July 27, 2012

 

China sees better corn crop expectations

 

 

Favourable weather in China's corn regions has revised higher forecast that it will have a bumper September output, and lesser demand from the corn processing sector will also ease stock pressure.

 

Anticipating a bumper harvest, some private Chinese feed mills are selling back some of the cargoes they imported in the first half of the year from suppliers in the US, where drought has driven prices to an all-time high.

 

"Corn is growing pretty well both in the northeast and northern areas, although some parts were hit by rainstorms. Yields this year will be better than last year," said Li Qiang, chief analyst with Shanghai JC Intelligence Co. Ltd.

 

High domestic grain prices since last year turned China into a net importer of corn, wheat and rice in the first half of this year, well before the global grain price rally driven by the worst drought in decades in major exporter the US.

 

The front-month Dalian corn price has risen 6.4% from the start of June while US corn futures are up more than 50% during the same period.

 

The moderate increase the price of corn, the major ingredient in animal feed, is not expected to boost Chinese pork prices, a key factor in food inflation.

 

The surging costs of soy, the raw material of soymeal, is expected to add to livestock costs, but meal accounts for less than 20% of the total composition of feed.

 

China is the world's top soy importer, with nearly half of its annual imports coming from the US, where soy prices have also hit a record high.

 

Chinese feed mills have been using cheap feed-grade wheat as a substitute for corn, and analysts expected the wheat replacement rate this year to be around the same or even higher than the 23 million tonnes of last year.

 

A good wheat harvest last month has also put pressure on domestic wheat prices with current feed wheat prices about RMB300-400 (US$47-$62) per tonne cheaper than corn.

 

Corn processors, blamed by Beijing for expanding rapidly and putting pressure on supplies, have been making losses since late last year because of weak demand for finished products, including starch, starch syrup and alcohol.

 

"We are running at 50% of capacity. Sales of products are poor," said one manager with Shandong RZBC Group, which produces citric acid from corn starch.

 

When running at full capacity, the industry utilises more than 70 million tonnes of corn a year, analysts said.

 

"The industry is likely to consume less corn this year due to lower starch production. Many plants are shutting down longer, which is rare during the peak consuming season. Some plants are having cash-flow problems after months of losses," said one industry analyst with an official think-tank.

 

Capacity utilisation in the industry was less than 40% in June, 10% lower than the same period of last year, said the China National Grain and Oils Information Center (CNGOIC).

 

But demand from livestock breeders remains healthy and CNGOIC raised its consumption forecast from the sector to 121 million tonnes in 2012/13 (Oct/Sept), up 4.3% on-year, due to larger hog stocks.