Thursday, October 10, 2013

China Corn Glut on the Horizon

Crop tours and news media indicate that China's 2013/14 corn output will increase this year. With the U.S. corn crop also likely to hit a record, and with demand relatively slow in China, the world could be flooded with corn after this year's harvest comes on the market. Paradoxically, Chinese price policies maintain strong demand for imported corn--and meat--despite the prospective glut of corn in China.

A corn tour covering China's northeastern provinces last month indicated that the volume and quality of this year's corn crop is a little better than last year. The crop tour found that growing conditions were good. This year's Chinese crop was only affected by flooding to a minor degree and was better than 2012 when typhoons, army worms, and heavy rain/snow affected the crop.

On October 8, an expert from China's National Grain and Oils Information Center estimated that China's 2013 corn crop would exceed 215 million metric tons, up 7 mmt from 2012. Liu Xiaoran, also vice chairman of the China Grain Industry Association, estimated that China's corn consumption would be 197.5 mmt, implying that supply will exceed demand by 14 mmt which will add to the country's corn inventories.

China's demand for corn is not that robust. A speaker at a corn industry conference said the corn-processing industry--which makes alcohol, starch, sweeteners and other products from corn--is going through a painful period of losses. Starch producers can only cover the cost of raw materials, the liquor industry is due for a big shakeout and monosodium glutamate producers mostly shut down in May. Many of these processors are operating at less than 50 percent of their capacity.

A speech at the same corn industry conference by Li Xirong, a livestock and feed industry official, surmised that excess capacity in China's poultry and pork sectors is dampening demand for feed. He estimated that tens of millions of rural migrants have gone back to their villages due to the economic slowdown--which has reduced consumption of meat. A second negative demand factor is this year's order to cut back on official banqueting--which also cut into demand for meat and alcohol--and by extension this weakens demand for corn. In particular, poultry and egg production--which account for half of industrial feed demand--is slow this year. The poultry sector has not completely recovered from the avian influenza and pharmaceutical abuse incidents that depressed the industry earlier this year.

Abundant domestic supplies and weak demand normally would push corn prices downward, but China's corn price support policy and restrictions on imports are preventing this from happening. While global prices for corn are plummeting, the Chinese price is supported by policy at a relatively high level. In July 2013, the Chinese government announced this year's support price for corn in the northeastern provinces would be increased from last year, to a minimum of RMB 2220-2260/metric ton in various provinces--about $9.40-$9.60/bushel. While Chinese officials have been trying to engineer an increase in their corn prices, U.S. corn prices have fallen from a drought-induced high of $8/bushel in 2012 to near $4.50/bushel recently.

Liu Xiaoran said the after-tax cost of imported corn in China is now RMB 2039/mt, about 15 percent less than the current cash price of RMB 2400/mt in the Chinese market. With domestic prices elevated above international prices, Chinese buyers are paradoxically clamoring for imported corn despite the prospect of a big glut of corn in the domestic market. China's 2012 imports--when U.S. corn was expensive--totaled 5.2 mmt. This year, with U.S. corn prices plunging and Chinese prices stuck at a high level, there is even more inclination for Chinese buyers to import corn.

However, China's tariff rate quota effectively caps corn imports at 7.2 mmt per year. Half of that quota is awarded to state-designated companies--mainly state-owned COFCO--while the other half is split among hundreds of private sector applicants.

The high cost of corn has encouraged Chinese users to seek out substitutes. A speech by a COFCO analyst at the September corn industry meeting noted that the rising cost of corn from 2007 to 2012 had stimulated increased use of wheat for animal feed (an unintended effect of China's policies to boost wheat output as a "food security" measure). Chinese users began importing distillers dried grains from the United States in 2009, and he estimated that DDGS imports could rise to 3 mmt this year. He estimated that China's imports of sorghum--a more expensive substitute for corn--could reach 1.5 mmt during this market year. China has no quota limits on imports of either DDGS or sorghum. The COFCO speaker noted that China's corn demand had slacked off since the second half of 2012.

The drop in U.S. corn prices could have knock-on effects on livestock and meat trade. U.S. livestock producers paying corn prices half those of their Chinese counterparts will boost supplies and drop prices. A corresponding gap between Chinese and U.S. meat prices could stimulate more Chinese imports of U.S. pork and chicken. Thus, China could end up importing more corn in the form of meat and poultry by next year.

With corn having shifted from shortage to surplus, the risk is that an usual year of bountiful corn supplies will lead to wasteful policies to use up surplus corn. Li Xirong's speech cited above recalled China's huge corn surpluses in the 1980s when much corn was wasted and exported with subsidies. The speech on industrial use of corn cited above recalled that Chna's corn-processing sector was set up (with subsidies) during a period of corn surpluses in the early 2000s to help farmers dispose of corn they couldn't sell. He praises the industry for increasing demand for corn. However, since then the livestock industry's demand for corn has exploded and competes with industrial processors, sending corn prices upward--until this year. The speaker calls for renewed subsidies and policies favoring export of corn-based products to help the processing industry through its rough patch. This year's prospective glut could stimulate similar policies.


Anonymous said...

Thanks for the informative summary. Really excellent blog. Today's WSJ reports that:

"China's military has weighed in publicly against rising corn imports in recent months"

Is this something you are aware of? How serious may these warnings be?

Thanks in advance

dimsums said...

The military implications of reliance on imported corn--nearly all of it from the United States--are almost never publicly discussed but are probably a concern that drives backroom discussions. The military strategists are one of several voices in Chinese-style behind-the-scenes policy-making by debate and horse-trading.

The agreement to import Thai rice (COFCO signed a 5-year agreement) is likely a signal from Premier Li that grain imports are OK. It may also be a quid pro quo for infrastructure and other deals China wants with Thailand.

Anonymous said...

Thanks again for your reply and helpful insights.

I must say that your blog is one of the most insightful resources out there on China's grain economy.