China’s Oils and Oilseeds Industry Situation and Development Prospect Xue Cong CHEN, Sinograin Oils Corporation

 I. Supply and Demand of Oils and Oilseeds  (I) Supply of Domestic Oilseeds  (II) Demand for Oils and Oilseeds  (III) S&D Balance of Oils and Oilseeds  (IV) Impacts of Reserve Policies on S&D  II. Latest Development of China’s Oils and Oilseeds Industry  (I) Rapid Capacity Expansion  (II) Capacity Distribution  (III) New Trends in Crushing Industry  III. Outlook of China’s Oils and Oilseeds Industry  (I) Demand for Protein/Oils Will Keep Growing but at a Lower Speed  (II) Future Trends  (III) Small- and Medium-sized Packages will Boom as Driven by Upgraded Food Safety  (IV) Lasing Influence of Macro Control on Oils and Oilseeds Market Contents

I. Supply and Demand of Oils and Oilseeds Contents

(I) Supply of Domestic Oilseeds 1. Growth of production of oilseeds slows down, especially soybean and rapeseed. Production of peanut and cotton seed fluctuated between 9 – 11 million tons. Sunflower seed Cotton seed Peanut Rapeseed Soybean Sunflower seed Cotton seed Peanut Rapeseed Soybean I. Supply and Demand of Oils and Oilseeds Source: Sinograin Oils Corporation

2. Production and acreage of soybean and rapeseed decreased year by year due to lower comparative income and yield. I. Supply and Demand of Oils and Oilseeds (I) Supply of Domestic Oilseeds Source: Sinograin Oils Corporation Production & Acreage: SoybeanProduction & Acreage: Rapeseed Production (in 1,000t) Acreage (in 1,000h) Production (in 1,000t) Acreage (in 1,000h) Acreage Production

3. Factors decelerating production growth (1) After many years of shrinking, area of arable land was kept at 1.8 million mu (around the red line) to ensure production of staple food grains – no room for cash crops. I. Supply and Demand of Oils and Oilseeds (I) Supply of Domestic Oilseeds Source: Sinograin Oils Corporation

I. Supply and Demand of Oils and Oilseeds (I) Supply of Domestic Oilseeds Source: Sinograin Oils Corporation (2) Gap between soybean and other cash crops in terms of yield is widening; the situation is the same with rapeseed, which costs more time and energy. Yield in Heilongjiang: Soybean vs. CornYield in Hubei: Wheat vs. Cole Corn Soybean Wheat Cole

I. Supply and Demand of Oils and Oilseeds (I) Supply of Domestic Oilseeds Source: Sinograin Oils Corporation (3) Yield in China is obviously lower than major soybean/rapeseed exporters and is hard to improve. Yields of Major Oilseed Producers (in tons/hectare) China U.S. Brazil Argentina Rapeseed Yield: China vs. Canada (in tons/hectare) Canada China

(II) Demand for Oils and Oilseeds I. Supply and Demand of Oils and Oilseeds Source: Sinograin Oils Corporation 1. Domestic demand for oilseeds grew by 3% in the past six years: 5-6% in and zero in rest of the years. Soybean oil was the major contributor to the growth. Consumption & Growth of Oilseeds Palm oil Corn oil Sunflower seed oil Cotton seed oil Peanut oil Rapeseed oil Soybean oil Annual growth (in 1,000 tons)

2. Domestic demands for protein/feed climbed high in the past five years: annual growth of production reached 8.5%/8.9%. Production of meat, egg, poultry and aquatic product grew by 3%. I. Supply and Demand of Oils and Oilseeds (II) Demand for Oils and Oilseeds Source: Sinograin Oils Corporation, China Feed Industry Association and National Bureau of Statistics Annual Growth of Protein, Feed and Products Production Feed Poultry & Egg Protein Aquatic Products Meat

Demand grew fast since 2006, and the gap between supply and demand kept widening. Growth in import was also rapid. (III) S&D Balance of Oils and Oilseed Source: Sinograin Oils Corporation S&D of Oilseeds (in 1,000t, including other oilseeds) I. Supply and Demand of Oils and Oilseeds

