Brazilian agribusiness must pay attention to China’s post-coronavirus phase

Brazil must pay attention to measures to encourage Chinese agricultural development and the effects of complying with the first phase of the new US-China trade agreement

05.06.2020 | 20:59 (UTC -3)
Maria Clara Guaraldo ​

In a scenario of strong GDP contraction, with a 2020% drop in the first quarter of 6,8 - the first contraction in decades -, China is beginning to emerge from the acute phase of the crisis caused by the Covid-19 pandemic. Concerned about a second wave of the disease, the Chinese government initiated profound agricultural reform, with strong investments in public policies that prioritize national agricultural development. The aim is to reduce the Asian country's external vulnerability for basic foods.

China wants to increase food security by diversifying its import channels and procurement strategies. Among the strategies, four of them promise to change the route of Chinese imports and should serve as a warning to the Brazilian commodity market.

The data comes from the most recent study by Embrapa's Secretariat of Intelligence and Strategic Relations (Sire): “China post-Covid-19: a warning to Brazilian agribusiness”. The work was prepared based on information from international risk agencies, such as Fitch Solutions Macro Research, belonging to the Fitch Ratings Risk Agency and RaboResearch Agency, Food& Agribusiness, department linked to the Rabobank, a leading institution in financing services for food and agribusiness.

With the aim of mitigating possible interruptions in food supply, as a result of the crisis generated by Covid-19, the Chinese government wants to accelerate the pace of geographic diversification in relation to its food manufacturing and processing capacity, thus avoiding future production interruptions. internal. 

The country also wants to resume the mega infrastructure development project that connects 70 countries in Asia, Europe and Africa. The objective is to promote trade with countries and regions along this initiative's routes, which include important grain suppliers. The plan is known as “One belt, One road”, or more popularly as the “new Chinese silk wheel”, and foresees a series of investments, especially in the areas of transport and infrastructure, connecting regions of extreme geopolitical importance. 

On the other hand, the government is evaluating ways of adopting measures that result in reducing the risk of interruptions in shipments received from abroad due to the logistics of exporting ports, as in the case of Brazil. 

The fourth strategy is investment in a profound reform of the agricultural sector, accelerating its modernization process. In addition to supporting family farming, the country is now seeking to accelerate the implementation of the long-term plan to modernize agriculture through several changes including a strong focus on innovation and ambitious internationalization plans with a view to ensuring food security. The country has 230 million farmers. More and more small farmers are migrating to cities, however, there is still a large number of rural domestic properties, most of which are out of step with modern development.

Among other measures, priority was given to increasing subsidies for an increase in the area cultivated with corn, the reactivation of pig farming - a sector that still faces strong consequences due to the outbreak of African swine fever (ASF), which has already decimated around 50% of the Chinese pig herd -, and the formation of strategic stocks that guarantee the supply of food to the population in times of pandemic. 

China: still the largest destination market for world exports

However, even in the face of a scenario that seeks to reduce international dependence on food, China will continue to be, in the coming years, the largest destination market for world exports, including grains - such as soybean and corn commodities - , and proteins, especially pork and beef. In 2025, China is expected to have a population of 1,438 billion, mainly concentrated in urban areas (65,4%) and will not be able to supply the domestic food market.

“The Covid-19 epidemic has altered the food stability of a gigantic nation dependent on countless sources, internal and external, for the food security of its citizens. The necessary closure of cities (lockdown), regions, ports, highways, combined with the forced social isolation of millions of people, drastically affected the circulation of food, inputs, animal feed, the availability of labor for productive and industrial activities, greatly inhibiting domestic production . China has become more dependent on an external market, also strongly affected by the Covid-19 pandemic”, explains Embrapa researcher, Mário Seixas, author of the study.

He adds to this other aggravating factors that led China to adopt measures aimed at its national development, including the decline in agricultural production in some regions of the Asian country due to environmental pollution and land use restrictions, as well as the outbreak of Asian Swine Fever (ASF), which has caused the economic decline of thousands of small producers, in addition to the US-China trade dispute.

