China's Corn Vacuum: That '70s Show Rerun?

If feels like the 1970s. A shadowy foreign government buyer is purchasing vast quantities of grain, boosting prices, and inspiring talk of a commodity super-cycle. 

The 1970s Russian "grain robbery" kicked off a bout of food price inflation that became a nagging problem throughout that decade. This time the "robber" is China's state-owned grain buyer, COFCO, buying up corn millions of tons at a time. Everyone knows the "robber" is in the house, but it's not clear whether he'll be satisfied with taking the candlesticks or grab the silverware as well.

The aggressive Chinese corn purchases caught USDA off guard. USDA's February WASDE report estimates that China will import 24 million metric tons of corn in 2020/21, up from 17.5 mmt estimated last month.  Back in October, USDA estimated that imports would be 7 mmt. 

Source: USDA Production, Supply and Distribution data.

The purchases also caught China's Ministry of Agriculture off guard. The Ministry's monthly "CASDE" report also predicted China's corn imports would be 7 mmt until they grudgingly lifted their estimate to 10 mmt in January. (It was left at 10 mmt in its February report issued today.) Last April, China's ag ministry predicted that China's corn imports would gradually rise over the decade to just under 6.5 mmt in 2029. 

In another reminder of the '70s, we're seeing significant rises in prices. China's corn imports are prompted by a steady rise in corn prices underway since early 2020. The average spot price reported by China's National Bureau of Statistics in late January 2021 was 60 percent higher than a year earlier. 

Corn futures prices on China's Dalian exchange converted to dollars per bushel have been at least double the Chicago futures price throughout the past year. The Chinese price rose 46 percent from July 2020 to February 2021, and the Chicago price rose about 58 percent over the same period. The Chinese price in dollars got an extra boost by a 9-percent appreciation of the Chinese currency against the dollar. The Chinese CASDE report commented that China's corn imports have boosted international prices, raising the cost of importing corn to China. 

Chinese price converted to dollars per bushel using the official daily exchange rate.

USDA watches foreign markets closely to prevent surprises like the 1970s "grain robbery," but there is no reliable data to watch in China. The rebuilding of China's swine herd--hyped to reassure Chinese consumers--is one factor boosting demand for corn. China's Ministry of Agriculture CASDE report attributes the tight corn market to the faster than expected swine recovery, large poultry inventories, and corn hoarding by processors and traders. The Ministry is covering up reports of a resurgence of African swine fever and other diseases and a breakdown in the breeding chain that results in poor quality sows that must be culled and replaced early due to low productivity. If the sector has really been in recovery for a year, why are hog prices, piglet prices and pork imports still as high as they were a year ago?

There are indications that the imported corn is refilling warehouses as well as pig bellies. In April 2020, a rumor was circulated in Chinese news media that authorities were contemplating purchases of 20 mmt of corn, 10 mmt of soybeans, and unspecified volumes of cotton, sugar and vegetable oil to replenish depleted reserves. The information appeared in state-run Futures Daily--identified in the title as a "rumor"--and was reported on many other sites. Reuters reported that three unnamed informants had told them about the import deliberations. According to the reports, officials were considering restocking commodity reserves to quell food security worries during the pandemic, fulfill the targets in the Phase One agreement, to take advantage of low prices in international markets, and to prevent prices from rising in the latter half of the year. It was noted that economic planners turned to the international market since China does not have enough of its own corn to refill reserves. 

The National Grain and Oils Information Center's lead analyst said private companies have been stocking up on corn to ensure they have enough feed on hand in case supplies are interrupted if the covid pandemic gets out of control again and necessitates shutting down roads and logistics. He cites a shrinking volume of new-crop corn still in farmers' hands, surging prices overseas and a devalued U.S. dollar contributing to high Chinese corn prices. At the same time, the analyst cited substitution of wheat, rice, and sorghum for corn and experiments with zero-corn feed rations as industry players cope with high corn prices.  

From May to September 2020 Chinese authorities held weekly auctions of domestic reserves that reportedly sold more than 55 mmt of corn. Authorities supplemented the corn auctions with sales of wheat and rice reserves as corn substitutes for feed mills and distilleries throughout 2020. The pace of domestic corn procurement is much faster than last year, according to data from the Chinese grain administration. Yet Chinese corn prices continue to rise.

What seems to be indisputable is that China's corn reserves fell to a low point in 2020. The 2020 auctions reportedly were the last of a 4-year campaign to jettison a massive stockpile of corn that had peaked at nearly a year's supply. In 2015--the last year of a disastrous price support program--it was reported that 125 mmt of corn was purchased by the program. That suggests that the government's warehouses bought up almost the entire corn crop in the northeast provinces where the program operated--an implausible amount. An educated guess: a massive check-up of grain reserves conducted in 2019 may have discovered the warehouses were already nearly empty, and the 2020 "auctions" may have been an accounting transaction to take phantom reserve numbers off the books. 

The UN's Food and Agriculture Organization just made "a massive downward adjustment to maize inventories in China" that shaved 54 mmt from its estimate of Chinese corn inventory by revising upward its estimates of China's feed consumption as far back as 2013/14. This suddenly makes the global grain S&D look tighter. 

China's import quota for corn was always presumed to be a ceiling on imports. Last April's "rumor" of plans for 20 mmt of corn imports seemed implausible at the time since it was three times the quota. Suddenly the quota is irrelevant, as China imported 11.3 mmt in 2020--4.1 mmt over the quota. How did this happen? More quota? subsidies? tariff waivers? Nobody knows. No expansion of the quota was announced for 2021.

Here are some unsubstantiated rumors floated in news reports over the past year:

• Additional special quotas of 7 mmt were issued to feed mills to tamp down price speculation in response to news of last summer's typhoon damage to the corn crop.
• A temporary "loophole" for some processors in Shandong Province allowed them to import additional corn at low tariffs without using import quota.
• The Chinese government issued 5 mmt of additional quota to COFCO to make purchases of corn--mainly from the United States--to restock reserves. COFCO got a subsidy, but had to return funds if their profit exceeded 30 yuan per ton.

China's corn import quota stipulates that 60 percent of the quota is allocated to COFCO, making this one company the dominant importer. Over 1000 Chinese companies applied for a share of the 2021 corn import quota, but they only get dribs and drabs of the quota. All of the rumors and anecdotes about Chinese corn purchases involve COFCO. Customs data show that Beijing-based companies (almost certainly COFCO) accounted for all the increase in corn imports last year.

The USDA reporting system for foreign grain sales has brought the COFCO buying spree at least partly into the open despite COFCO's efforts to keep it in the shadows. ProFarmer's newsletter reported last week that COFCO is taking advantage of loopholes to keep its purchases out of the USDA's reporting system until the grain is actually shipped to China. However, ProFarmer's informants suggest that the system is pretty much working: everyone knows that China needs a lot of corn and COFCO does not have a big enough operation in the United States to keep all the sales out of the reporting system. 

No one knows whether the Chinese purchases are a temporary boom or a "new normal." Is corn the new soybeans, or could the corn purchases stop as abruptly as they started? China has a history of frenzied purchases that were presumed to be the tip of the iceberg but turned out to be the edge of a cliff.