(IV) Impacts of Reserve Policy on S&D Since 2008, the government took a number of active measures to increase national reserves of oilseeds, playing a critical role in stabilizing domestic market. 1. Purchase price increased year by year to keep the purchased volume at high levels; sufficient reserves also improved ability to regulate and control. Source: China National Grains & Oils Information Center I. Supply and Demand of Oils and Oilseeds Purchase Price and Volume of Soybean Reserve Purchase Price and Volume of Rapeseed Reserve Volume (in tons) Price (Yuan/t) Price (Yuan/t)

2. About Reserve Policies China has a long history of making and implementing oils and oilseeds reserve policies, which are now pretty mature. The administration of oils and oilseeds reserve is carried out at two levels, namely the central level and the local level. The central government is responsible for central reserves, and Sinograin is incorporated for this purpose; local governments are responsible for local reserves, and governor of each province is the person in charge. Central reserves are divided into two types: long-term reserve and interim reserve. The former is set up as an emergency response and market stabilizer; it also ensures people’s life and national food security. Sinograin ensures the freshness of long-term reserve through regular rotation. Interim reserve is set up to maintain oilseed price and farmers’ willingness to plant oilseeds; it is purchased from the farmers at the minimum price and then released to the market through auction or direct marketing. As the reserve policies go mature and the reserves increase, the impact of the policies on oils and oilseeds market will grow stronger. I. Supply and Demand of Oils and Oilseeds (IV) Impacts of Reserve Policies on S&D

II. Latest Development of China’s Oils and Oilseeds Industry Contents

(I) Rapid Capacity Expansion 1. Soybean crushing capacity (1) Soybean crushing capacity grew fast, especially after Now the annual crushing capacity has reached 100 million tons, or 300,000 tons per day. (2) Operating rate of imported soybean crushing plant is now less than 60% after two years of declination. II. Latest Development of China’s Oils and Oilseeds Industry Source: Sinograin Oils Corporation Operating Rate & Capacity of Imported Soybean Crushing Plants (in 1,000t/day) Crushing Capacity Operating Rate

Source: Sinograin Oils Corporation II. Latest Development of China’s Oils and Oilseeds Industry (I) Rapid Capacity Expansion (3) Soybean crushing capacity are centralized in Pearl River Delta, Yangtze River Delta, Bohai Ring Area and Shandong. Newly added capacity mainly comes from costal areas. (4) The two key companies built or expanded their soybean/rapeseed crushing plants along the middle and upper reaches of the Yangtze River in recent years, and capacity increased to 13,000 tons/day. Expansion of Crushing Capacity (in 1,000 tons) Bohai Ring Shandong Yangtze River Delta Pearl River Delta

2. Rapeseed crushing capacity (1) China’s total rapeseed crushing capacity is 38 million tons per year, including 15 million tons of capacity newly added in recent years. Number of small- and medium-sized traditional rapeseed crushing plants is still large, but they are in a inferior position in the competition due to poor equipment and low productivity. (2) Newly added capacity is centralized in two key areas: the middle and upper reaches of the Yangtze River, where newly built or expanded soybean/rapeseed crushing capacity is 13,000 tons/day; coastal provinces in South China, where rapeseed crushing capacity reaches 37,000 tons/day. This area mainly crushes imported oilseeds. Source: Sinograin Oils Corporation Newly Added Rapeseed Crushing Capacity (tons/day) Area Newly Added Rapeseed Crushing Capacity (tons/day) Total Liaoning1,500 4,500 Fujian1,5003,0006,00010,500 Guangdong3,500 10,500 Guangxi 5,0006,50011,500 Total6,50013,00017,50037,000 II. Latest Development of China’s Oils and Oilseeds Industry (I) Rapid Capacity Expansion

(3) A point to note: China mainly imports rapeseed from Canada, but Canadian rapeseed crushing capacity grew fast, too. Therefore, Canadian rapeseed available for export may decrease in volume. This could be a challenge to the operating rate of new capacity added in coastal provinces. Newly Added Capacity in Canada (in tons/day) Source: Statistics Canada II. Latest Development of China’s Oils and Oilseeds Industry (I) Rapid Capacity Expansion

