oilseed meals 7.3 1.6Grain processing by-products 14.7 34.2Manufactured feed products 36.3 10.9Additives 3.4 0.8

Share of feed materials from own productionGrains 13.9 35.3Oilseed meals 0.8 38.9Grain processing by-products 0.9 69.8

Source: Zhang and Lu, 1997.

slaughtering weight. This system may fully use all kinds of feed resources, but the feedingefficiency in terms of nutrient intakes is low due to unbalanced nutrition. In contrast, theintensive system can produce a high feeding efficiency, but it cannot fully use non-grainfeed resources. To some extent, production by the specialized households combines themerits of the two systems. These characteristics in pig production can be seen from the in-formation summarized in Table 3.

Similar characteristics were also observed in the production of other animals. For in-stance, the Chinese government has been implementing a “straw for beef” project, whichaims at increasing beef output with minimum feed grain input. A technology of two-stagecattle raising has been developed and extended in agricultural regions where supply of bothstraw and feed grain is abundant. Under this technology, young calves are raised mainlywith roughage such as tubers, grasses, and treated straws by ensilage fermentation or am-moniation for about 18 to 24 months and then fattened by adding concentrate feed to thediet for a short period (usually 3 to 6 months) up to slaughtering weight. This technologycan turn out beef with adequate quality while keeping input of feed grains at a low level.

Apart from the issue of feeding efficiency, the different production systems also showdistinct economic viability and environmental impacts. With little fixed capital input andfull use of under-employed family laborers and farm feed resources, the household pro-duction system is highly insulated from changes in prices of feed grains and livestock prod-ucts. In addition, the residues from animal production are used for crop production withoutmuch impact on the surrounding environment, although the living conditions of the animal-raising households are adversely affected. In contrast, the intensive production system hashigh capital costs and the operating result is highly sensitive to changes in input and outputprices. Large scale production units often encounter pollution control problems.

Another important issue related to the animal production systems is that their productsvary in quality. The traditional systems use nutritionally unbalanced diets and the quality


TABLE 3. Characteristics of Different Pig Production Systems (1996)

Specialised State orBackyard Pig-Raising Collective-Owned

Productiona Household Piggery

Average size of operation (No. of pigs) 9 196 3768Average duration to feed (days) 217 170 143Finished live weight (kg per head) 105.3 103.0 98.0Incremental weight (kg per head) 85.0 83.7 78.1Intake of concentrate feedb (kg per head) 237.4 258.5 273.2Concentrate feed conversion ratio 2.79 3.09 3.50Net income per labor-day (Yuan) 13.45 18.48 10.34Labor input (Labor-days per head) 17.2 9.7 5.8Material cost (Yuan per head) 633.89 686.45 764.47

Fine feed 345.07 401.44 491.75Roughage 66.43 41.38 4.45Overhead 17.83 19.42 52.51

aIn fact this number is much larger than that of an ordinary farm household, which is about two pigs per house-hold on average. The difference is attributed to the sampling bias. The surveying agents tend to select pig-raisinghouseholds of a certain scale rather than drawing samples randomly due to financial restrictions.bConcentrate feed includes cereals, tubers (grain equivalent), grain by-products, oilseed meals and commercialfeed products.Source: State Planning Commission, 1998.

of the product is often poor. This problem is further worsened by inadequate marketingarrangements. In contrast, the intensive feedlots can ensure a high sanitary standard for theirproducts. However, it is observed that the urban consumers are suspicious of certain ani-mal products produced under an intensive system. In fact, some traditional breeds of poul-try and eggs are preferred by a significant segment of Chinese consumers and receive highprice premiums over other products.

3.4 Potential to Increase Feed Grain Production

With limited reclaimable land resources, China’s potential for a further increase in coarsegrain production depends primarily on yield improvement. While the official statistics in-dicate that the yield of coarse grains as represented by corn has been improved notably, itis much lower than that in the US and EU countries. Besides, as it has been revealed, Chi-na’s cultivated land areas are significantly under-reported (SSB, 1997a), perhaps by asmuch as 40%. On the basis of empirical evidence, Wu and Wang (1997) indicated that theyields reported in official statistics must be biased upward to compensate for the effect ofunder-reported areas.

