Agribusiness , Food and Consumer Economics Research Center

1. Agribusiness, Food and Consumer EconomicsResearch Center The Chinese Soybean Industry: A U.S. Success Story? Dr. Gary W. Williams Professor of Agricultural Economics and AFCERC Co-Director Department of Agricultural Economics Texas A&M University, College Station, Texas 4th CAER-IFPRI Annual International Conference, “Transforming China’s Agricultural and Rural Sector: Challenges and Solutions,” China Agricultural University ,Beijing, P.R. China,October 18-19, 2012 Department of Agricultural Economics, 600 John Kimbrough Blvd, Suite 371, 2124 TAMU, College Station, Texas 77843-2124. Phone: 979-845-5911. Email: afcerc@tamu.edu. Website: http://afcerc.tamu.edu

2. Introduction China’s dramatic transformation from a closed, planned economy into a dynamic, rapidly-growing, market-driven economy Evident in the rapid growth of Chinese per capita incomes Growing shift in the composition of Chinese diets: - more calories and protein from livestock products - less from traditional foods - almost inevitable consequence of economic development An enormous across-the-board, sustained increase in Chinese agricultural and livestock production.

3. Introduction China’s accession to the WTO in 2001 did not result in broad-based surge in Chinese imports of grains and other agricultural commodities Robust growth in Chinese domestic agricultural production has satisfied much of the burgeoning Chinese food demand But rapid growth in livestock product demand is challenging the Chinese agricultural sector’s ability to expand foodgrain production while diverting land into the production of feedgrains and oilseeds Price support and subsidy policies that enhance the relative profitability of foodgrains over oilseeds and opening of Chinese markets have spurred a meteoric rise in soybean imports

4. Introduction Growth in Chinese soybean imports recently hailed as a “U.S. success story” by the U.S. soybean industry U.S. soybean producers (ASA, USB, and USSEC) have invested millions of dollars since early 1980s to develop China as a market for U.S. soybeans. Recent research concludes that U.S. soybean checkoff program has high Benefit-Cost Ratio (BCR): - $6.4 return per dollar invested in all research and promotion programs - $9.2 return per dollar spent specifically on export promotion “The American Soybean Association spent 16 years in China before we ever sold them the first soybean,” says Danny Murphy, “and today China is the largest customer for U.S. soybeans, buying almost one-fourth of all the soybeans grown in the U.S. — more than $11 billion worth annually.” As the ASA and its grower members celebrate the 30th anniversary of the opening of the organization’s Beijing office, the relationship between the two

5. Introduction Is the surge in Chinese soybean imports over the last 15 years a “U.S. success story”? - Contribution of U.S. checkoff program to that growth? - Returns U.S. soybean producers from checkoff investment in China? This paper explores the answers to these questions. - Brief review of: (1) changes in Chinese soybean and product markets (2) soybean checkoff promotion efforts in China - Overview of the econometric simulation model used in analysis - Analysis focuses on: (1) measuring the contribution of the U.S. soybean checkoff program to the rise in Chinese soybean imports. (2) benefit-cost evaluation of the soybean checkoff program investments in China. - Summary of the main findings

6. Background primary soybean gene center 11th century B.C. 1st century A.D. mid-1700s 1730s 15th-16th centuries early 1900s 1950s

7. Background

8. Background Chinese agricultural output declined sharply in the 1950s Agricultural stabilization policies in 1960s: - major share of soybeans and industrial crop acreage shifted to grains. - soybean production began to drop. - agricultural output gains achieved but population growth and demand for food grains limited growth in soybean acreage. Chinese soybean production began slow growth in mid-1970s - Chinese policy change to boost soybean area for food use - public investments in soybean research that boosted yields - soybean production previously directed primarily to food markets. Need to expand livestock feed supplies and vegetable oils soon became evident - growth in per capita incomes and food demand - expansion of livestock production

