Rising corn prices push China closer to imports

 

 

Spiralling corn prices in China, after a poor harvest and government stockpiling, could see major imports from the world's most populous nation for the first time in four years.

 

According to analysts and traders, feedmillers are in talks with suppliers and some may be close to signing deals, adding that any purchases would strengthen benchmark CBOT futures as Chinese imports would bring much needed fresh demand to amply supplied global market.

 

CBOT corn jumped 3% on Wednesday (April 7) after talk of Chinese purchases surfaced, but is still down 15% on the year.

 

China's animal feed industry, one of the largest in the world, is likely to buy corn from the US and South America, although the government will keep tight control over shipments through rigid quarantine standards and import quotas.

 

Prices are completely in favour of imports, with US corn costing around US$240-245 a tonne, including cost and freight into China, compared with US$284 quoted in the domestic market.

 

As well as a poor harvest, China's domestic price rise was driven by Beijing's policy of offering subsidies to state firms and feedmills to buy corn in the northeast, aiming to help rural farmers boost incomes.

 

Output of corn in China, the world's No. 2 largest producer and consumer after the US, was estimated at 138 million tonnes in 2009, according to reports, down from the previous year's 165 million tonnes due to drought in major growing areas in the northeast.

 

This could drag down China's closing stocks to around 49 million tonnes at the end of this year, from 53 million tonnes last year, as the country's annual consumption is forecast by the USDA to rise nearly 5% to 159 million tonnes.

 

Corn is processed into feed for chickens, pigs and fish and China is the world's biggest consumer of pork, accounting for nearly 50% of the world's estimated output of 98 million tonnes.

 

Meanwhile, traders in the US said Chinese feed makers have applied for permits to import small quantities of corn in recent weeks, but the talk on Wednesday included a major commercial buyer seeking government permits to import up to 2 million tonnes.

 

China allows corn imports through quotas, which stand at 7.2 million tonnes for 2010, of which 40% has been allocated to some 1,000 private companies. In addition to quotas, China controls imports through a strict procedure for bringing in genetically-modified (GM) food.

 

Chinese traders said feedmills in the south were negotiating contracts because of the high cost of transporting grain from the north, where much of the country's supplies were located. Bad weather in the northeast had also delayed transport to major consuming areas in the south over past months.

 

China has been self-sufficient in corn and it has been selling its surplus to top buyers such as Japan and South Korea, but the country started buying smaller quantities in recent months from Southeast Asian exporters, signalling tight supplies in the domestic market.

 

Another sign of China's robust demand and high prices is in imports of dried distillers grains with solubles (DDGS), a by-product of corn ethanol which can replace corn and soymeal in animal feed. The nations' imports of DDGS could rise to more than one million tonnes this year, up 54% from last year.

 

China's corn purchases could put life back into Chicago corn futures, the benchmark for the global industry, which dropped to a six-month low last week as bearish USDA stocks data weighed on the market.

 

Additionally, USDA pegged US corn stocks at the beginning March at 7.694 billion bushels, above an average of analysts' estimates for 7.496 billion.