Highlights:

As changes in government policy are lowering expectations for corn profits, MY16/17 soybean acreage is up moderately with a forecast production of 12.5 MMT, up from the 11.6 MMT in the previous year. However, growth in soybean production is unlikely to increase the total domestic oilseed supply given the low forecast for rapeseed and cottonseed production.

Executive Summary:

In anticipation of higher demand for industry feed and protein meal as a result of a recovery in swine production and steady growth in the poultry sector, China's soybean imports are forecast to hit a record of 86 million metric tons (MMT) in MY16/17, up from the estimated 83 MMT in MY15/16. Post's forecast for MY16/17 soybean imports is slightly lower than the official USDA data forecast of 87 MMT. As changes in government policy are lowering expectations for corn profits, MY16/17 soybean acreage is up moderately with a forecast production of 12.5 MMT, up from the 11.6 MMT in the previous year. However, growth in soybean production is unlikely to increase the total domestic oilseed supply give MY16/17 soybean production is forecast to recover to 12.5 MMT

Due to the recent change in the Chinese government's corn policy, domestic soybean production is forecast to recover in MY16/17. Recovering to12.5 MMT from the estimated 11.6 MMT in MY15/16. Post's MY16/17 production, slightly higher than the USDA June 2016 official data of 12.2 MMT, is based on a forecast planted area of 6.9 MHa, up 7.1 percent over the previous year.

The latest information from major soybean-producing provinces continues to support a moderate recovery in soybean acreage for MY16/17. The Heilongjiang province's soybean industry leader estimated MY16/17 corn acreage in the province is down by 1 million hectares (MHa), part of which is substituted with soybeans. Similarly, Henan province's official planting intention survey showed an 8.6 percent fall in the corn area for MY16/17 (or about 280,000 Ha) and significant increase in planted soybeans. However, the province's yearly soybean production remained small at about 500,000 tons in recent years. China's Ministry of Agriculture (MOA) continues to boost food soybean yield by providing technical and financial assistance to some demonstration farms in soybean-producing provinces.

MY16/17 soybean imports forecast at 86 MMT

Based on a forecast steady growth in protein meal consumption to meet the growing animal production sector, Post's forecast for MY16/17 soybean imports is 86 MMT, a net increase of 3 MMT from MY15/16. This is lower than the USDA June 2016 official forecast of 87 MMT. Post estimate for MY15/16 soybean imports coincides with USDA's official June estimate of 83 MMT, up by 4.65 MMT from MY14/15. According to the Global Trade Atlas data, China's soybean imports continue to be strong hitting 53 MMT in the first eight months of MY15/16, up 15 percent over the previous year.

According to China's Ministry of Agriculture (MOA), China's swine sector continued on a recovering trend for three consecutive months. Swine inventory was up 0.4 percent in May from the previous month, although the sow inventory declined slightly. Currently pork prices remain high while down slightly from the peak price in April. The June profit margins for swine farmers remained high ranging from RMB800 ($123) to 1,000($154)/head but lower than the RMB1,000 ($154) to 1,500 ($230)/head in May. Chinese officials and industry leaders believe the current high pork price/profit is compensation to the sector after experiencing heavy losses in the past few years. The growing trend in the swine sector is expected to continue for the rest of 2016 as the current sow inventory is still below the level of the past five years. The poultry and aquaculture sectors are expected to see steady growth during the remainder of 2016.

Since MY14/15, China's declining production of rapeseed meal and cottonseed meal continues to boost the use of substitutes, primarily soybean meal. In MY15/16 and MY16/17, the widely perceived overestimation of rapeseed production data, and the forecast decline in cotton seed production will continue to support a growing consumption of soybean meal.

In anticipation of tight global soybean product supplies and a rebound in global prices as a result of dry weather in Brazil and flooding in Argentina, China's feed mills and animal farms increased their stocks in June. As a result, the soybean meal price is up by about 40 percent which may impact additional soybean meal inclusion in feed processing in the coming months. In recent years, as soybean prices remained low, China's feed industry maximized its soybean meal inclusion rate in feed production. The rapid growth of soybean imports in MY15/16 may result in relatively high carry in stocks to MY16/17. In addition, industry sources indicated that currently China's government's “tentative soybean reserve," holding more than 6 MMT of old soybeans, will have to be used before there is further quality deterioration. Thus, the government's decision to release soybean reserves sometime in 2016 could slightly impact import growth in 2016. In addition, China's strengthened restrictions in using imported biotech soybeans for food processing is expected to moderately impact the import growth rate for soybeans in MY16/17 and beyond.

MY16/17 rapeseed production is expected fall.

Based on a forecast planted area of 7 MHa, down 4.1 percent from the previous year, MY16/17 rapeseed production is forecast to fall by 5.6 percent to 13.5 MMT.

The China National Grain and Oilseed Information Center (CNGOIC) indicated that the MY16/17 rapeseed production is likely lower than it is currently estimated at 14 MMT. This is likely due to the constant rainfall during the harvest time in the Yangtze River region.

