December 3, 2007

 

China corn prices may not fall much despite harvest

 

 

China's corn prices are unlikely to fall much despite more corn coming to market during the current harvest season.

 

Farmers' and traders' reluctance to sell corn amid overall inflation expectations will continue to keep corn prices at current high levels ahead of the Chinese New Year holiday in early February, according to industry participants.

 

"There will be a wrestle between farmers and (corn processing) plants ahead of the (year-end) holidays," said Shen Wei, a department manager at COFCO China's cash corn prices have been rising during the past few weeks due to limited availability despite the ongoing harvest.

 

Processing plants have rushed into the market to compete for new corn with higher bids, but farmers have not been selling actively as they expect prices to rise further.

 

A rise in food prices is the main cause of China's high consumer price index growth, which rebounded to 6.5 percent in October, matching August's almost 11-year high.

 

A severe drought earlier this year pushed China National Grain and Oils Information Centre, a government think tank, to cut its forecast for corn output this year to 148 million tonnes from earlier expectations of 149 million tonnes.

 

However, many private consultancy firms and foreign traders expected corn output to be of the same level or even lower than last year's 145.48 million tonnes.

 

A delayed harvest in northeast major producing regions on warmer weather and tight transportation, a result of surging crude oil prices, also helped to boost the corn prices.

 

Corn prices were driven up by industrial processing plants' thirst for raw materials, while rising prices in the downstream sector allow the plants to buy corn with higher prices.

 

For example, glucose prices have risen 15 percent to around RMB3,000/tonne in October from a month ago.

 

Xiwang Sugar Holdings Co., China's leading crystallized glucose producer, currently has corn stocks of 70,000 tonnes to 80,000 tonnes, which can only meet its demand for less than a month.

 

"We are unlikely to purchase a large volume of corn due to the high prices, (but) it would be best if we have stocks of 300,000 tonnes to 400,000 tonnes," said Sun Xinhu, head of business development at the company.

 

He said the company will buy more corn if prices fall because of the large amount of corn coming into the market.

 

The average corn purchase price has risen 15 percent to RMB1,541/tonne from RMB1,339/tonne at the start of this year, according to data from the Ministry of Commerce.

 

The slow recovery of feedmeal demand will continue to support corn prices.

 

Feedmeal output increased by 20 percent from a year earlier in October, mostly from poultry feedmeal, according to data from China Feed Industry Association.

 

But profits of feedmeal plants have been dwindling due to high corn and soymeal prices.

 

A manager with a small feedmeal producer in Shandong province said his company would further reduce the use of corn in its feedmeal prescription as corn prices are too high.

 

Industry participants don't expect corn prices to have much room to rise further before the Chinese New Year.

 

Prices have almost reached traders' price targets, and the harvest start from early December in northeast producing regions will put some pressure on prices, said a trade manager at a big feedmeal enterprise.

 

Meanwhile, China has stepped up its tightening measures to control rising food prices.

 

CNGOIC said Thursday China will sell at least 2 million tonnes of corn from state reserves in non-producing regions to stabilize domestic feedmeal prices.

 

Agricultural Development Bank of China will also issue new measures to urge enterprises to speed up the sale of corn reserves to pay back their loans, it said.

 

The government "will definitely release corn to the market continuously" and this will have a psychological impact on the market, said Fu Jianjun, a researcher at Miracle China Futures Brokerage.

 

Besides that, the government has also been increasing the volume of wheat it auctions weekly, and these measures have caused the market's concern of further tightening policies.

 

Corn futures contracts traded at Dalian Commodity Exchange have been falling this week, along with other agricultural products futures, with the benchmark May 2008 contract settling at RMB1,756/tonne Friday (November 30), down from RMB1,800/tonne at the start of this week.