The Chain: Food Shortages in China May Increase Reliance on Brazil

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April 1, 2020

China’s reliance on imported soy and beef could continue to rise as the country is facing food shortages and worries persist that the coronavirus pandemic may cause further supply chain interruptions. This situation is stimulating incentives for exporting countries such as Brazil to increase volumes to China. A combination of limited labor, seeds, and fertilizer is leading to disruptions in China’s domestic food market, which is causing prices to spike. Food inflation recently reached the highest level in 12 years. At the same time, the domestic meat market is contending with the ongoing African Swine Flu, which has cut the domestic supply of hogs by about half for the past two years. Although this development has lowered soy imports, it has increased meat volumes from Brazil.

Currently, Brazil’s agricultural exports have not been significantly interrupted by the global COVID-19 pandemic. Soy exports doubled during the first three weeks of March. China’s soy purchases from Brazil dipped in January and February as a result of rains in Brazil, causing Chinese stocks to fall to low levels. But market sources reportedly expect China’s buying to ramp up in coming months to meet demand and replenish stockpiles. China produces its own soy, but it is dependent on imports for its livestock herd.

Figure 1. High Number of Ships Carrying Brazilian Soy to China

Although China is now increasing its soy purchases from the United States as the trade war between the two has eased, China is still expected to favor purchasing from the Brazilian market. The Brazilian harvest season will peak in April and Brazilian soy is economically attractive with the Brazilian real weakening versus the U.S. dollar. As part of a deal between Washington and Beijing, China will buy USD 80 billion of agricultural products from the United States in the next two years. When soybean prices from the two countries are at the same level, China tends to prefer Brazil’s product due to its higher protein content.

Beef exports have also remained high, and China is the top destination. The Brazilian Beef Exporters Association (ABIECsaid that its members can meet the demand for the export market despite concerns about the coronavirus disrupting supply chains. Volumes from Brazil accounted for more than a quarter of China’s total meat supply in 2019. With pork production expected to decline by 15-20 percent during the second half of this year, according to a Rabobank analysis, and the Chinese government likely to take measures to limit the consumption of wild animals, China will continue to look to foreign markets. Against this backdrop, Chinese imports of meat from Brazil are likely to rise in 2020 by even more than originally anticipated.

The increased reliance on Brazil could increase deforestation risks in both the Cerrado and the Amazon. China, which uses soybeans for cooking oil, soymeal, and pig feed, is a key destination for soy produced in the Cerrado, particularly the Matopiba region, where deforestation is higher than other areas in Brazil and most of the Cerrado’s remaining native vegetation resides. In the Amazon, cattle ranching is the main driver of forest loss, contributing to deforestation levels not seen in a decade.

Higher deforestation in Brazil could bring about a backlash among consuming countries and pose reputation and market access risks for companies. Companies operating in Brazil have been positioning themselves for continued increases in production and exports. For instance, commodity trader Bunge reportedly purchased two soy-crushing facilities, expanding its position as the top soy trader in the country. In the beef market, JBS saw its Q4 earnings rise by 332 percent in large part because of growing export opportunities. Approximately 40 new Brazilian beef export facilities were authorized last year to sell to China. In 2019, Brazil exported 1.8 million metric tons of beef, an 11 percent increase compared to 2018. Forecasts suggest that volumes will rise above 2 million metric tons in 2020, with Asia and Russia the top markets.

Investors will be watching to the extent which the coronavirus epidemic will bring about commodity supply disruptions and shifts in global commodity trade flows, and how they factor into greater sustainability risks. Markets are currently adapting to shocks on both the supply and demand side. Food security concerns are likely to grow in China and most markets around the world due to logistical constraints, consumer hoarding, and government lockdowns. In the EU, for instance, travel restrictions have led to labour shortages. Reports say that soybean processors in China are concerned that exporters will face challenges from logistics and disruptions related to the COVID-19 outbreak. This could lead to more food shortages in China. The number of coronavirus cases in Brazil lag other countries, but the number is expected to rise sharply in the coming weeks.

 

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