Sunday, November 24, 2013

China Grapples With Grain Glut

Suddenly, China has a surplus of grain and authorities are struggling to prevent prices from falling. China's grain imports are surging despite the big harvest because Chinese prices exceed world prices.

Futures Daily recently pronounced that the arrival of China's new rice crop on the market is dragging down prices. The article estimates that China produced 11 mmt more rice than it will consume this year. Yet China is set to import 2-to-3-mmt of rice this year to surpass Nigeria as the world's leading importer. Customs statistics through October show China has imported over 1.8 mmt of rice in 2013, slightly behind the 2012 pace when it imported 2.6 mmt. These numbers don't include undocumented border trade which may push the annual total to 3 mmt.

China has had another big corn crop but demand is not robust. The hog and poultry sectors are recovering from a deep downturn earlier in 2013 and processors of starch and alcohol are operating at about half of their capacity.

The grain surplus is concentrated in China's northeastern provinces. The government has a "build some, move some, sell some" strategy for dealing with the surplus. This means building new storage capacity, subsidizing transportation of grain to the south, and auctioning grain from current reserves."

Authorities have launched programs to buy up corn, rice and soybeans in the northeast to prop up prices, but the bins still hold grain from last year's crop. Sinograin, the government's reserve-holding company, expects to purchase 60 mmt of grain in the northeast this year, but only has 40 mmt of storage capacity. They are renting warehouses and plan to build 20 mmt of open-air temporary storage facilities. These new storage facilities will be less susceptible to fire and rats than old ones.
New-style temporary grain bins were put on display in downtown Shenyang as a 
promotional activity in 2011. Source: Zhejiang Online.

The Chinese government has also launched a subsidy of 140 yuan/mt for enterprises from outside the northeast to compensate them for buying grain at the government's minimum prices in the region. This appears to be both an attempt to alleviate the northeast surplus and to open policy-purchase business to other companies besides Sinograin.

According to one Chinese grain analyst, imported corn is 500-to-600 yuan per mt less than domestic corn, so he thinks the subsidy for buying corn from the northeast will not have much effect.

Another Futures Daily article forecasts that the government is about to roll back its interference with market prices. One futures market analyst said, "After a close reading of the 'Decision' [of the third plenum] I feel we are closer to the market dream and the futures dream."

No comments:

Post a Comment