Latest Policy Change on Soybean Meal Use in Animal Feed in China May Improve Palm Oil Demand

1.  Development of China’s Animal Feed Industry

The development of China’s animal feed industry started in the 1970s, and by 2011, its output surpassed the United States and ranked first in the world, accounting for about 17% global animal feed production. In 2020, the animal feed produced in China touched 252.76 mil MT, which accounted for approximately 20% of world animal feed output.

The major types of animal feed produced in China are swine feed, broiler feed, and layers feed. According to data from the China Animal Feed Industry Association, the output of swine feed accounted for 35.30% of total feed produced in 2020, while broiler and layer poultry feed products accounted for 36.30%and 13.26% respectively. Meanwhile, aquafeed accounted for 8.40%; ruminants feed accounted for 5.22%, pet feed accounted for 0.38% and other feed accounted for 1.14%. (Fig.1)

Fig. 1 – Market Share of China’s Various Animal Feeds in 2020

Source: China Feed Industry Association

2.  Background to the Reduction Plan

Corn and soybean meal have always been the main components of animal feed industry in China. The traditional animal feed formula contains 60% corn and 18% soybean meal, while the proportion of corn and soybean meal in the swine feed is higher, which is about 65% and 20%. Animal feed have always been the major cost factor for the livestock product prices as it accounts for 60% to 70% of animal breeding costs. Hence, fluctuation of corn and soybean prices will directly impact the animal feed prices and subsequently the breeding cost of livestock. This is even more significant for a country like China which needs to rely on import to satisfy the needs of feed ingredients.

In recent years, China has to rely on imports to close the supply-demand gap for the supply of corn, while soybean is almost dependent fully on imports. Being major soybean supplier to China, the US-China trade dispute, which started in 2018 led to a temporary disruption of the supplies of US soybean, which in turn affected the China soybean meal market and animal feed industry. Coincidently, the swine sector was hit by African Swine Fever (AFS) outbreak in the same year, and this relieved the tightness of soybean meal supplies as the demand for animal feed dropped. At the same time, China was able to cope with shortages of US soybean by increased soybean imports from other countries, and also tried using other oilmeals to substitute soybean meal.

Although all the above had temporarily eased the tightness of feed ingredients in 2019, the strong recovery of China swine sector in 2020, and steady increase of poultry and other livestocks once again led to the rapid increase in the demand for animal feed.  This subsequently led to the increase reliance on importation, especially the dependence on major producing countries such as US and Brazil. In order to cut down the reliance on import to avoid disruption of feed ingredients supplies in future especially when there is dispute between countries such as US-China trade dispute took place in 2018, finding alternate supplies or optimizing the use of other types of ingredients available locally are the way to overcome this problem.  

 3. Introduction of Blueprint for Reduction and Substitution of Corn and Soybean Meal in Animal Feed 

In order to ensure the stable supply of animal feed ingredients and improve the modernization level of the husbandry industry supply chain, , the Animal Husbandry and Veterinary Bureau of the Ministry of Agriculture and Rural Affairs of the People’s Republic of China issued a notice on 15th March, 2021, promoting the reduction and substitution of corn and soybean meal. And the “Blueprint for Reduction and Substitution of Corn and Soybean Meal in Animal Feed” was subsequently issued.

Recalling the relevant announcement made earlier, it was as early as September 2020 that the “Opinions on Promoting the High-quality Development of Animal Husbandry” was being issued by the China State Council, mentioning the need to adjust and optimize the structure of animal feed formulations and promote the reduction and substitution of corn and soybean meal, but without specific timeline being set.  The “Blueprint” released this time set out the timetable for various tasks in detail, which reflected the government’s strength and determination to improve the animal feed formula. Corn and soybean meals were being identified as the target ingredients for substitution in this blueprint due to the heavy reliance on import, as well as skyrocketing prices in recent years. Hence, the “Blueprint” aimed to reduce the proportion of corn and soybean meal in animal feed, thereby reducing animal feed costs and reducing dependence on import of raw materials.

