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As the Chinese government continues to boost agriculture productivity in its drive to ensure national food security, we expect government subsidies to continue to grow In 2011, it reached a total of CNY134 5bn (USD21 2bn), with a large portion of it being channelled into seed, fertiliser and fuel subsidies That said, we believe the country will inevitably grow more reliant on imports of key grains such as corn, sugar and even rice in the long term as consumption growth exceeds production growth

Yield improvement would be the fastest way to meet growing demand and we note that the recent verbal acceptance of genetically modified (GM) seeds is an acknowledgement of the need to recalibrate the government's previously staunch stand against GM products in this respect

Key Forecasts

- Cotton consumption growth to 2016: 32 0% to 40 3mn bales Growth will originate from textile processing demand to meet overall global textile consumption, especially as global economic growth recovers in the coming years

- Pork consumption growth to 2016: 25 0% to 62 5mn tonnes Continued consolidation of the Chinese meat industry is likely to support large-scale production and increase economies of scale in production This will help to meet the growing demand of a national diet that is increasing its protein intake

- Whole Milk Powder production growth to 2015/16: 50 0% to 1 59mn tonnes Dairy products with a longer shelf life are generally more favoured by Asian consumers owing to safety concerns Despite the consistent growth, however, the dairy sector is notoriously inefficient because of its fragmented nature - more than 70% of Chinese milk production comes from farms with fewer than 20 head of cattle

- 2012 real GDP growth: 7 5% (from 9 1% in 2011, forecast to average 7 0% over the next five years)

- 2012 consumer price inflation : 3 0% ave (from 5 6% in 2011, forecast to average 3 4% over the next five years )

- 2012 central bank policy rate: 6 06% ave (from 5 8% in 2011, forecast to average 6 4% over the next five years )

Industry Developments

China has long been a key player in the global soybean trade and an increasingly important player in the global corn trade However, there is now potential for China to become a key rice importer Historically, the country has never been a large rice importer, but local shortages and difficulty transporting rice around the country has some traders in Vietnam and Thailand expecting Chinese imports of almost 2mn tonnes in 2012, which would make it one of the world's largest importers Historically, China has never imported more than 1 3mn tonnes of rice (out of consumption of roughly 125mn tonnes), and received imports from Thailand Tellingly, local Chinese rice prices have increased in recent months, and Chinese officials have contacted Vietnamese rice traders to assuage concerns about reduced production in south west Yunnan, which is suffering a drought According to the USDA, China is forecast to import 1 0mn tonnes of rice in 2012 and 2013 per year This is significantly higher than the ten year average of about 650,000 tonnes

We maintain our view for China to become a major importer in the coming years With forecasts for Chinese imports to be around 5mn tonnes in 2011/12, China is on its way to become the fourth largest importer of corn, on a par with Egypt and the EU-27 The corn sector has been self-sufficient until 2008/09, but has been a net importer ever since We expect China to increase imports over the coming years, which should help keep prices at historically-elevated levels in the future The Chinese government intends on alleviating this situation and will probably pass a Grain Law, aiming at ensuring sufficient supplies and at reducing import dependence The recent policy shift towards growing acceptance of GM corn should translate into higher corn yields and production in the future However, steady improvement in supplies will be needed to prevent further surges in corn imports

We believe the country's recently stated objective to maintain self sufficiency in sugar production to a minimum of 85 0% after 2015 is in line with our view for output to grow 32 1% to reach 14 8mn tonnes in 2015/16 To achieve this objective, the government announced measures to increase sugar cane mechanisation Farmer utilisation rates for ploughing, planting and harvesting will be raised to 90%, 25%, and 20% respectively This will be achieved by introducing a machinery subsidy (now only given for grain production), and by supporting the creation of special cooperatives that offer mechanised planting and harvesting services

Click for Report details:China Agribusiness Report Q3 2012