9. Background Soybean production increased (1980/81-1994/95) - allowed some increase of domestic processing for oil and meal - China was a small net exporter of soybean over this period Government opened markets to soybean imports 1995/96 - rapid increase in soybean imports - WTO accession in 2001 further boosted soybean imports 57.5 Record imports of 57.5 mmt in 2011/12 expected - Almost all crush is now from imports - Production again supplies food demand 16.0 7.9 accession to WTO soybean market opened

10. Background Heavy Chinese investment to expand oilseed crush capacity Differential import tax on soybeans - 3% on soybeans, 5% on soymeal, and 9% on soyoil Minimal Chinese imports of soymeal or soyoil

11. Background American Soybean Assn (ASA) began investing in China in 1978 $5.9 million Technical assistance to enhance livestock feeding efficiency and productivity Shifting livestock feeding away from traditional feedstuffs to balanced rations that use soymeal as protein source. Assist oilseed crushing industry in adopting more efficient soybean meal and oil extraction technologies $148,000

12. Methodology Analysis based on the results of the 2009 evaluation of the soybean checkoff program (Williams, Capps, and Bessler 2009). SOYMOD: 180-equation, annual econometric simulation model of world soybean and product markets First step: Econometrically isolated the effects of checkoff expenditures on U.S. supply and U.S. and foreign demand for soybeans and products Second step: Model simulated over 1980/81 - 2006/07 under two scenarios: (1) “With expenditures” scenario (2) “Without expenditures” scenario Differences in the simulated levels of the model variables (production, demand, prices, trade, etc.) in the two scenarios are measures of the effects of the checkoff expenditures over time.

13. Methodology Simulation results used to calculate the contribution of the soybean checkoff program to the growth in Chinese soybean imports over the years. Results for Chinese soybean imports used to calculate two benefit-cost ratios: (1) U.S. export revenue benefit-cost ratio (EBCR) Measures the additional export revenue generated by the checkoff expenditures in China per dollar of soybean checkoff funds spent in China (2) Grower profit from exports benefit-cost ratio (NEBCR)Measures the additional soybean grower profit generated from the additional U.S. soybean exports resulting from the checkoff expenditures in China per checkoff dollar spent in China.

14. Results The Williams, Capps, and Bessler (2009) study concludes that over the entire 1980/81-2006/07 period of analysis, the soybean checkoff program added just under 1 million mt to U.S. soybean export volume in each year (5% of world volume) China accounted for small share of the simulated addition to U.S. soybean exports from the soybean checkoff program during those years Soybean checkoff expenditures in China increased from 9% of all expenditures in all countries in 1995/96 to 21.2% in 2006/07. China accounted for a small but growing share of the total international soybean checkoff export promotion expenditures before China opened up its soybean markets (1.5% in 1980/81 to 9.6% in 1994/95) Soybean checkoff expenditures in China have accounted for about 2% of the growing volume of Chinese soybean imports since 1995/96 Increasing volume added to China’s net soybean imports 500,000 mt 2006/07 65,000 mt 1995/96 Small annual average reduction in net exports of soybeans of about 43,000 mt

15. Results

16. Conclusion Can the explosion in Chinese soybean imports since the mid-1990s be considered a “U.S. success story”? NO AND YES YES: Return to U.S. soybean producers from their investment in China has been high. - Few investments today can yield a 7-to-1 return - But the size of the BCR does NOT imply a large absolute impact of the expenditures on the volume of Chinese soybean imports NO: The soybean checkoff program has contributed no more than 2% to the annual increase in soybean imports by China since 1995/96 - The program has successfully contributed to that growth but has been a minor force behind the import growth achieved. - Other factors such as economic development policy in China, growth in Chinese per capita incomes, government livestock production policies, growing urbanization in China, China’s accession to WTO, Chinese exchange rate policy, and a host of other factors have been the major factors in promoting Chinese imports of soybeans which have dwarfed the effects of the U.S. soybean checkoff program.