4.  The Impact of The Blueprint and Benefits to Palm Oil

The “Blueprint for Reduction and Substitution of Corn and Soybean Meal in Animal Feed” shows that wheat, rice, cassava, rice bran, barley and sorghum can all be used as alternative raw materials to corn. The raw materials that can replace soybean meal include rapeseed meal, cottonseed meal, peanut meal, sunflower meal, sesame meal, corn processing by-products, etc. The “Blueprint” also provides specific reduction alternatives based on the conditions of various regions in China. For example, the use of alternate ingredients available in Northeastern China can reduce the use of corn by at least 15% and the use of soybean meal by at least 10%. On the other hand, the use of corn in North China can be reduced by at least 15%, and the use of soybean meal will be reduced to zero if using the alternate feedstock available. The amount of corn and soybean meal in Central China can be reduced to zero. In South China, Southwest and Northwest China, corn consumption can be reduced to zero, while soybean meal consumption can be reduced by at least 5%.

According to the “Blueprint”, the state government has also organized animal feed and breeding companies with applied hospitals to conduct demonstration and promotion, and evaluate the application effects in animal feed production and breeding practices.

With the development of the livestock industry, animal feed products with higher economic value will gradually become the mainstream instead of conventional compounded grains feed. The current industry structure comprising mainly small-scale farm house is also gradually changing, with the number of large-scale and mechanized livestock farms increased significantly in recent years. These changes will strongly drive the growth of industrial animal feed demand. Therefore, the animal feed industry will maintain growth for a long period in the future, and the industry has more room for growth.

This is evident from the fact that from 2016 to 2020, the compound annual growth rate of China animal feed production was at 3.04%. In 2020, China’s animal feed industry output reached 252.76 million MT, an increase of 10.40% over the previous year, and it was expected to be at 256.38 million MT in 2021.

Animal feed output recovered strongly in 2020 due to the revival of swine sector, and stable growth of other livestocks. Nevertheless, output in 2021 is forecasted to grow only at 1.4%, mainly due to the drop of swine breeding margin which will lead to slowdown in breeding interest especially small farmers.

Fig.2 – Animal Feed Output of 2015-2021F

Source: China Feed Industry Association & ASKCI (7 May 2021)

Hence, based on the 1.4% growth forecasted for animal feed output in 2021, and on the assumption that the growth of soybean meal demand will be at the equal proportion, China’s soybean meal consumption level in 2021 is forecasted to reach 73.2 mil MT.  Assuming that the share of feeds for swine, broiler and layers also unchanged in 2021 at 85%, the soybean meal demanded for these feeds is estimated at 62.2 mil MT in 2021.

Hence, hypothetically if the total soybean meal usage is reduced by 5% or 10% in these feeds, it will lead to the reduction in soybean crushed and subsequently the decline in soybean oil output which is stipulated as below:

Table 1 – Estimation on the Drop of Soybean Oil Output based on Reduction in SBM Demand

Percentage Reduction in SBM Demand Drop in SBM Demand (mil MT) Drop in SB Crushed (mil MT) Drop in SBO Supply (mil MT)
5% 3.11  3.89 0.70
10% 6.22 7.78 1.40

According to Table 1, the reduction of soybean meal inclusion in the animal feed will ultimately lead to a reduction in soybean oil output & supply by 700,000 MT for every 5% drop. And being the most competitively priced vegetable oil, palm oil is the best option to substitute soybean oil in the food sector, which will lead to the increase in palm oil import and consumption.

In addition, as the reduction of soybean meal and corn usage, it is necessary to increase oil/fat to make up for the shortage of energy supplies (from corn) in the animal feed. Although some palm oil and animal oil are added to the animal feed fat, soybean oil remains as the best ingredient in this aspect due to its physical properties. Therefore, it is estimated that the application of soybean oil in the animal feed industry will increase under the introduction of the blueprint. As such, it may compound to the tightness of soybean oil supplies faced in food sector, and if direct import of soybean oil does not increase, this will further widen the need to seek other alternatives and palm oil will stand a better chance to play this role if the discount further widen due to the supply-demand imbalance between soybean oil and palm oil. Nevertheless, since there is a transition period for the reduction and substitution of corn and soybean meal to be fully materialized (and will fully materialized as this is a top-down government initiative), the actual impact of rising demand for palm oil may be witnessed at the end of 2021 onwards.

Prepared By:  Desmond Ng

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