3. Palm oil fractioning capacity China’s palm oil fractioning capacity grew quickly to 57,000 tons/day, or 20 million tons per year. Palm oil import volume maintained stable in the past five years at around 4.6 million tons, and a major part of it went directly to consumers, so overcapacity was quite common. Now China’s palm oil fractioning industry is having a tough time with unbalanced pricing system and declining margin of palm oil fractioning. Source: Sinograin Oils Corporation, China Customs II. Latest Development of China’s Oils and Oilseeds Industry (I) Rapid Capacity Expansion Palm Oil: Annual Import and Growth 1,000t

II. Latest Development of China’s Oils and Oilseeds Industry (I) Rapid Capacity Expansion 4. Factors driving capacity expansion (1) Domestic demand grew fast in the past decade (2) Active financial and monetary policies in response to the financial crisis in 2008 (3) Expansion of large-sized group companies (4) Appreciation of RMB and difference in interest rates

(II) Capacity Distribution The charts below reveal two facts. Firstly, capacity distribution changed in the past three years: foreign companies controlled 50% or above of the capacity before 2009, state-owned and private sectors took over 23% and 13 respectively; but now the share of foreign companies has dropped to around 34%, while state-owned and private sectors increased their shares to 30% or so. Secondly, size of key companies changed along with the capacity shifts. Source: Sinograin Oils Corporation II. Latest Development of China’s Oils and Oilseeds Industry Soybean Crushing Capacity of Key Companies (in tons/day) Capacity & Import Shares Foreign Companies Private Sector State-owned Sector Impor t share Capacity share

(III) New Trends in Crushing Industry 1. Dependence on import increased to above 70% Growing demand and limited domestic supply boosted soybean and rapeseed import. Oils import declined slightly at the same time. Source: Sinograin Oils Corporation II. Latest Development of China’s Oils and Oilseeds Industry Total Soybean oil Rapeseed oil Palm oil Dependence on Oils Import (%) Soybean/Rapeseed Import (in 1,000t) Palm/Rapeseed/Soybean Oils Import (in 1,000t) Rapeseed Soybean Palm oil Rapeseed oil Soybean oil

Source: Sinograin Oils Corporation II. Latest Development of China’s Oils and Oilseeds Industry (III) New Trends in Crushing Industry 2. The crushing industry went through many difficulties in the past three years as the margin shrank. Economic downturn, capacity expansion, unbalanced pricing system and macro control were the main contributing factors. Crushing Margin: Spot vs. Spot ($/t)

Source: Sinograin Oils Corporation II. Latest Development of China’s Oils and Oilseeds Industry (III) New Trends in Crushing Industry 3. Domestic soybean production available for crushing reduces. (1) A major part of China’s soybean crushing capacity comes from Heilongjiang. Statistics shows that the province has crushers with daily capacity above 50 tons, but less than 100 crushers with daily capacity above 500 tons. Small size, scattered distribution and large number of crushers are the key features. (2) Imported soybean is superior to domestic supply in terms of processing quality and price, domestic soybean is loosing its competitive edges. As crushing margin declines, operating rate lingers around very low levels. (3) Domestic demands for edible soybean and protein grows steadily, and domestic soybean will go for these demands in the future. Total demand for edible soybean exceeds 8 million tons, and more than 1.7 million tons of soybean are used to produce edible protein. Crush Volume of Domestic Soybean (in 1,000t)

4. More and more importers are now importing oils and oilseeds. Increase import brings more uncertainties while complementing domestic supply. Source: Sinograin Oils Corporation (III) New Trends in Crushing Industry II. Latest Development of China’s Oils and Oilseeds Industry

III. Outlook of China’s Oils and Oilseeds Industry 报告提纲

III. Outlook of China’s Oils and Oilseeds Industry (I) Demand for Protein/Oils Will Keep Growing but at a Lower Speed 1. China’s population growth, urbanization rate and GDP growth are unable to maintain a high speed like before. Source: Sinograin Oils Corporation, National Bureau of Statistics Total Population (10,000) Consumption of Vegetable Oils (1,000t) Population Vegetable Oil Urbanization Rate Per Capita Consumption (kg/year) GDP GrowthVegetable Oils Consumption Growth

