June 8, 2007

 

China corn output up as demand soars; shunting soy

 

 

China's farmers are shifting acreage from soybeans to corn, as demand for the grain from industrial users soars, leaving the nation in need of increased soy imports to feed its livestock.

 

Corn and soymeal, made by crushing soybeans, are used primarily as animal feed, but corn has attracted a premium in recent years because of the high oil price and corn's role as a source of alternative energy in biofuels. Food processors are also sucking up more of the grain as they substitute high-priced sugar with starch-based sweeteners for food and drink.

 

The Chinese government has tried to limit the industrial use of corn. Citing food security concerns, it has encouraged food processors to substitute corn with sorghum, sweet potatoes and cassava, but too little effect: demand is still rising and prices are up some 20 percent from this time last year and almost 30 percent since the beginning of 2007.

 

"The main culprit is the rising crude oil price," said Gu Lifeng, general manager of Cofco Maize Co, a unit of major Chinese grain trader COFCO Ltd.

 

This price signal has fed through to farmers, who are expected to produce 3.2 percent less soy this year and 1.0 percent more corn, according to a monthly report from the China National Grain and Oils Information Centre released Wednesday (Jun 6). The centre, a government sponsored think-tank, is forecasting 2007 corn output to rise to 147 million   tonnes, on a 2.5 percent increase in area planted, and soybean output to fall to 15 million tonnes, on a 5.5 percent cut in acreage.

 

China has completed most of its soybean and corn plantings for the year, although some more corn will be sown after the wheat harvest is completed in June. The two crops have similar planting seasons and compete for the same agricultural land.

  

Corn to grab more soybean acreage

 

About 68 percent of corn produced in China is currently used as animal feed, with another 25 percent going into the production of ethanol, starches and sweeteners. The remaining 7 percent is consumed directly as food.

 

The volume of corn processed for industrial use--which includes biofuels and food processing --was nearly 35 million tonnes last year, versus just over 25 million tonnes in 2005, according to data from the National Bureau of Statistics.

 

Even so, China has the ability to handle twice as much, with its annual corn processing capacity rising to 70 million tonnes in 2006 from 50 million tonnes a year earlier, said Xie Fuzhan, commissioner at the statistics office.

 

Although the central government has issued guidelines to curb over-investment in corn-based ethanol projects, corn demand from the ethanol industry has been rising because local governments have failed to comply, said Wang Jimin, a researcher at the Chinese Academy of Agricultural Sciences.

 

Corn use in the starch industry is also expected to grow as Chinese consumers get richer and eat more processed foods, fuelling rapid growth in the food processing, beverage and catering sectors, said the US Department of Agriculture in its April report.

 

Industrial demand for corn is likely to reach 38 million to 40 million tonnes in 2007 and 45 million tonnes in 2008, largely supported by this rise in demand for starch, said Liu Xinhua, a trader at Great Wall Futures Co.

 

As crops such as soybeans are shunted aside to meet growth in corn demand, imports will rise.

 

"Imports of soybeans will further increase, likely at an annual growth rate of 7 percent, as the demand for animal feed is strong," said Cui Xiaoli, a researcher at the State Council's Development Research Centre.

 

Conversely, China's once-abundant corn supplies will be insufficient to meet domestic demand in the medium term, cutting into exports. China had issued a corn export quota of 1.4 million tonnes in March, which will expire at the end of the year, but further quotas are unlikely to be issued for the rest of 2007, observers said.

 

"Even if there will be more quota issued, it can't exceed 2 million tonnes," said Li Jun, deputy manager of the import and export unit of Jilin Grain Group Co., another major corn exporter.

 

Weather conditions until the October corn harvest will be crucial to price stability. A harvest of around last year's 145 million tonnes should see prices stabilise or move slightly lower, but weather problems and a reduction in the crop size to below 130 million tonnes could see prices surge by up to 200 yuan a tonne, said Gu at Cofco.