Thursday, August 14, 2008

Is the "food crisis" about the turn the corner?

More signs that China's supply situation is turning the corner. Perceived shortages that prompted panic-driven cut-off of grain exports, stuffing of grain inventories, and furious purchases of soybeans and vegetable oil are gradually turning into gluts.

China National Grain and Oils Information Center predicts a record corn harvest this year. They raised their projection to 156 million metric tons, up 3 million from their forecast last month. The rise in corn production is due to excellent weather. It comes despite a slight decline in corn acreage as farmers switched some area to soybeans to take advantage of the high soybean prices. CNGOIC says last year severe drought in july and august hit corn yields, cutting yields over 10% in many areas and 20% in some places. (No one was admitting this last fall.) The drought also devastated China's soybean production last fall, probably more than reflected in government statistics.

With a big new corn crop prices are likely to fall. Earlier this year the Chinese government banned corn exports until the new corn harvest--a big harvest might re-open the corn bins for Chinese corn exports this fall.

CNGOIC also raised its estimate of wheat production for this year to 112.5 mmt. All indications are that the summer grain harvest (winter wheat and early-season rice) was quite good.

CNGOIC's latest balance sheet for corn shows that corn supply has been above (or at worst equal to) corn use for the last 5 years running. And use includes exports. China has been building up corn inventories even during the recent "crisis" period. CNGOIC should know about the status of corn inventories since they are an arm of the Grain Bureau that manages them. Overall grain supply exceeds use as well.

China has really been piling up wheat inventories. CNGOIC also reports that by July (just about a month after harvest) central grain reserves had procured 32.3 mmt of wheat in six major wheat-growing provinces, up 10.8 mmt from the same period last year. Based on the report, last year central reserves procured nearly 36 mmt, around a third of production. We don't know how much wheat they have in stocks, but it's a lot.

Meanwhile, China has imported a record amount of soybeans (related to the drought mentioned in first paragraph above) and now has a glut. Prices of soybean and other veg oils have plunged in recent weeks.

When we look back at this food "crisis" we will see that China's panic-driven response--cutting off grain exports and over-importing soybeans and vegetable oil--drove prices higher than they needed to go. At a time when the world needed food China kept it stored in bins.

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