While this is likely to be the real situation, the issue should be examined in further detailwith respect to coarse grain production. Unlike the major cereals such as wheat and rice,coarse grains are often planted on marginal lands, which are more likely to be omitted fromthe statistical accounting. Consequently, the output of coarse grains could be under-report-ed by a larger percentage. Logically, this implies that the potential for raising coarse grainproduction is much greater than that was previously thought.

Another relevant fact is that grain production in China has long been dominated by pur-suit of a high output of grain kernels. This strategy was consistent with the past situationof constant shortage in food grain supply. However, such a production system may not nec-essarily produce the maximum output of nutrition available for feeding animals from giv-en land areas. By incorporating a feed production component into the cropping systems,it is possible to increase the total output of feed nutrients. This approach has been sug-gested by scientists and accepted by government planners. Measures being considered in-clude establishment of feed corn and soybean production bases in the Northeast and Hebei,Shandong, and Henan; feed rice production bases in Hunan, Jiangsu, Hubei, and Sichuan;and feed sugarcane production bases in Guangdong, Guangxi, and Fujian (Chen, Zhu, &Li, 1996). Breeding suitable varieties has been given high priority in government fundedresearch.

4. POLICY OPTIONS AND IMPLICATIONS FOR FEED GRAIN MARKETS

It is certain that the income of the Chinese people will continue to increase, although like-ly at a slower rate in the longer term. This, coupled with population growth and urbaniza-tion, will drive up demand for livestock products and hence the demand for feed grains.However, it would be dangerous to make any inferences from China’s past experiences orfrom the path experienced by some overseas Chinese communities. From discussions in theprevious section, the following important aspects are recognized with respect to predictingfuture demand for feed grains:

• The downward adjustment of the statistics of livestock production suggests the needto examine the basic supply parameters, such as the feed conversion rates;


• The demand patterns may have changed significantly and the old parameters may nolonger be suitable for the purpose of predicting future consumption changes;

• The structural changes in the livestock production systems may impact on the demandfor feed grains as well;

• Apart from the relative prices of feed grains and non-grain feed, the price differentialsbetween products generated from different production systems may have an impact onthe organizational structure of the livestock sector;

• Choice of the development strategy will impact on market conditions and therefore thepath of market development.

Therefore, prediction of future feed requirements should take into account how the pro-duction structure will change, which is, in turn, dependent on development strategy andpolicies chosen by the Chinese government.

4.1 DEVELOPMENT STRATEGY FOR LIVESTOCK SECTOR AND GRAIN POLICIES

The Chinese leaders have stated time and again their intention to continue market-orientedreforms in the future. However, the policy directions often change in response to urgent eco-nomic and political situations. Considering this reality, the Chinese policy-makers maychoose from the following policy options with regard to foreign trade of grains and live-stock products:

1. To ensure basic self-sufficiency in both livestock products and grains;2. To protect grain production but allow a freer trade of livestock products;3. To protect production of staple food grains and livestock products but allow freer

trade of coarse grains; 4. To protect production of major food grains but allow freer trade of coarse grains and

livestock products; and5. To liberalize trade of both grain and livestock products to allow the market mecha-

nism to determine what to export and import.

These options range from the most restrictive arrangement to a free trade system. It is ex-pected that the market prices of grains and livestock products would be significantly dif-ferent under different policies, which will result in changes in the comparative advantagesof different livestock production systems and thus demand for feed grains.

A country with a huge population and limited arable land area, China has a comparativeadvantage in labor-intensive products but not in land-intensive commodities, such as cere-als. Although there is still potential to raise the grain yields by increasing inputs and by im-proving applied technologies, such gains are likely to be associated with rising productioncosts and, perhaps, at the expense of environmental quality in the long run. Therefore, itwould be too costly for China to ensure self-sufficiency of grains if the demand were togrow significantly. On the other hand, China may keep a comparative advantage in pro-duction of certain livestock products by virtue of the low labor cost and China’s proximityto some major importing markets, such as Hong Kong and Japan.

