China’s hunger for Latin American agriculture

By Sumeet Chugani and Margaret Perez, Diaz Reus & Targ
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A once-stagnant Sino-Latin American business relationship has exploded with burgeoning Chinese imports of Latin America’s rich natural resources and agricultural commodities. What started out as just a flirtation between the two regions has transformed into a relationship which promises to fulfill China’s insatiable needs, with the potential for much more.

With Sino-Latin American trade reaching US$120 billion in 2009, Chinese president Hu Jintao’s earlier prediction of realizing US$100 billion by 2010 could in fact be tripled by this year. The recent signing of free trade agreements between China and several countries throughout Latin America illustrates the strong links between the two regions.

As one of China’s most reliable suppliers in agricultural products, raw materials and energy, Latin America is taking strides to fulfill China’s mounting needs. Of these commodities, agricultural products are increasingly exported to fulfill the demands of China’s population. In particular, Latin America has drastically increased its harvesting of soya beans in order to meet China’s demand.

Understanding its importance to the Sino-Latin American relationship, we focus on this crop – which continues to make headlines – as the most significant commodity needed to sustain China’s population.

Chinese demand for soya beans

Sumeet Chugani
Sumeet Chugani
Associate Attorney
Diaz Reus & Targ

For the Chinese, soya is a versatile product for both human and animal consumption. Soya beans can produce soy flour, soy milk, soya bean oil, tofu and textured vegetable proteins. Soya beans are also a principal ingredient for soy sauce, a Chinese staple.

China is the largest soya bean importer in the world, consuming about 40 million tons annually. As China’s population grows, its median income increases and its agricultural industry expands. In turn, China’s demand for soya products has outpaced its domestic supply. Financial forecasters predict that China may soon import over 50% of global soya bean production. This will necessitate an even greater reliance on Argentina and Brazil, two of the largest soya producers in the world. Because of China’s steady shift towards Latin American imports, the Sino-Latin American soya trade will soon overtake export numbers from the United States, the current top soya bean exporter.

Latin America’s response

Recognizing China’s high demand for soya bean products, and the benefits stemming from China’s deep pockets, Latin American nations have responded aggressively. Brazil and Argentina, for example, have shifted their economies to further cater to China’s soya bean needs. Argentina, once a country known for its cultivation of numerous types of crops and high beef output, now devotes over 50% of its farmable land to soya bean production.

Soya beans and global markets

Margaret Perez
Margaret Perez
Associate Attorney
Diaz Reus & Targ

Chinese importation of soya beans is currently one of the most heavily monitored futures transactions in the international market. Soya bean prices, demand and production are important indicators of global financial health. The worldwide financial community speculates that a rise in soya bean prices is a strong indicator that the recent global economic recession is passing. Economists closely monitoring soya bean supply and demand are also keeping a steady eye on the thriving Sino-Latin American soya bean trade.

If China’s investment in Latin American agriculture is any indication, Sino-Latin American trade will continue to boom in the coming decade. Latin America’s rich resources, including crude oil, copper and lithium, will continue to serve the needs of the Sino-Latin American investor.

Some economists suggest that the thriving trade between China and Latin America cannot last for ever, and that China will soon reduce its need for raw materials. However, the steady increase in the number of Sino-Latin American free trade agreements evidences more than just a fleeting engagement between the regions. For example, on 1 March, the bilateral free trade agreement between China and Peru took effect. According to Peru’s Foreign Trade and Tourism Ministry (Mincetur), during the agreement’s first decade alone, more than 10,000 new companies will begin exporting their products to China.

In addition, on 8 April, Costa Rica signed a free trade agreement with China, removing trade barriers and enhancing bilateral ties. Most importantly, the agreement removes tariffs from more than 90% of the products traded between these nations. As Asia’s ninth largest trading partner in Latin America, Costa Rica hopes that the agreement will open more sectors for Chinese investment as well as create a Sino-Latin American synergy of culture, sports, and technology.

China has made its desire to increase trade with Latin America clear. In a visit to various South American nations in April, Chinese officials began mapping out a strategy designed to further promote Sino-Latin American trade and encourage foreign direct investment in Latin America. China’s leaders are not the only ones promoting closer ties between the two regions. President Alvaro Uribe of Colombia recognizes that China is creating long-term opportunities for the region. In promoting a free trade agreement with China, Uribe hopes to promote greater Colombian trade to Chinese markets.

Looking to the future

To sustain its current economic expansion, China will undoubtedly become a leading purchaser and consumer of major commodities and energy sources.

Latin American nations stand ready to meet China’s seemingly unquenchable needs. In exchange for massive exports to China, Latin American nations continue to gain considerable foreign direct investment.

The soya bean market, although immensely important to Sino-Latin American trade relations, is just the tip of the iceberg of the potential for vast trade and investment flowing between these two emerging regions.

As more Latin American nations enter into free trade agreements with China, investors from both regions will discover new potential in commodity trade, as well as increased ventures into new markets.


Sumeet Chugani and Margaret Perez are associate attorneys at Diaz Reus & Targ.

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www.diazreus.com
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