March 29, 2012

 

China's Q2 corn prices seen to drop

 

 

China's Q2 corn prices may go downward given the relatively high level of prices, raising stocks from imports, the expected increase in the local sowing land, as well as wheat's rising replacement for corn, according to Chen Li, an analyst with CES Futures.

 

Since November of last year, corn prices in northeastern areas of China, the country's biggest corn production base, have cumulatively surged more than RMB280/tonne (US$44.36) or 10%, mainly pushed up by state purchases, hikes of corn purchase prices by deep-processing companies, and farmers restricting on sales.

 

However, as corn futures traded on the Dalian Commodity Exchange have refreshed new highs recently, investors should be more prudent in corn trading, Chen notes.

 

The planting area forecast for soy and corn is one of the important factors affecting the crops market in the March to April period. The international agricultural commodity market is focusing on the USDA's release of planting area projections for the two crops, which is due at the end of this month.

 

Currently, corn, soy and wheat futures on the CBOT have a strong correlation before the spring planting. Historic data showed that the price ratio between soy and corn usually maintains at 2.2 to 2.3 while between corn and wheat it is 0.6 to 0.9, compared with the current 2.04 and 1.03, respectively.

 

The higher profits for corn planting are likely to stimulate farmers to increase corn planting area and reduce soy acreage.

 

China's corn imports reached 1.3 million tonnes in the first two months of this year, equivalent to 75% of the country's total corn imports last year.

 

Meanwhile, the import cost price for corn of the state stockholder, the China Grain Reserves Corp., stood at around RMB2,200/tonne (US$348.57), far lower than that in the domestic major producing areas.

 

The increasing corn imports are expected to put pressure on domestic corn prices.

 

The corn planting area in Northeast China's Heilongjiang province is anticipated to reach 6 million ha in 2012, up 2.27% over the previous year, according to the provincial agricultural department.

 

Heilongjiang has been adjusting its planting structure by slightly reducing acreage for some wheat and soy crops with lower unit yields to increase the high-yield corn area.

 

This year, Chinese farmers are strongly inclined to plant corn, which promises higher profits than soy crops. The country's corn planting begins from May.

 

China's wheat crops are growing well and the downstream flour and bran prices are remaining stable. Domestic corn prices have increased for more than three months and even topped the earlier high point. As the price parity between corn and wheat is narrowing, wheat's replacement effect for corn is strengthening significantly.

 

Meanwhile, the country's development plan for the grain processing industry during the 2011-2020 period also stipulates that the government will strictly control the blind development of deep processing of corn for non-food use.

 

Currently, China's deep processing industry consumes 28.2% of domestic corn supply, surpassing the upper limit of 26% set by the government.

 

Chen projects that corn prices will correct in the May to June period when farm produce prices are expected to move to a seasonal downward phase after a rally in the first quarter.