February 17, 2012
US faces strong competition with Argentina's corn for China
As China steps up its purchases of corn after a deal with Argentina, the US is challenged with a new strong competitor.
Relentless demand has driven corn prices in China, the world's second largest corn consumer, to an eight-month top this week, raising concerns over food inflation. Dalian corn , on track for its third monthly gain, jumped to its highest since mid-June on Tuesday (Feb 14).
Argentine and Chinese officials signed a sanitary protocol on Wednesday, opening the door for trade in corn products after months of negotiations, according to the South American country's agriculture minister.
"South American supplies into China will erode demand for US corn," said Ker Chung Yang, an analyst at Phillip Futures in Singapore. "It is likely to be bearish for US corn prices as it shows that demand from China is shifting away from the US market."
US corn futures slid to a three-week low on Thursday, falling for a third straight day. Corn futures have been losing ground to soy this week on inter-market spreads as traders fret that US farmers might not plant enough soy acres this spring.
China, which accounts for half of the world's pork consumption, has turned to the world market in recent years to import corn to fatten livestock, threatening to squeeze global supplies. It already buys more than half of the soy traded in the world.
The country's purchase of more than three million tonnes of US corn last year to refill its depleted state reserves sparked global concern that the country - the world's second-largest economy - may become a large importer as it did in soy.
To take advantage of China's supply deficit, Argentine officials had aimed to strike a deal with the Asian giant before the harvest of the 2011/12 crop, which was hit by a drought in January.
A government source in Argentina said corn output should total at least 22 million tonnes, despite a drought earlier this season. The USDA forecasts Argentine corn production of 22 million tonnes and exports of 14 million.
Chinese traders said the agreement was unlikely to result in large volumes being shipped from Argentina to China in the weeks ahead partly due to uncompetitive prices.
"Chinese buyers have more choice now," said one Beijing analyst, referring to the agreement. "But we don't expect any import in the short term, some mills could be interested to buy on a trial basis."
A trader in Beijing cited higher South American values as a key constraint.
"Argentina's price is about the same as what is offered in the US Also for China, it is not the right time to import," he said. "Argentina allows only a certain volume of exports by issuing export quotas. There may be a chance for China to buy a small volume, but not a very big one."
The US corn stockpile looks to shrink this year to its smallest size in 16 years, down 5% from the previous forecast to 801 million bushels, according to a USDA report.
China turned into a net corn importer since 2010 from a major exporter in 2002 and 2003.
USDA expects China to quadruple its purchases of corn in the coming decade as its demand grows.
In a 10-year outlook, USDA said Chinese soy imports would rise by 59%, to 90 million tonnes, by 2021. A quarter of the US soy crop goes to China, the No. 1 customer for US farm exports.