US-China trade relations remain “the biggest millstone around the neck,” says new Rabobank F&A outlook

15 Jan 2019 --- The food and agribusiness sector in China will continue to be volatile throughout 2019, according to the latest RaboResearch China Food and Agribusiness (F&A) Outlook 2019. The sector is facing a slowing economy beset with uncertainties and headwinds, the report notes.

Difficulties include the on-going US-China trade tensions, tightening consumer wallets and manufacturing slowdown. In addition, China’s consumers are becoming much more critical and sensitive to trends such as health and wellness. Social media is gaining importance and companies tapping into these trends are expected to show the most growth. 

Rabobank describes China’s economic outlook as “stably unstable” and stresses that although the government has repeatedly said it is aiming for stable growth, employment, prices, markets and the exchange rate, “it is extremely hard to see how these can all be achieved.” 

One of the biggest impacts revolves around the ongoing US-China trade war, which may or may not eventually result in a deal, notes Rabobank. “It runs the risk of disrupting Chinese exports significantly in 2019, which will only exacerbate pressures. In fact, US tariff action to date is already encouraging a shift in investment out of China and into ASEAN and India, something that further reduces the Chinese economy’s long-run growth potential. Should we continue to see a broader deterioration in US-China ties, the outlook will only darken further.”

These are the key trends across the F&A sectors:

• US-China trade relations and the outcome of negotiations remain the biggest millstone around the neck of many industries, influencing prices, supply chains and

global trade flows. Even with a trade détente, China will seek alternate supplies or use this episode to upgrade domestic operations.

• Production or supply-side reform and upgrading is ongoing in grain- and livestock-farming, either due to policies or a natural progression. Productivity and yield

improvement are the key focus points and size is increasing as farms and industries consolidate.

• Environmental protection and sustainability efforts will continue. These are mainly state-led, as consumers are aware but not willing to pay for it yet.

• Digitization and automation march on, not just in the already impressive e-commerce area but also in production, operation, distribution, logistics and consumer-facing channels. Unmanned convenience stores and robot-baked bread are still in an experimental phase, but big data collection and usage are becoming an operational reality. China is probably still the only place in the world where you can go out for a full day of shopping and eating using only your phone and no wallet.

• Businesses are gearing up to offer more than a single product and change into a platform of services and products both at the production and consumer level. This

better captures value in a price-sensitive market and allows for conglomerate-building.

• China’s massive consumer base is becoming pickier and sensitive to trends, such as health and wellness. The ability of companies to keep track of social media

and use it to influence consumers will separate the winners from the losers.

• Aging and weaker-than-expected population growth, despite measures like the relaxation of the one-child policy, are weighing on longer-term sentiment, even

though there are huge opportunities to serve the silver generation as well as younger consumers.

“Urbanization and rural upgrading are still providing a base for growth in the service sector and increasing food spend,” says Ping Chew, Head of RaboResearch Food & Agribusiness, in Asia. “But the F&A sector is facing a slowing economy beset with uncertainties and headwinds, including US-China trade negotiations, tightening consumer wallets, weak financial and real estate markets, and manufacturing slowdown.”

“China’s F&A sector is also confronted with potential disruptions from diseases, and ongoing structural changes as a result of industry consolidation, environmental policies and rapidly changing consumer trends,” notes Chew.

Value upgrading is happening in many sectors, leading to changes in products and business portfolios. Domestic enterprises, especially e-commerce giants and their ecosystems, are beginning to dominate, adding value and becoming a platform of services and products. 

However, Rabobank says that there is scope for foreign businesses in China but speed, consumer intelligence, smart alliances, as well as identifying core appeal and adapting products will be increasingly important.

Last week, China approved imports of DowDuPont’s genetically modified (GM) soybeans clearing the way for US farmers to expand planting the pesticide resistant Enlist E soybeans. The approval for the soybeans not only poses a challenge to competitor Bayer but also signals that the US and China may be beginning to reconcile trade tensions that have seriously impacted various commodities on both sides for months, including severely damaging the US soybean sector.

As the trade war between the two countries intensified last year, China upped the severity of its sanctions against the US by targeting soybeans for 25 percent retaliatory tariffs, after initially not including the commodity on its list of items impacted.

While the US-China relationship remains volatile, the fact that President Trump said trade talks were “going very well” last week after a round of meetings wrapped up in Beijing, could signal that negotiations are making progress. 

However, this could be a turning point with the latest round of meetings between the two sides wrapping up in Beijing. A US delegation has just returned from several days of trade talks in China and President Trump recently tweeted: “Talks with China are going very well!”