“The African swine fever (ASF) outbreak began in August 2018, and it narrowly missed decimating the pork sector. ASF is still very much present in China, despite measures taken by the authorities to contain it and support a recovery in production. For the period 2020 to 2024, an average evolution of pork production of around 3,7% is estimated. However, the country will continue to depend on international supplies of the protein”, details the researcher.

Seixas believes that China will maintain a deficit in pork and beef in the coming years, but competition will be great in the latter, coming mainly from Australia, the country that is closest to China.

International port logistics

The Embrapa researcher highlights that the measures adopted by the Chinese government signal that the country has learned from the first phase of the disease and therefore wants to prepare for the risks of the global pandemic hindering and even reducing the flow of production from exporting countries, in especially, Argentina, Brazil and the United States. Brazil sends most of its soybeans, corn and cotton through the port of Santos; the USA concentrates its corn and soybean export points in the northwest of the country and in New Orleans. And Argentina, through the Rosario region.

The logistics of Brazilian ports are seen as a weak link in the supply chain that channels exports of grains, meat, sugar and other agricultural products from the country to the rest of the world. The risk of interruption of shipments abroad due to problems of social isolation and logistical transport and storage at terminals and the availability of labor, as a result of the Covid-19 pandemic, worries China. 

“An example mentioned by the risk agencies was the one that occurred in March of this year, when a threat of work stoppage in the port of Santos was avoided, after the implementation of a package of measures to reduce the risk of sanitary infection in the port”, he adds. the Embrapa researcher.

US-China trade deal

Another relevant warning for Brazilian agribusiness concerns the growing risks related to the commitments assumed by China under the new trade agreement with the United States. “The Chinese soybean market will continue to demand the product from foreign markets and Brazil must be aware of the risks and opportunities”, declares Seixas. He highlights that soy consumption by the Chinese is expected to increase by 3,3%. However, grain is the focal point in agricultural trade between the US and China, due to the large volume of trade. 

Brazilian exports of this commodity reached 16,3 million tons in April 2020, 73% more than in the same period of 2019. However, due to the US-China agreement, the Asian country should increase the import volume of United States, closing 2020 with 90 million tons purchased from Americans, 10 percent more than in 2019.

With regard to corn and wheat, the Chinese government has declared that there will be no changes to the current import quota system. But it is estimated that China will considerably increase purchases of corn and wheat from the US, to the detriment of other international partners such as Ukraine (corn), Canada and Australia (wheat), as a way of fulfilling the first phase of the US-China agreement.

Regarding corn, the report warns that one of the priorities of the agricultural policy aimed at mitigating the impact of Covid-19 will be the increase in subsidies and the increase in the cultivated area, as well as investments in sanitary measures to face the fall armyworm that affects the production of various Chinese crops, including maize.

Environmental sustainability

The Embrapa study also draws attention to the issue of environmental sustainability related to the animal protein sector, with a view to Brazilian agricultural exports. Internationally, concerns about the environment, climate change, forest preservation and the issue of environmental sustainability are on the global agenda. “For Brazilian agribusiness, the topic is highly relevant and is an important warning for the future of exports”, says Seixas. 

In 2019, there was a marked increase in sustainable beef-related activities globally. The initiative of the Brazilian Association of Carbon-Neutral Beef Producers was created to develop the supply and demand for beef produced in integrated systems with forests that ultimately compensate for the methane emissions made by the animals. 

“Defining what constitutes sustainable animal protein production is complex, as the impacts of production on the environment and animals vary between local species and agricultural systems. This lack of clarity hampers efforts to develop long-term sustainability strategies. Animal protein production systems are constantly evolving and technological development and innovation will play increasingly important roles in the development of the animal protein sector. In this aspect, Embrapa's contribution will be fundamental for the generation of new technologies and new developments for sustainable Brazilian agriculture.” highlights the RaboResearch report, Food& Agribusiness, 2019..

Access the complete study on "China post-Covid 19: a warning for Brazilian agribusiness" in the Embrapa Agropensa System.

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