Noble fights for share of China's soya bean market

Enjoy a local bean curd dish on the mainland and you could be eating soya beans grown in South America, shipped to China by a multinational food company and processed in a large, foreign-owned crushing plant, making one of the mainland's humblest foods a dish served up by the world's powerful multinationals.

Throughout China there are small presses churning out oil and meal.

However, in the past two years companies such as Archer Daniels Midland, Bunge and Cargill, which control much of the world's food supply, have bought significant market shares in China's soya bean crushing industry from troubled domestic crushers.

They are betting that their global reach and higher efficiency, together with steadily growing demand, will produce profits where smaller local companies have failed.

Hong Kong's Noble Group plans to give these big players a run for their money. It entered the global food trade five years ago; the ABCs of the business - ADM, Bunge and Cargill - have all been at it for well over 100 years.

'We plan to expand our crushing capacity in China to about 10 per cent of all imported beans in [the country], which would mean going from one million tonnes (crushing capacity) to three million next year,' says Ricardo Leiman, Noble's chief operating officer and the man behind its expanding agriculture business.

Soya beans are a key ingredient in everything from beef stew to pesticides, but it is China's changing diet that gives these companies their biggest reason for optimism. Chinese consumers can afford to eat more meat, oil and fats than they could 10 years ago.

Soya beans are crushed to extract their oil and the remaining material, known as meal, becomes an integral part of animal feed, tying the soya bean industry to meat consumption.

'As incomes rise, diet patterns change in a very predictable way. Instead of just grains and pulses and roots, they begin to eat more dairy, meat, fruit and vegetables and eventually more snacks and then at some point they turn to healthier diet foods,' Patrick Vizzone, an analyst at Rabobank, says.

China imported 26.6 million tonnes of soya beans last year and industry sources expect that to rise to 30 million this year. The country only grows some 17 million tonnes of soya beans a year. Most of the imported beans are fed into crushers operated by multinational firms.

'The change (China's urbanisation) is positive in terms of consumption, but it's what the local food and agribusiness corporations can do to monetise the opportunity that remains to be seen,' Mr Vizzone said.

Volatile world soya bean prices in 2004 put many of China's crushers out of business, leading them to default on soya bean import deals, and a drop in soya oil prices made it difficult for marginally profitable crushers to compete with cheap oil imports, providing a golden opportunity for foreigners to enter China.

'In the past year or two, many of the smaller plants have been forced to close,' said Li Ke, a senior analyst at the China National Grain and Oils Information Centre.

The government has since put import taxes in place, which encourage domestic crushing rather than the importation of meal and oil as separate products.

Noble's strategy for making money where smaller, local players failed is to do what multinationals do the world over - control the entire supply chain.

The company has already spent more than US$50 million to build a port in Argentina for exporting soya beans and plans to invest in ports in Uruguay and Paraguay.

'We're focused on supply management. South America offers the low-cost production and in Asia we're targeting the high growth demand,' Mr Leiman said.

Noble is also eyeing a possible entry into the palm oil market. Palm oil is cheaper than soya oil and is commonly used in baking and margarine. Consumption is rising rapidly in China with imports expanding 12 per cent between 2004 and last year.

Noble, Asia's largest commodity trader, earlier this year hired Mr Leiman away from Louis Dreyfus, where he had revamped the company's commodity business and improved its Asian operation.

China has more crushing capacity than it can use, but some of the excess machinery is outdated and inefficient. Some of these operations are just too small to compete with multinationals that have access to South American soya beans, own the ports they are exported from and the ships that carry them to China.

'If you look at the capacity issue, then acquisition looks better than building,' Mr Leiman said. 'There's widespread consolidation going on in the crushing industry, and I'd expect it to continue.'

He estimates that ADM holds about 30 per cent of the market, Cargill roughly 15 per cent and Bunge and Noble each about 5 per cent. Already 55 per cent to 60 per cent of the crushing capacity in China is in the hands of multinationals.

While the avian flu crisis has badly dented animal feed demand in China, the feed industry is still growing due to changing consumer patterns, which boosts soya meal demand.

'China's feed industry is going through an upgrade, the efficiency of the feed is increasing, which means more demand for soya meal,' says Bai Shanlin, vice-chairman of Chia Tai Group Agro-Industry Business (China), a unit of the Thailand-based feed manufacturer Charoen Pokphand Group.

Chinese farmers are only beginning to shift from traditional, small-scale farming methods to the more industrial approach used in developed countries.

Mr Bai says only 40 per cent of the country's farm animals are fed special animal feed, with the rest eating more traditional fare such as grain and hay, giving foreign soya bean importers and crushers reason for optimism as they take hold of an ancient Chinese industry.