November 4, 2011
China's record corn output fails to meet demand
China harvested its seventh record corn crop in eight years, but that is still not sufficient to meet feed demand, potentially leading to a fivefold gain in imports, according to a Bloomberg report.
Production reached 189.2 million tonnes in the harvest that began in September, up 6.7% from a year earlier, according to a survey of growers in the seven main producing regions carried out by Geneva based SGS SA. Imports in the marketing year that began last month may jump to five million tonnes from one million tonnes, according to the median estimate of 10 analysts and traders surveyed by Bloomberg.
While the supply predicted in the SGS survey would exceed the USDA's estimate by more than seven million tonnes, rising imports show farmers are failing to grow enough grain for livestock feed. The fivefold expansion in China's economy in the past decade reported by the World Bank spurred a change in diets. The dairy herd almost tripled since 2000, and per capita pork consumption in the nation of 1.34 billion people rose 26%, USDA estimates show.
"It's an amazing crop, but demand is just too strong," said Dan Cekander, the director of research at Newedge USA LLC in Chicago, who toured corn fields in Jilin Province, the top grower, during September. "Everybody has been projecting a record crop, and yet domestic prices are historically high, and the Chinese government just bought US corn."
Corn futures on the CBOT have gained 3.9% to US$6.54 a bushel this year and averaged US$6.90, heading for the highest-ever annual figure. The grain will probably reach US$7.25 in the first quarter, Cekander said. Prices in Jilin jumped 16% and touched a record CNY2430 a tonne (US$9.67 a bushel) on September 19, according to Shanghai JC Intelligence Co., the nation's biggest independent agricultural researcher.
The USDA announced October 13 that China bought 900,000 tonnes of corn, the most in a single day since a 1.45 million tonne purchase in 1994.
Corn has outperformed this year's 13% drop in the Standard & Poor's GSCI Agriculture Index of eight commodities and the 6.9% decline in the MSCI All-Country World Index of equities. Treasuries have returned 8.8%, Bank of America Corp. indexes show.
Chinese demand rose 50% since 2000 as output gained 38%, USDA data show. Only the US grows and uses more. China, which became a net importer for the first time in 14 years in 2010, is "entering a golden age for consumption," Morgan Stanley analysts led by Hussein Allidina said in a report October 25. They expect an average of US$7.25 in the 12 months that began September 1, from US$6.47 a year earlier.
Prices may not accelerate as much as anticipated because of slowing economic growth. Corn demand rose 1.1% in 2009, the least in six years, as nations contended with the worst global recession since World War II, USDA data show. Corn fell 18% from this year's high for a most active contract of US$7.93 in Chicago on June 9.
Plunging wheat prices also may help contain corn costs as farmers switch to cheaper supplies for feed. Corn trades at a premium of US$0.17 a bushel, compared with an average discount of US$1.83 in the past five years, data compiled by Bloomberg show. Wheat use in feed will expand 9.5% to 124.2 million tonnes, compared with a 1.4% gain in food demand, the London based International Grains Council estimates.
Weaker growth could be compounded by a continued expansion in output. Farmers surveyed by SGS said they will plant 4.6% more corn next year, after a 6.1% increase in 2011. The survey included interviews with 305 farmers in the seven-province northeast region that accounts for about 68% of the nation's output.
More supply may help ease inflation that reached a three year high in July, fuelled by a 57% jump in pork prices. Consumption of the meat in China, which produces about 50% of the world's supply, will rise 3.5% to a record 51.56 million tonnes in 2012 from a year earlier, USDA data show.
China became the largest buyer of US farm products in 2010. The nation purchased 1.98 million tonnes of US corn for delivery before August 31, 2012, six times the quantity a year earlier, USDA data show. An additional 4.7 million tonnes was sold to unknown destinations and 1.1 million of that amount may be to China, Newedge's Cekander said.
"In the last few years, the government auctioned off some of its reserves to cool prices and hasn't been able to fully replenish them," said Li Qiang, the managing director of Shanghai JC Intelligence. "China importing corn is not a short- lived event. It's a medium to long term trend."
Chinese imports may reduce global stockpiles more than expected before the Northern Hemisphere harvests. The USDA on October 12 predicted a 5.1% drop in inventories to a five year low of 123.2 million tonnes. The agency will update its forecasts November 9.
Production in China will likely fall 11 million tonnes short of demand by 2015, Li Xigui, the deputy head of grains at the state run China National Grains and Oils Information Centre, said that importing corn to make up the deficit would rank the country as the world's second biggest buyer after Japan.
Agricultural production faces "grave challenges," Fang Yan, a deputy director at the government's National Development and Reform Commission, told that increasing urbanisation, changing diets and higher production costs make ensuring food supplies more difficult.
The country may need to import as much as seven million tonnes of corn and four million tonnes of lower quality wheat next year to feed its hog, poultry and dairy herds, said Dan Basse, the president of AgResource Co., a research company in Chicago.
"China's record harvest still doesn't equate to a surplus because the government has to replenish depleted inventories," said Troy Lust, a senior risk manager for commercial grain at INTL FCStone Inc., a commodity brokerage in West Des Moines, Iowa. "The one thing that could derail the Chinese economy is food insecurity, and they will do whatever is needed."