Given the above assumptions on China’s grain market, it can be expected that, with thefirst option, the Chinese government would set trade barriers to restrict import of grains andlivestock products. In such a case, domestic grain prices would rise, which might push up


the production costs of livestock products. Therefore, while domestic supply of coarsegrains might increase relatively, the demand would be reduced. Under such a scenario, thedemand growth would be dampened by the rising prices and, perhaps, also by reduced realgrowth of income. Such a market condition would favor the backyard system due to its highresistance to a rise in feed grain prices. However, China would lose its price competitive-ness in the world meat market.

If trade in livestock products is to be liberalized while restriction on grain import remains,the domestic market condition is still unfavorable for livestock production. Under this sce-nario, China would increase import of livestock products. In this situation, the coastal ur-ban markets would be supplied with imported products and the rural areas and inland citieswould rely on domestic production. Consequently, the need for expanding coarse grain pro-duction would be weakened and the domestic grain prices would change in favor of wheat.However, it should be noted that the Chinese people consume mainly pork, for which theworld market supply is limited. Therefore, China’s entrance to the world meat market maycause a significant restructure in meat production.

The third option is relatively close to China’s current situation. With the given precondi-tions, China is likely to import coarse grains, as well as protein feed, in large volumes andexport some livestock products to the world market. Realization of such a scenario requiresrestructuring and improving the livestock production systems so that quality products canbe produced at low cost. Adoption of this strategy would lead to an increased use of man-ufactured feed products and increased concentration of animal production into large-scaleproduction units. The southern coastal regions would benefit most from reduced barriers tocoarse grain imports and may develop export-oriented production as well. On the otherhand, the Northeast provinces would need to find a market for their surplus. In this case,the growth of domestic production of coarse grains would be slow.

The fourth option represents a further step towards free trade. Under this scenario, bor-der protection measures are used only to ensure an appropriate rate of self-sufficiency instaple food cereals. In the event of cheap supply of coarse grains from the world market be-ing available, import of meat products would be limited, since domestic products may beprice competitive to imported products. Therefore, this scenario makes no notable differ-ence from the third option in terms of the outcomes. However, the consumers may benefitfrom increased diversity of meat products.

Several studies with computable general equilibrium models have revealed that Chinawill benefit most from adoption of free trade policies (e.g., Arndt et al., 1996; Yang andHuang, 1997; Wang, 1997). Under this scenario, China may increase imports of wheat, andthe resources released from food grain production would be partially used for coarse grainproduction in both southern and northern China. Consequently, while total imports of grainmay increase, the need for importing coarse grains may be weakened. Adoption of a freetrade policy may help to remove trade barriers for China to enter the overseas markets aswell. However, this policy will inevitably result in structural adjustment of the economicsystem, which is associated with some social and economic costs, particularly in the short-term.

4.2 Prospects of the Feed Grain Market

It becomes apparent from the above analysis that, with different policy schemes, the de-velopment of China’s livestock sector, and hence the pattern of demand for feed grains, willbe affected notably. While the future policy measures of the Chinese government are still


uncertain, the general direction of the policy reform can be predicted on the basis of pastexperiences and the expected future conditions for the development of China’s economy.

With the policy reforms of the past two decades, the Chinese economy has been trans-formed from a central planning regime to a mixed system, in which the market mechanismhas been playing an increasingly important role. The reforms have also resulted in a grad-ual integration of the Chinese economy into the world economic system. It is expected thatfuture reforms will in general continue in this direction.

