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China's trade outlook for agricultural products

- Tuesday, November 18, 2014

The China-Australia Free Trade Agreement (ChAFTA) announced Monday 17 November 2014 will benefit Australian agricultural trade for some commodities more than others. The big winners are undoubtedly the dairy and beef cattle industries with import tariffs imposed by China being phased out over the next four to 11 years. Sugar and cotton appear to be the commodities that have missed out, although an analysis of China's trade performance in these commodities suggests that these commodities are also likely to face lower Chinese import barriers in the future.

The fact that dairy and beef imports stood out as the major winners for Australian agricultural trade prospects aligns with the outlook for China’s trade balance of these products (see chart below). Current forecasts by the OECD-FAO suggest that China will import over 600 thousand tonnes of beef and 800 thousand tonnes of milk powder by 2022.

The Australian horticulture and seafood industries are also winners with a wide range of import tariffs imposed by China on commodities from these industries being eliminated over the next four years. However, in comparison to beef and dairy, the outlook for increasing imports of these commodities is not as favourable as China currently exports a significant volume of fruit, vegetables and fish. Therefore, the trade opportunities for Australia to export horticulture and fish products to China will likely be limited to Australia’s current competitiveness for trading these products on world markets.  

Some of Australia’s agricultural commodities that are not likely to benefit in the initial ChAFTA were wheat, rice, sugar and cotton. During the last decade, China has been mainly self-sufficient at producing wheat and rice domestically to cater for its own needs (see chart further below). Current forecasts by the OECD-FAO also indicate that China will largely be self-sufficient for these commodities in the medium term. China’s planning procedures for essential crops like wheat and rice aim at incentivising Chinese farmers to grow these crops by implementing minimum support prices at the beginning of each seasonal production cycle.

China’s production outlook for sugar and cotton however is generally not as resilient as wheat and rice. In recent years, both sugar and cotton have achieved self-sufficiency of around 85%. This means that domestic use of these products has exceeded domestic production and therefore imports have been required to meet the market demand in China. The Chinese Government is anticipating that this level of self-sufficiency for these products can be maintained by providing some support to these farmers through minimum prices and import restrictions. However, China's trade outlook for sugar and cotton is not assured with significant risks that domestic production of these crops will not be able to keep up with domestic demand. Chinese demand for sugar and cotton has been growing at around 4% pa and 2% pa (on average) respectively over the last 10 years.

In summary, the Australian agricultural commodities that are likely to benefit from the initial ChAFTA are largely in line with China's trade outlook. China will need to import larger volumes of both beef and dairy products in the future to meet domestic demand. The Chinese horticulture and fish industries have generally been competitive on world markets so the phasing out of import tariffs for these commodities will not be as significant. 

The commodities that are not likely to benefit from the initial ChAFTA are mostly aligned with the Chinese Government's planning procedures for industries that are considered essential commodities such as wheat and rice or mostly self-sufficient such as sugar and cotton. The revision of the ChAFTA in three years’ time however will provide an opportunity to see whether China will maintain its self-sufficiency goals for these commodities and if not, it might see some opportunities unfold in Australia’s favour, especially for sugar and cotton.  

 
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