Tuesday, May 18, 2010

We Don't Need Your Corn. Really!

The Chinese corn market is a chief example of a "dim sum." No one knows how much corn China has, so there is huge uncertainty in the market. Last fall, photos of fields decimated by drought were circulated, but official organizations insisted that the harvest only dropped a couple of million tons. Now, Chinese corn prices have surged to about double the U.S. corn price and the first major shipments of corn from the U.S. to China since the mid-1990s have been made.

On May 18, the vice-director of the National Grain Bureau was sent out to give a carefully scripted "interview" to dispell any notion that China is short of grain.

The vice director, Ms. Zeng, insists that the supply of corn still exceeds demand in China and that rising prices reflect speculation, not a lack of corn. Ms. Zeng tells us China has plenty of corn in reserves to keep a steady supply on the market. She doesn't know why some companies have bought U.S. corn--that's their business--but the imports amount to a tiny share of the Chinese market and they would get along fine without it.

Ms. Zeng explains the reasons for rising corn prices in China:

1. Last year production was down in the northeastern region. Everybody has a different opinion on the magnitude and some organizations and enterprises estimate that corn production fell a lot, which has a big impact on the market expectations.
2. The economy is recovering from the effects of the financial crisis, so feed and livestock enterprises and industrial processors are returning to normal operations and demanding more corn.
3. This year’s natural disasters had an impact and low temperatures in the northeast slowed corn planting. The market expectations were for rising prices and enterprises built up inventories. Some large corn processors are holding up to 3 months' worth of corn.
4. Domestic and foreign money is going into the market and pushing futures prices higher.
5. Farmers are holding on to grain stocks due to government provisional purchase policies and rural financial service improvements. In a survey of 7 provinces by the grain bureau, farmers are still holding over 17 mmt of unsold grain.
6. Some people surmised that the State provisional grain reserves were nearly sold out. In fact, the State still has very large inventories of corn due to abundant harvests in the last few years. After the sales of provisional purchases have been completed, the state will start selling corn from its national reserves. The State inventories of corn are sufficient to meet the demand.

Ms. Zeng denies that corn auctions were halted last week because they are running out of reserves to sell off. They were halted so the rules could be changed to prohibit hoarding. The new rules require that purchasers take any corn they purchase at auction and process it themselves; they can't resell it to anyone else.

This year the quota for private companies’ imports of corn total 2.8 mmt. In theory all of it can be imported, but genetically modified corn requires a certificate. The U.S. corn that has been purchased already has gotten the license.

Ms Zeng explains, "These imports have virtually no effect on the basic supply-demand. Presently the domestic market does not have a shortage of corn. The corn being imported now is being bought by companies on their own; it’s not being directed by the government to fill market supply. The rise in the corn price is due to the reasons I explained."

Ms. Zeng thinks a gradually rising corn price is a general trend of the market and a good thing. She says, "[The rising price] can encourage corn production and benefit farmers and help us attain our macro adjustment targets."

However, a sharp rise in price is not good and she says the state will step in to stabilize the market price by implementing adjustment policy measures if prices rise unreasonably fast. "Keeping grain prices basically stable is an objective of macroeconomic adjustment."

Market participants apparently weren't reassured. An article about corn markets on May 19 reported that companies continue to stock up on corn, fearing continued increases in prices. Cash and futures prices continued rising despite Ms. Zeng's reassurance that there's plenty of corn for everybody. Auctions held in Heilongjiang and Jilin each sold about 350,000 mt of corn harvested in 2008 at prices ranging from 1560 yuan to 1800 yuan per mt.

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