Tuesday, October 5, 2010

Reserve Purchase Policy Key for Corn Market

The Dalian Commodity Exchange gathered futures analysts to hold a "Beijing Region Futures Salon" where they discussed the outlook for China's corn market. An article in Futures Daily summarizes the interesting discussion.
The discussion focused on the growing demand for corn. A major change is the explosive growth in industrial processors' demand for corn. One analyst notes that capacity in this sector grew rapidly during 2002-07 and industrial uses now account for 28% of corn consumption in China. If the processing capacity of 77.5 mmt were entirely utilized, this sector would consume 47% of the corn crop. The analyst suggests that the sector faces "integration" (consolidation?) in the next 3 years, but its growth has changed the "amount and rhythm" of corn demand.

Other major demanders for corn are feed mills and corn reserve warehouses. Feed demand is robust, given the rapid growth in China's economy.
Analysts said that enterprises now have little corn in inventory. There is a gradually tightening corn supply-demand situation. Typically, corn prices fall during October when the new harvest comes on the market. Analysts think there may be little decline and prices will remain relatively high in the current supply-demand situation.

The big uncertainty, according to another analyst, is reserve policy. The government's historical role has been to soak up surplus corn from the northeastern region to support prices and warehouse it or send it to other provinces. In a fundamentally changed situation of tight supplies, will the government continue in its customary role?

The government has been auctioning reserves into the market this year to cool down prices. Will the government go into the market this year to replenish reserves? If it does, the government will be competing with feed mills and industrial users for a limited supply of corn.

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