Thursday, January 8, 2009

Corn Market Report

A 2008 China corn market report from the China Corn Net is mostly pessimistic.

The corn harvest has been big 5 years in a row. This year it rose a lot (but no estimate given). The government announced three rounds of temporary corn procurement for state reserves to support prices (reported here in December). The 30 mmt would be nearly half of the reserves in the Northeast. Afterward, much of the grain would be in state hands. The procurement is boosting prices as processors and traders try to buy up corn. In parts of Hebei Province there is a scramble for grain as traders are competing for the grain while it's cheap. Processors and feed mills are increasing inventories, preparing for post-spring festival normal operations.

Still, demand from industrial users is down. Paper and textile exports (significant users of corn starch) are down. Sugar prices are down, reducing demand for corn sweeteners. In 2008, it is estimated that starch production fell sharply, perhaps by 3%. During the Olympics period (July-August), many small and medium starch producers in Hebei and Shandong Provinces had to shut down [because of environmental, water use, and energy concerns]. Starting in September, production started to fall nationwide and by October production was down at nearly all starch producers. Capacity utilization was about 60% in September and is now under 45%. In mid-December, northeasstern corn starch prices were down to 1630-1650 yuan/mt, about 2005 levels, but the corn price was still at the 2007 level, leading to serious losses for corn processors. Currently processors lose more than 200 yuan on each ton of corn they process.

It is believed that national starch processors' unsold inventory now is 800,000 mt, more than a month's production. They are counting on demand picking up after this month's Spring Festival holiday. Although the government already eliminated export taxes on corn products, there is not much benefit to the starch industry since overseas demand is down.

Demand from the feed industry is also weak, but not as bad as the last couple of years when the hog industry was depressed. Fourth-quarter feed production in November was down 15% year-on-year, December down by a smaller amount. According to preliminary Feed Industry Association stats, 2008 feed production will reach 130 mmt, up 6% from 2007. The pork price recovered, affecting feed production growth, but since hog inventories are relatively high, pig feed grew 10%, but poultry feed growth was about 3-5%.

Economic growth is slowing, so 2009 meat consumption will probably fall. The feed and livestock sectors are not optimistic. In the short term, the chief concern is whether the 2009 hog price will continue falling, especially after spring festival. If the hog sector experiences serious losses, it could slow feed production in the first half of 2009.

The outbreak of avian influenza in Hong Kong 9 days ago was upgraded to serious, and already stopped imports of domestic poultry and other birds from the mainland for 21 days. The HK AI incident is affecting the poultry industry in Guangdong and other areas.

With a surplus of corn, the govt is relaxing corn export controls. But the import price of corn in November was 1300 yuan/mt. The US corn price is clearly lower than domestic prices, and domestic grain processors are more interested in importing US corn. But recently the CBOT price rose and the domestic price fell, narrowing the gap. There could be competitive pressure for imports. Not a few grain enterprises enthusiastically applied for corn import tariff rate quotas allocated for 2009.

According to preliminary customs statistics, Jan-Nov 2009 corn imports were only 41,298 mt, up 76.2%. In November imports were 18,700 mt, already on an upward trend. [However, this is still a miniscule amount. Other reports say this is mostly coming into southern China's border areas from Southeast Asia.]

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