Saturday, February 26, 2011

Replenishing Corn Reserves Pressures Market

According to the 21st Century Business Herald, the Chinese government's eagerness to restock its corn reserves could lead to corn imports about mid-year.

In 2010, the government auctioned off large amounts of corn to prevent prices from rising. Now they want to restock their warehouses. According to one analyst, Sinograin, the company managing the government's reserve, plans to buy as much as 36 million metric tons for reserves this year. In January, Sinograin started trying to buy corn for reserves in the northeastern provinces. The initial plan is to buy 11 mmt by March, of which 9 mmt is to be purchased in the northeast. The government thinks they need to add to reserves to cool off inflationary expectations.

Problem: if the government goes out to buy corn, it has to compete with other buyers, pushing prices even higher. Farmers are not eager to sell to the reserve purchasers because they pay lower prices than other buyers. Solution: tell other buyers to stop buying. State-owned companies like COFCO were forbidden from buying corn in the northeast and industrial users in Jilin Province were ordered to stop buying corn in January. Now, 70 industrial-processors in Heilongjiang province have been ordered to stop buying corn until April 15. The government is checking to make sure traders buying corn for reserves are actually qualified to do so (to prevent speculators from masquerading as reserve purchasers).

The article emphasizes that Sinograin is having a hard time buying corn. Farmers are not satisfied with the price offered and expect prices to go higher in the future.

Last year China imported 1.57 mmt of corn, but imports stopped in the fall after the new corn harvest came on the market. The increase in U.S. corn prices last fall made corn imports too expensive. According to one trader in the south of China, imported corn is now about 400-yuan-per-ton more than domestic corn. However, with the added pressure on demand from restocking reserves, many are expecting corn imports to resume mid-year. The article points specifically to COFCO, the state-owned company which holds 60% of the corn import quota, as a potential importer.

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