The demand driver for food commodities is pretty simple. It amounts to the number of mouths to feed and the household income available to spend on food. Food being a necessity, when marginal income increases are achieved in low-income countries a larger proportion of that income tends to be spent on food than in higher-income countries. This varies across food categories but consider for a moment the chart below that compares per capita real GDP versus animal protein consumption.

There are roughly 180 dots on this chart, with each dot representing a country and the large gold dot representing China. The larger the dot, the greater the population. As a country moves from left to right on the axis, its population immediately consumes more animal protein on a per capita basis. As development continues, the increase in animal protein consumption continues, but at an ever-slowing rate, as household expenditures are focused on other things.

This is exactly what has happened to China. Its economy has grown extraordinarily, expanding 10% annually from from 1990-2013 and causing a transformation that has taken China from a near afterthought in world food and agriculture commodity trade 30 years ago to a dominant importer in many categories. Below is a chart of China's proportion of world imports in the crop year 1992-93 for 20 more or less randomly selected agricultural commodities as compared to 2022-23. China rarely amounted to more than 10% of world trade 30 years ago and now it is the largest importer in 12 of the 20 commodities.

Economic growth has clearly played a role in this transformation, but it does not account for all of it. At the same time this economic miracle was happening in China, its population was growing. Over the past 30 years, the country's population has grown by nearly 25%, or about 280 million people. To put this into perspective, 280 million people is roughly the population of Indonesia, the fourth most populous country in the world behind only India, China, and the US. Combine the population growth -- more mouths to feed -- and economic growth, higher household incomes, and you have the demand-side disrupter that China has become in food and agricultural markets.

The case of soybeans

Nowhere has this Chinese transformation been more evident than in soybeans. This oilseed -- when processed or crushed -- produces soybean oil, cooking oil for frying and food preparation; and soybean meal, a high-protein animal feed ingredient. It is this soybean meal that has become critically important in China's building out the world's largest hog population to satisfy the country's growing appetite for pork and the world's largest aquaculture industry. Roughly half of all the hogs in the world are in China and it also accounts for nearly 70% of global aquaculture production. Without soybeans and the soybean meal that is produced from them, this could not happen.

Looking at the past 30 years, China barely registered as an importer of soybeans until the crop year 1995-96. A little more than 15 years later, it already accounted for roughly 60% of world trade and remains there until today. China's demand for soybeans over the past 30 years has grown roughly 90 million mt, while the rest of the world has grown less than half of that.

To fuel this growing demand for soybeans, Brazilian agriculture transformed and its production of soybeans grew with China's demand. Since the 1990-91 crop year, Brazil's soybean production has grown nearly tenfold, making it the largest producer and exporter of soybeans in the world. Without China's explosive demand growth, there would not be a market for such supply-side expansion.

In recent years, however, China's physical demand growth has slowed significantly. China's soybean crush grew by 33 million mt from 2010-11 to 2016-17. In the subsequent six-year period ending in 2022-23, it appears China's soy processing will grow only about 3 million mt. This is likely due to the slowdown in economic and population growth manifesting in slowing growth of animal protein consumption.

The impact of the sharp slowdown in China's physical consumption of soybeans has been somewhat masked by their building of stocks. Likely spooked by the US-China trade war and the continued chilly trade relations with the Washington, Beijing continues to import more soybeans than they country consumes, building stocks by more than 30 million mt since 2016-17, when US President Trump was elected and arguably the beginning of the US-China trade relationship deteriorating. It should be noted that the US is the second largest exporter of soybeans to the world, representing a little more than 30% of world trade on the export side.

China's population shrinkage is in its nascent stage, but what will happen when it shrinks by 80 million people in the next 25 years as the World Bank projects? S&P Global Market Intelligence projects China's GDP will grow at around 5% for the foreseeable future, well below the average over the past 30 years. If income growth from economic development and population increase built China into what it is today as an agricultural consumer, it would be naïve to think these shifts forecasted will not matter. How will prices behave? How will exporting countries react?

It is early days in this Chinese transition, but it should be noted that US soybean futures are approximately 25% below a year ago. It is also important to note that Brazilian soybeans have fallen even further in the past year. Some, including analysts at S&P Global Commodity Insights, are questioning what the rate of soy area expansion will be in Brazil next year. By S&P Global calculation, the price of soybeans in Brazil is now below the cost of production for converting pasture ground to crop production. This was unthinkable not long ago. Furthermore, S&P Global analysts expect that soybean prices could continue to fall another 25% if the US grows a normal crop of soybeans. While planting has gone quickly and smoothly, there is a long growing season ahead.

The implications could be broad

To be clear, the projections of China's declining population are not spurious or made without an assignable cause. The World Bank projects China will fall by 80 million people in the next 25 years, similar to the population of Germany. This forecasted drop in population is a direct result of declining birth rates. Despite China lifting the "one-child" policy in 2016, birth rates continue to fall today. Couple this with presumed slower GDP growth and it does not take a lot of imagination to see slower growth in food demand.

While the focus has been on the linkage between China's animal protein consumption and world soybean production and trade, the implications of these macro trends in China do not end there. It is hard to imagine a portion of the global agriculture and food supply chain that will not feel the impact.

China has been a key demand driver for many commodities for a generation. Even those that China is not a large consumer may feel the impact indirectly. If the price of one commodity goes down due to stagnating Chinese demand, another may go down, because arable land is fungible.

If the price of soybeans goes down, for instance, other commodities that can be produced on the same land and climate are likely to go down, otherwise, they will be overwhelmed by supply, as producers shift to the high-priced alternative. The upside of this is likely to be reduced food inflationary pressures for consumers. The downside is likely to be profitability and returns to farming.