China plans to purchase 5 million tonnes of corn for state reserves to boost prices after a record harvest, and may buy more if the melamine-contaminated feed scandal further hurts demand from poultry producers, according to traders on Monday (November 3, 2008).
State reserve firm Sinograin plans to buy from farmers in the northeast, where prices have declined by about 10 percent due to lower demand from corn processors.
If the 5 million tonnes purchase fails to support prices, the government may consider buying more, said an analyst at a government-backed think tank.
However, some traders said 10 million tonnes instead of just 5 million tonnes were required to effectively support prices.
Corn demand has weakened amid accusations that domestic feed was melamine-contaminated, which started a whole vicious chain of cycle that included the milk powder scandal, several tainted dairy products as well as the recent contaminated eggs discovered in Hong Kong.
The melamine scandal has hit farmers hard, and some poultry farmers have begun to slaughter their chickens as a result.
Egg consumption in some areas has dropped by 10-20 percent, and a bigger drop was reported in provinces where melamine-tainted feed has been found, said Sun Zhiqiang with China Feed Industry Association.
Guangdong province, one of the top corn consuming areas, has discovered melamine in livestock and fish feed. Sun said feed demand would be hit hard if more animal feed are found to be contaminated.
China, the world's leading egg producer, uses about 40 million tonnes of corn in chicken feed, nearly half the 90 million tonnes used for total feed production.
Corn prices have fallen below wheat in the past month, making substitution with feed wheat impossible.
China's export restriction have ensured sufficient domestic prices, keeping local prices lower than US prices despite a 46-percent slump in CBOT corn futures since July.
Chinese corn prices are only about RMB 100 cheaper than imported corn, therefore Beijing's corn purchases could boost domestic prices just enough to make US corn imports attractive, said feed officials.
However, a reduced poultry feed demand meant that the melamine scandal could continue to pressurise Chinese prices below the point where imports are profitable.
China's feedmills are now applying for 2009 import quotas, although many failed to use this year's allocation. The only exceptions this year were feedmills in the southwestern province of Yunnan, where corn is more cheaply imported from Myanmar and Laos.
So far, over 3,600 tonnes of melamine-tainted feed have been destroyed, and 238 illegal feed producers were shut down. Still, government officials said that China's animal feed supply was largely safe and that only a small number of operators had deliberately added melamine to feed, often using it as a cheap filler in order to cut costs.
China is expected to harvest a record 156 million tonnes of corn this year.