Tuesday, June 23, 2020

China's Emerging Corn Deficit Marked by Price Rise

Rising prices in China's corn market signal the transition from glut to seller's market, according to some analysts in China. The market has been filling its corn deficit by drawing down a stockpile over the past four years, but the stockpile is expected by many to be depleted in 2020.

Over 15.9 million metric tons of corn was sold at four weekly auctions of "temporary reserve" corn held between May 28 and June 18, 2020--nearly all of the corn offered. Premium prices were paid, with the average price rising from 1765 yuan per metric ton in the first auction to 1884 yuan in the June 18 auction. The auctions are the main source of corn now that farmers have sold nearly all of their surplus corn from last fall's crop.

The auctions are replicating similar frenzied conditions that prevailed during corn auctions 11 years ago when fiscal stimulus to prod China out of the 2008-09 recession leaked into some commodity markets. Authorities have upped deposit requirements for auction participants for upcoming auctions, an echo of restrictions on participation imposed in the 2009 auctions to cool off suspected speculation.

Corn prices at southern port of Huangpu in Guangdong Province has been on the rise from 1970 yuan per metric ton in early March to 2240 yuan per metric ton on June 22, a 14-percent increase. Prices have been rising in all regions.
Source: gdgrain.com
An analysis by Grain and Oils News proclaims 2020 as an historic transition for China's corn market from a buyer's market to a seller's market. This year is hailed as the "finale" for the temporary reserve price support program that accumulated a huge glut of corn that has been dumped back into the market since the program was ended in April 2016. The estimated 56 million metric tons remaining in the temporary reserve ahead of the May 28 auction is expected to be depleted by this year's sales. Subtracting the sales from the first four auctions, the temporary reserve should now be down to about 40 mmt.

Grain and Oils News reckons that China's use of corn now exceeds its production by a significant margin. The deficit has been filled by sales of reserves, but the market will now become tighter as the reserves are depleted. The analysis observes that domestic Chinese prices exceed the price of corn imported from the United States by about 500 yuan/mt for July-November.

A similar analysis posted on the BRICS market analysis site estimates that China's consumption of corn is 285-300 mmt for 2019/20 while 260 mmt was produced, a deficit of 25-40 mmt. However, the release of reserves and imports of corn and substitutes can easily fill that gap and allow private traders and processors to increase their inventories. BRICS presumes that all 56 mmt of temporary reserves and 13 mmt of other reserves will be sold in 2020. BRICS expects 10-20 mmt of corn, sorghum, barley and DDGS to be imported. With corn prices rising close to wheat prices, BRICS also sees more substitution of wheat for corn in feed in wheat-growing regions. BRICS attributes the rise in corn prices to disruptions of logistics and cautious sales by farmers due to covid-19 this year.

The Ministry of Agriculture and Rural Affairs CASDE balance sheet estimates production of corn in 2020 at 266.5 mmt and corn use totaling 285.5 mmt. CASDE expects 5 mmt of corn imports, leaving a deficit of 14 mmt for 2020/21, presumably to be filled by corn from inventories. CASDE estimates that domestic corn prices will be 1900-2000 yuan/mt and estimates the landed cost of imported corn at 1750-1850 yuan/mt after taxes. CASDE expects imports of corn and substitutes to rise in the second half of the year.

Analysts agree that demand from starch and alcohol processors is tepid, as profits and capacity utilization are low. Analysts see recovery of the swine sector boosting feed demand based on the Ministry of Agriculture and Rural Affairs' report of rising sow numbers. According to industrial feed output statistics for January-May 2020, feed output was up 3.1 percent from a year earlier. The report appears to be evasive in reporting swine feed statistics. Swine feed production in May 2020 was down 14.5 percent from a year earlier, but it had plummeted by 41.3 percent in October 2019 when swine numbers appear to have bottomed out.

BRICS mentioned fall army worms as a possible factor affecting China's corn supply in 2020, but CASDE cited good soil moisture in projecting a record yield of 6.4 mmt per hectare with no mention of army worms. An agriculture industry development report issued by the Chinese Academy of Agricultural Sciences (CAAS) on June 4 estimated that fall army worm infestations could destroy less than 2.5 percent of the corn crop--equal to about 6.5 mmt. The CAAS report estimated that swine production capacity would recover to at least 80 percent of normal by the end of 2020. CAAS estimated that the deficit in corn supply could be filled by reserves and by imports of corn and substitute grains.

1 comment:

Luke said...

Great post. China govt sold another 4mn tons this week. I'd also add that China not only sold 20mn tons over the last 5 weeks, but also offered the same amount. Rarely, if ever, has China sold the entire allotment of corn that they offered. They are also planning to sell another 4.1mn tons next week.

This suggests demand is very strong. What do you think is driving that? You suggest feed demand, but it still seems like there has to be something else, given that African Swine Fever isn't completely gone.