Such changes are also apparent in the grain sector, although the government attempts toretain a firm control over the market on the grounds of national food security. The Chinesegovernment recently introduced a tariff-rate quota system for grain products,4 for whichtrade was previously managed by planning control with a zero rate import tariff. In themeantime, import of animal products is still subject to a relatively high tariff (see Table 4).The structure of the out-quota tariff rates reflect the Chinese government’s inclination togive high protection to the production of major food grains. On the other hand, the within-quota rates remain low. Provided that the government can manipulate the quotas, this sys-tem allows great flexibility for the Chinese government to alter the beneficiaries of tradepolicies. If the consumers’ interest takes precedence in policy consideration, the govern-ment may issue a larger import quota so that cereals can be imported at low tariff rates andmade available at cheaper prices. Otherwise, a small quota will result in a sharp increase inthe import costs of cereals, thus granting protection to the domestic grain producers.

While this flexibility is attractive to the policy-makers, China’s grain trade pattern be-comes less transparent and predictable. This scheme is expected to be used until China’sWTO membership negotiation is satisfactorily completed. In the longer term, China’s tradeprotection on agricultural products will be reduced gradually through both unilateral poli-cy reforms and the multilateral negotiation process. With regard to the markets of animalproducts and feed grains, the most likely outcome is firstly to reduce barriers for importingcoarse grains and then to extend the reform to the trade of animal products. It may take amuch longer time to realise the elimination of resistance to free trade of food grains. Howfast China is to go ahead depends on a range of domestic and international factors. There-fore, the future environment of the livestock product and feed grain markets is highly un-certain.

Apart from growth of income and population, the future demand for animal products inChina will also be driven by the speed of urbanization and by the extent to which China cangain access to overseas markets. While per capita consumption of livestock products for ur-ban consumers may grow with income, the changes in the meat consumption pattern arelikely to be dominated by a shift in consumption preference towards high quality and health-ier products. The rural demand for livestock products is more income-elastic and thus fu-ture consumption is dependent critically on how fast the rural income will grow. WhetherChina is able to expand the export market is also uncertain, although the government em-phasizes this prospect. With cheap labor and a vast land area, China has a cost advantagein livestock production, although the quality remains a limiting factor. In particular, Chinacannot export pork and beef to Japan because of the presence of foot and mouth disease.However, markets less concerned about quality, such as Russia and South Korea, are thelikely targets for Chinese exports. In fact, China has already started to export beef to thesetwo countries under longer-term contracts. A great deal of effort is needed to get access toJapan, the potentially most remunerative market for China.


4It seems that, by far, the quotas have not been made transparent.

While the rural market can be easily served by the existing production systems withoutmuch need to improve production technologies, the growth in urban and export marketsmay require updating of technologies and handling systems. It has also been observed thatin the economically affluent regions, the wealthier households tend to give up backyard an-imal raising. Therefore, household backyard production is expected to decline, while theshare of products provided by intensive feedlot systems will increase over time in the coastalregions, especially when trade of coarse grains becomes freer. In contrast, the backyard sys-tem may retain its vitality in inland regions.

The factors mentioned above have different influences on demand for feed grains. It isexpected that the continued growth of animal production will result in an increase of de-mand for feed grains, which is likely to be enhanced further by a gradual concentration ofproduction in large scale feedlots. On the other hand, development of the feed crop pro-duction system, improvement of feeding efficiency, and structural adjustment towards pro-duction of grain-saving animal proteins, such as poultry meat, eggs, milk, and fish, maydampen the demand growth. Therefore the net effect is expected to be a slower growth offeed grain consumption than previously suggested.

In respect of the supply side, the potential for further improvement of coarse grain yieldsis likely to be far greater than that suggested by the official statistics. It is expected that theChinese government will exercise strict control over diversion of cultivated land into non-agricultural purposes. Efforts will also be devoted to improving agricultural infrastructurefor the purpose of raising land productivity. Even with a freer trade for coarse grains whileimport of wheat is still restricted, it is unlikely for producers to divert land to wheat, sincea large portion of land planted to coarse grains is not suitable for wheat production. On theother hand, if trade of all grains is liberalized, more land resource will be diverted to coarsegrains. Production of coarse grains is more likely to be affected by changes in the prices ofprotein feed. China’s trade position in protein feed products tends to be deteriorating grad-ually. In fact, China became one of the largest importers of soybean meal in the world inrecent years. Given that cheap supply of feed proteins and vegetable oils is available fromthe world market, it would be to China’s advantage to produce more coarse grains than toproduce oilseeds. It is expected that China may maintain appropriate growth of coarse grainproduction in the next decade, particularly if world prices begin to rise.

