September 18, 2009

China's huge corn stockpiles are likely to decline as a drought threatens to cut this year's harvest, with the government ready to use export subsidies if supply worries fail to keep domestic prices upbeat.

 

The drought in China's main corn-growing regions may cut this year's harvest by 12 million tonnes, or 7.5 percent, from 160 million tonnes in 2008, said Yue Guojun, assistant president of China's largest grain trader and corn processor, COFCO, on the sidelines of the third International Corn Industry Conference in Dalian, China.

 

Despite the severe drought, a larger planting area this year would ease the impact. It is unlikely to be felt by consumers as China has built a reserve estimated at 36 million tonnes that can be put on the market if prices rise.

 

Yue added that China do not see any need for imports in the coming years as the country is basically balanced in corn supply and demand.

 

Good sales of corn starch and alcohol indicate corn processors are operating at higher rates than in early 2009, he said. Consumption is likely to be of the same levels next year as there has been no expansion of processing capacity this year.

 

Meanwhile, demand from feed mills could increase as the US-China trade dispute could weigh on chicken imports, causing China's domestic poultry inventories to rise.

 

During the conference, Yue also said the Chinese government may still consider procuring corn from the northeastern regions to support prices against the negative impacts from the global economic downturn. He added that the corn processing companies should participate in the corn reserve plan to reduce their distribution cost and in the meantime lighten the government's inventory pressure.

 

To stabilise the corn market, China had purchased 40 million tonnes of corn for state reserve last year, accounting for about 24 percent of that year's total output.

 

On the other hand, Liu Yonghao, chairman of the country's leading feed mill, New Hope Group, said China needed to start preparing its corn market for imports.

 

He said the market should expect to see a turning point in about three years' time due to solid demand from feed mills and processors. He added that the Chinese government should study corn policy and be prepared as China's feed demand will continue to grow at an average of 5 percent annually amid increasing urbanisation.

 

With the US$585 billion government stimulus package helping to lift workers' and farmers' incomes, Chinese diets will include more meat, dairy products and eggs, Liu said.

 

Liu said 60 percent of China's corn was allocated for animal feed and 25 percent was processed, leaving little for human use. New Hope alone needs over 15 million tonnes of corn a year. He said the company will consider imports if the US corn price and the freight charges enjoy a price advantage over Chinese corn.

 

Meanwhile, Li Ming, COFCO's assistant president and general manager of COFCO Agri Trading and Logistics, dismissed Liu's comments as one company's opinion.

 

He said the Chinese government will not relax its control because the government is aiming at 95 percent self-sufficiency. If China imports more corn, it will drive up the international price. At the same time, the US is also using more corn for ethanol production.

 

He said the government has started an export programme to ease the pressure on its stockpiles but the price difference between domestic and international markets meant no deals had yet been done.

 

Traders said the government was offering subsidies of RMB250 (US$36.61) per tonne on up to two million tonnes of exports, allocated to COFCO and Jilin Grain Group.

 

However, a senior trading manager with an international trading house said based on Dalian corn prices, even with the government subsidies, the price is still at least US$10 per tonne higher than US corn to South Korea and Japan.