China could start importing corn sooner than you think

29.08.2016

Who wants Chinese corn?

Appetite is limited, if the latest results of government auctions are anything to go by.

And if that reluctance is being fuelled by quality concerns, as some commentators suggest, the read-through could be that China's imports – heralded earlier this decade as the next big theme for grain markets – could actually start to live up to, a little bit, of that hype.

Sales stall

The Chinese government is offering its massive corn stocks (equivalent to more than 40% of total world inventories, according to the International Grains Council) in a series of auctions, as part of an ongoing drive to rationalise its agriculture sector.

But take-up at these auctions has been sluggish, and demand for aging corn, and corn held in temporary storage, has been modest since the middle of July.

January corn futures on China's Dalian exchange, while well below mid-June highs, are basically flat since the start of the auctions in late May, which would appear to question ideas of a large oversupply.

A question of quality

The problem appears to be quality, with many analysts suggesting that a significant portion of the government corn stocks are unfit for human consumption.

In April of this year, the US Department of Agriculture's Beijing bureau reported industry estimates that some 20m tonnes of the reserves are no longer suitable for human consumption or animal feed, and concerns have only increased as the auction sales stalled.

John Clemmow, a commodities commentator at Barclays, told Agrimoney, that the likelihood that all of the corn reserves are fit for consumption "very low".

"Stocks-to- use ratios of more than about 25% are always highly questionable," Mr Clemmow said.

"You get spoilage, you'll tend to find that reserves above that level aren't suitable for consumption" he said, calling the high stocks to use ration an "enormous red flag".

Industrial use limited

Industrial buyers have been active at the government auctions, but the capacity of China's biofuel industry to absorb excess corn, and supress global demand by drawing down Chinese ethanol imports, is limited.

Although China is the third largest ethanol market, its domestic industry only has capacity to absorb a few tonnes of corn a year.

Even if extra capacity is built, extensive mould damage makes corn unsuitable even as ethanol feedstock.

Fewer acres

So with questions over the size of usable Chinese corn stocks left over from previous harvests, the debate over supplies turns more to what the country will produce from now on.

And there is cause to foresee at least a slowdown in the rate of growth which has seen China's output more than double so far this century.

China's agriculture ministry has declared a policy of cutting corn acres by 9% from 2015-20.

And a decline may be encouraged by a subsidy shake-up which will see farmers paid by area, rather than output, and which many believe will foster a cut in producers' income.

Sooner than expected

Meanwhile, following the rationalisation of the country's pork industry, demand for livestock feed is only likely to increase.

Sure, with another big corn harvest expected this season, with the USDA expecting a production shortfall of 8m tonnes, there seems little chance of a supply squeeze this year.

But given there is reason to believe the deficit will widen, accelerating the drawdown on stockpiles.

And a big portion of the stocks really is off the menu, a bounceback in Chinese corn imports could come sooner than the market expects.
    

 


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