Saturday, April 15, 2017

Imports of Corn and Substitutes Continue

While China's Ministry of Agriculture has proclaimed that domestic corn prices have fallen enough to choke off imports, commercial reports say imported corn substitutes still have a clear price advantage over Chinese corn. Low prices of imported corn and substitute grains could undermine plans of Chinese authorities to release domestic corn reserves into the market in coming months.

According to a report this week, imported substitutes for Chinese corn retain a clear price advantage. Corn markets in northern and northeastern China are generally tight, maintaining firm prices for domestic corn shipped to southern corn deficit regions. At Guangdong Ports, the cost of corn arriving from ports in Liaoning Province on April 12 was 1730-1750 yuan/mt, up 30 yuan from the week before. However, the cost of imported U.S. sorghum was reported to be 1640-1650 yuan/mt, and imported Australian barley cost 1540-1550 yuan/mt. The report said feed mills are gradually increasing their use of imported corn substitutes.

The report said 28 vessels of Ukrainian and U.S. corn totaling 1.54 million metric tons (mmt) are due to arrive at southern China ports during May-August, 2017--the same time Chinese authorities will be holding auctions of domestic corn reserves. Another 8 vessels of sorghum and 8 vessels of barley are also reportedly on the way. As of April 12, commercial inventories of feed grains at Guangdong ports were already adequate, at an estimated 1.3 mmt.

One report describes "psychological warfare" between participants in China's domestic corn market as they negotiate prices with rumors swirling about upcoming auctions of government corn reserves. At present, corn supplies are tight in China's corn-producing regions and prices are firm as farmers have sold most of this year's new crop of corn. The price for corn arriving at ports in northeast China's Liaoning Province ports is 1600-1610 yuan/mt and the reported price for shipment in bulk is 1650-1660 yuan/mt.

But next month the government will begin auctioning old corn from its reserves, and rumors of large volumes and low prices for the corn auctions are circulating. Some rumors say opening prices could be as low as 1250-1350 yuan/mt. Market participants, therefore, worry about being caught with high-cost inventories if the auctions put downward pressure on prices next month. Some warehouses at the northeastern ports have reportedly stopped buying new corn, forcing traders to cut prices slightly by about 10 yuan/mt despite tight supplies of new-crop corn.

Downstream demand for corn is reportedly soft at present. Hog inventories are reportedly at a low level and there has been a large drop in demand for poultry feed. Starch processors are profitable in Jilin Province where the provincial government is giving a 200 yuan/mt subsidy and corn prices are relatively low, but processors in Shandong Province are losing money paying 1700-1780 yuan/mt for corn.

Authorities appear poised to manage the corn auctions to prevent downward pressure on market prices. Hunan Province's branch of Sinograin, China's Grain Reserve Corporation, held auctions of 32,150 metric tons of corn produced in 2015 over the last two weeks to test the waters, but the minimum price was set at 1800 yuan/mt, above prevailing prices. The auctions sold 44 percent of the corn offered.

The availability of lower-priced imported corn and substitutes will constrain the release of old corn from reserves over the next 4-5 months. With cash prices for domestic corn higher than the cost of imported sorghum and barley at southern ports, sales of old corn from reserves may be slow unless authorities allow auction prices substantially lower than current cash prices. If authorities want to keep market prices firm they may be forced to continue holding old corn in reserves.

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