Combined with the change in demand, China’s import requirement for coarse grains isexpected to be much lower than has been forecast. However, in the long term, China is un-


TABLE 4. China’s Tariff Rates Applied to Cereals and Meat Products in 1997

Above-Quota Rate (%)

Commodity Preferential General Within-Quota Rate (%)

Wheat for food use 114 180 1Wheat for feed use 91.2 120 9Paddy and milled rice 114 180 1Corn 114 180 1Barley 91.2 120 3Soybean meal 5.0 30 Not appliedBeef 50.0 70 Not appliedPork 45.0 70 Not appliedMutton 45.0 70 Not appliedPoultry meats 45.0 70 Not applied

Source: China General Customs Office, 1998.

likely to meet the growing demand with domestic resources and thus import will increaseinevitably. How fast import may grow depends on what policies the Chinese governmentfollows, and this in turn is related to the progress of China’s WTO negotiation.

5. SUMMARY

The future growth of demand for grains in China is expected to be driven mainly by thegrowth of feed grain demand. Because of the use of incorrect statistical information andfailure to take into account the structural change in the Chinese economy, the previous pre-dictions on the growth of demand for animal products and hence for feed grains are likelyto be biased upward, while predictions on the potential to increase grain production are like-ly to be biased downward, leading to a pessimistic view of China’s grain market in the medi-um term.

With an appropriate knowledge of the animal production system in China, it can be con-cluded that the requirement for feed grains is determined not only by the volume of animalproducts China will produce, but also by the methods of production. The selection of pro-duction systems depends on the prices of differentiated animal products, feed grains andnongrain feed resources, which can be altered substantially by the development strategyadopted by the government.

In the long term, China may have to import grains to meet domestic demand, although thegovernment will continue its effort to ensure an adequate rate of self-sufficiency. Domesticproduction of food grains is likely to be protected, whereas regulation over trade of coarsegrains is more likely to be relaxed. However, substantial import of feed grains can only oc-cur when China is able to get access to the overseas market for its animal products. Such anadjustment will be consistent with the principles of comparative advantage and may resultin welfare gains for China and its trade partners. In such a case, the increase of China’s im-ports will be partially offset by a decline in feed grain consumption in other economies and,hence is unlikely to generate substantial impact on the world coarse grain market.

ACKNOWLEDGMENTS

The authors are most grateful to Zhangyue Zhou, Marjorie Wilson, and the Editor and thetwo referees of the Journal for their valuable comments on earlier versions of the paper. Thisstudy is a joint work by the College of Economics and Management of China AgriculturalUniversity and the Asian Agribusiness Research Centre of Orange Agricultural College, theUniversity of Sydney. The paper was written while Wei-Ming Tian was a Visiting Profes-sor at the Asian Agribusiness Research Centre, June–August, 1998. Professor Tian wishesto thank the Asian Agribusiness Research Centre for financial support for the visit.

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Wei-Ming Tian is professor at the College of Economics and Management of China AgriculturalUniversity in Beijing. He obtained his Bachelor of Agricultural Economics from China AgriculturalUniversity in 1982 and Master of Agricultural Economics from the University of the Philippines atLos Banos in 1986. His current research interests mainly lie in agricultural marketing and trade policyissues. John Chudleigh is professor and principal of Orange Agricultural College of the University ofSydney. He obtained his Bachelor of Agricultural Science (Hons) from the University of Sydney in1961. His current research interests include trends in world commodity markets, rural resourcemanagement, and economic policy issues.


china's feed grain market: development and prospects

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