(I) Demand for Protein/Oils Will Keep Growing but at a Lower Speed 2. Estimated average growth of protein in the next five years is 4-5%; meat and egg drop to between 1% and 2%, about half of the average growth in the past five years. III. Outlook of China’s Oils and Oilseeds Industry Source: Sinograin Oils Corporation Average Growth FeedProtein Meat Poultry & EggAquatic Products

Source: Sinograin Oils Corporation III. Outlook of China’s Oils and Oilseeds Industry (I) Demand for Protein/Oils Will Keep Growing but at a Lower Speed 3. Based on the 4-5% growth of the demands for feed and protein, we estimate that soybean import will grow by three to four million tons per year in the next five years. Estimated Growth Soybean import

3. China’s per capita consumption of vegetable oils has exceed world average, so the demand will grow at a lower speed in the next five years. Source: OECD III. Outlook of China’s Oils and Oilseeds Industry (I) Demand for Protein/Oils Will Keep Growing but at a Lower Speed World’s Per Capita Consumption of Vegetable Oils: 2011 (kg) South Korea Japan China U.S. E.U. World World’s Per Capita Consumption of Vegetable Oils: History (kg) World U.S. S. Korea E.U. China

Estimated Import Volume of Three Main Oils Source: Sinograin Oils Corporation III. Outlook of China’s Oils and Oilseeds Industry (I) Demand for Protein/Oils Will Keep Growing but at a Lower Speed , vegetable oil grew by 3% per year. In the next five years the growth will drop to 2%, i.e. 500,000 tons. Growing demand for protein will drive soybean import to increase by three to four million tons per year, so no need to import more vegetable oils to meet the demand. Rapeseed oilPalm oil Soybean oil

(II) Future Trends 1. As capacity expansion slows down, operating rate will climb in the coming years. Meanwhile overcapacity will last. Source: Sinograin Oils Corporation III. Outlook of China’s Oils and Oilseeds Industry Estimated Operating Rate ,000t/day Crushing capacity Operating rate

III. Outlook of China’s Oils and Oilseeds Industry (II) Future Trends 2. Industrial integration will continue, and more large-sized groups will take shape. 3. Crushers will keep improving the industrial chain by expanding toward upper and lower reaches for survival and future development. 4. Cumbered by economic downturn in the western world, China’s economic growth will slow down. Domestic demand for oils and oilseeds will grow, but at a lower speed. Overcapacity and intense competition will bring more challenges to the industry.

(III) Small- and Medium-sized Packages will Boom as Driven by Upgraded Food Safety III. Outlook of China’s Oils and Oilseeds Industry 1. The government will tighten its control over the entire circulation process from material sourcing to end product marketing, to meet the growing demand for higher quality of life. Examples include: stricter standards will apply to transport of imported oils and product quality beginning from the next year; the government’s attempt to take down the waste oil industry in recent years. These trends will facilitate rapid development of small- and medium-sized packages. 2. Total production of edible oils in 2011 was million tons, including 6.16 million tons of small-sized packages. Average growth since 2009 has been maintained at 10%, so the volume is expected to reach 8.8 million tons by Medium-sized packages will grow even faster because of the lower base number. Other oils Olive oil Sesame oil Sunflower seed oil Corn oil Rapeseed oil Peanut oil Soybean oil Blended oil Growth

(IV) Lasing Influence of Macro Control on Oils and Oilseeds Market Beginning in 2008, the government implemented a number of supportive policies such as making interim reserve and increasing long-term reserve. As a result, the government’s control over oils and oilseeds market is enhanced to play a more important role in stabilizing domestic market and affecting international market. As the government refines its reserve policies, the influence on the market will last for many years. The current situation shows that the government has accumulated sufficient reserves of soybean, soybean oil and rapeseed oil. As far as macro control is considered, the government is able to prevent high market volatility from occurring. When viewing from the perspective of the oils and oilseeds industry, we should never underestimate the government’s determination and confidence in protecting farmer’s interest and preventing the price from fluctuating. III. Outlook of China’s Oils and Oilseeds Industry

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