• STRATFOR ANALYSIS

    China: A growing appetite for US rice?

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    CHINA and the United States are expected to sign an agreement to open up the Chinese rice market to US producers, who have lobbied for the deal for more than a decade. China’s agricultural policies are gradually changing, but the country’s policy of self-sufficiency for rice will likely remain. The policy limits the percentage of total rice consumption that China can legally import, but given how much rice China consumes, it is still a lucrative market for global exporters. However, because of incompatible quality control regulations, up until now US exporters have not been able to tap into the Chinese rice market. Even so, in anticipation of an eventual deal, many US producers have been making the necessary adjustments to bring their crops in line with Chinese standards.

    International rice prices are low despite imbalances in supply and demand, though US export prices are currently much higher than those of its competitors. Thus, when the export protocol is signed, US exporters can at best expect to fill niche demand for high-quality rice in China. But regardless of price fluctuations, the long-term potential of US rice exports to China is uncertain because of China’s evolving regulatory environment.

    There has been much scrutiny of Chinese President Xi Jinping’s controversial first official visit to the United States. But agricultural trade policies have been eclipsed by more exciting topics such as cyber security and the potential implementation of sanctions. However, a deal that has long been advocated by US rice producers and that would allow US rice to enter the Chinese market is set to be signed during the visit. Nevertheless, the market for rice will not be opened up as much as the soybean market was in the 1990s, and Beijing will maintain self-sufficiency policies for rice because of its centrality in the Chinese diet.

    For the past 15 years, US rice producers have wanted to enter China, but China has required certain phytosanitary — or pest control — measures at several points along the supply chain, which the United States has been hesitant to agree to. With the implementation of the long awaited agreement on this protocol, in theory, US rice could be exported to China in as little as a month’s time.

    Gauging demand
    Over the past decade, US meat and dairy producers shifted their practices to meet the growing Chinese demand created by the expansion of the middle class. Rice producers now hope to do the same. And despite the slowing Chinese economy, rice is a staple of the Chinese diet and the market for it is expected to remain strong. In fact, consumption will likely continue to rise as long as the population does. Because of food security concerns, Beijing requires rigorous pest control measures along the entire rice supply chain in order to protect domestic crops, and some US farmers, have already begun making adjustments to meet Chinese requirements in anticipation of the agreement.

    China is the world’s largest producer and consumer of rice. And Chinese rice imports — sourced primarily from Vietnam, Thailand and Pakistan — increased substantially in 2012 and have remained high since, making China one of the world’s largest importers of rice as well. Beijing’s food security policies keep the domestic price of rice inflated, meaning that imports are economically competitive but are highly regulated. The international food price index recently hit the lowest level in six years, and low cereal prices are a large part of that decline.

    Despite this, rice consumption has outpaced milled rice production since the 2013-2014 market year, and prices have stayed low because of factors such as currency depreciation in Thailand and Vietnam, which has lowered minimum export prices to stimulate demand. Self-sufficiency policies in Indonesia and the Philippines have reduced import demand, also contributing to low prices. While we may see some price shifts because of the El Nino weather pattern in coming months, US rice trades at roughly a $200 premium over its Southeast Asian competitors.

    The United States, the world’s fifth largest rice exporter, sells rice to regional trade partners Mexico and Canada, to countries in South and Central America, to the Caribbean and to the Middle East. Japan is the only East Asian country among the top destinations for US rice, though it is because of a previous trade agreement, and only a limited amount reaches the Japanese market. Most is used for foreign aid or as animal feed.

    Both price and taste preference could hamper the United States’ push to enter the Chinese market, even once the agreement is signed. But concerns over the quality in domestic rice production and reports of heavy metal contamination in Chinese rice will certainly help boost the desirability and perceived quality of imports. As part of their campaign to export, the US Rice Producers’ Association conducted surveys of Chinese consumers, which indicate that there may be a market for US rice in China after all: the high-end market. This niche market would still represent a potential export increase of roughly 200,000 metric tons and would certainly be a boost to the industry, worth upward of $100 million based on current prices of US rice.

    Long term, the US rice industry will likely experience additional regulatory hurdles as China’s food security strategy matures. And whether because of some infestation or disease (China still has a ban on beef imports from the US because of a mad cow case in 2003) or because of contamination from genetically modified strains (corn imports were turned back in 2014 because of alleged contamination), China could still suddenly revoke the privilege to import. In 2006, a genetically modified strain of rice was detected in the US export supply, causing temporary restrictions to be put in place for other export destinations. Considering the resource scarcity much of the world will face in the coming years and decades, genetic engineering is poised to be a growing part of agricultural strategy, and so contamination will only become more likely. Even though there is already domestic development of genetically modified strains of rice, Beijing is likely to be extremely cautious about accepting foreign genetically modified crops, especially for staples like rice. Furthermore, as Beijing seeks to build up its own agricultural biotech sector as part of its food security strategy, we could see regulations shift accordingly.

    © 2015, STRATFOR GLOBAL INTELLIGENCE

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