MY16/17 rapeseed imports forecast at 4 MMT

Post's forecast for MY16/17 rapeseed imports is 4 MMT, down from the estimated 4.15 MMT in MY15/16, and compared to USDA official forecast of 3.8 MMT. Rapeseed imports will face uncertainty as the Chinese regulatory authorities are likely to enforce stricter inspection rules in September 2016. Based on a new inspection requirement, rapeseed suppliers will be requested to reduce foreign matter in rapeseed to 1 percent from the current 2.5 percent. Additionally, an expected relatively smaller global rapeseed supply in MY16/17 may also impact Chinese rapeseed imports. Lastly, China's sales of state rapeseed oil reserves, which reached 2.28 MMT as of June 1, is expected to take part of the rapeseed product market share for the rest of 2016. That said, a significant fall in rapeseed imports is not expected given China's large crushing capacity and smaller than officially reported domestic production.

MY16/17 peanut production is expected to grow to 17 MMT given its comparatively stable profits and also in response to lower government support for corn production.

Forecast MY16/17 peanut imports remain strong

Based on recent developments, Post raised MY15/16 peanut imports to 350,000 tons and forecast similar imports for MY16/17. This is mainly based on continuing imports from price-advantaged Senegal, despite the increase in Chinese domestic production.

Chinese imports of both shelled and in-shell peanuts surged in first months of 2016. The imports of shelled peanuts are mainly from Senegal (about 70 percent) and the in shell peanuts are almost all from the United States. The import boom is mainly driven by price as the shelled peanuts from Senegal stood at about $840/ton while the in shell peanuts from United States averaged at about $490/ton. These imports remain competitive compared to domestic product even after a combined 30 percent import duty and VAT. The majority of imported peanuts are crushed for oil. A small percentage may be used for food/snacks provided the quality factors meet requirements. China's slightly low shelling cost and less damage to kernels during shelling also facilitated imports of in shell peanuts from the United States. Despite the import surge, the import trend is difficult to predict due to factors such as a large domestic production (relative to the current total import volume), comparative prices for peanut and other oilseed products and inspection requirements.

MY16/17 domestic peanut production is forecast to grow in response to a growing demand for peanut oil and food. However, the preference for peanut oil flavor and the peanut oil share in blended oil (labelled as peanut salad oil) can be lowered provided there are other affordable vegetable oils choices. China's peanut imports will increase in the long term. This is based on a growing demand that is challenged by the limited potential growth in domestic production and increasing production costs. Many Chinese industry insiders, however, are not confident on the sustainability of peanut imports given the large and growing domestic supply, frequent price fluctuations and adequate supply of other oilseed products at competitive prices. In another words, imports might surge or plummet unexpectedly. Nevertheless, the share of imported peanuts in

China's total peanut use remains small.

MY16/17 cotton seed production is expected to fall to 8.3 MMT

Post's forecast for MY16/17 cotton acreage is more than 9 percent lower than the previous year. This is in response to low profit expectations due to the government's low support to cotton production, particularly in the Yangtze and the Yellow River regions. According to a survey done in May by the China Cotton Association, MY16/17 cotton acreage is expected to fall by 10 percent from MY15/16. Post's forecast for MY16/17 cotton seed production is 8.3 MMT, down significantly from the 11 MMT in MY14/15, and lower than the estimated 8.9 MMT in MY15/16.

Based on the high crushing volume of oilseeds and the release of state rapeseed oil reserves, China's vegetable oil imports in MY16/17 are forecast to be flat with soybean oil imports at 700,000 tons, unchanged from MY15/16 estimate. MY16/17 rapeseed oil imports are forecast at 750,000 tons, down from MY15/16. MY16/17 palm oil imports are forecast at 5.6 MMT, slightly up from the estimated 5.5 MMT in MY15/16.

Forecast MY16/17 vegetable oil imports level off

Release of state oilseed product reserves

Rapeseed oil reserves

Since late 2015, China began to sell its aged rapeseed oil reserves, estimated at 6.41 MMT. Based on CNGOIC, as of June 1, 2016, a total of 2.28 MMT of rapeseed oil reserves were sold. As of June 26, an estimated 1.5 MMT of this rapeseed oil reserves have been delivered from the state warehouses for refining. Of these, only about 800,000 tons have entered the market as demand remained weaker than expected. Industry sources estimate the rest of this rapeseed oil will gradually enter the end-user market. The government suspended the auction of rapeseed oil in June although no official news was published. Some industry sources speculated that the suspension is expected given the slow delivery of the sold rapeseed oil and in support of the marketing of the MY16/17 new crop. China's state rapeseed oil reserve stands at about 4.1 MMT.

Sales of state soybean reserves postponed

China's State Grain Administration (SGA) had previously announced the sale of state soybean reserves would begin on June 1, 2016. However this was immediately put on hold on account of “some technical difficulties."

China's soybean reserve volume is not officially published. However, it is estimated at more than 6 MMT and all of them were purchased in MY13/14 or before as a part of the “state tentative reserve." The current sale is also in response to the central government's plan to cut stocks including excessive corn and cotton. There is no additional news on whether the sale of reserves will happen. It remains unclear how much soybean reserves will be sold and what the basic auction price will be. Generally, domestic soybeans are used mostly for food processing. As the state soybean reserves have been in storage for more than 3 years, industry sources are concerned about the quality if it is used for food processing.