December 22, 2006

 

Testing time for China's corn industry
 

 

Beijing would soon need to reduce corn exports and import large quantities of grain to safeguard its food supply owing to dwindling stocks and a booming ethanol industry.

 

Despite a bumper corn harvest this year, prices continue to soar. China has been lately witnessing the same trend as the US where growing ethanol output has lifted Chicago corn prices to 10-year highs.

 

With the Chinese economy roaring ahead at an annual rate of about 10 percent, demand for animal feed and thus corn has been expanding at least at 3-4 percent a year, outpacing an increase in the country's grain production, industry officials said.

 

While many feel China could handle the grain situation if it puts an end to grain exports, this has not stopped feed mills from scrambling to obtain 2007 import quotas. This is because the rapidly expanding corn processing sector has been eating into available grain supply.

 

According to a Shanghai trader, the country might move from minimising its corn export next year to eventually importing huge quantities in two years time.

 

Though officially China is making only 1.3 million tonnes of fuel ethanol this year, some estimated it was churning out at least 5 million tonnes of ethanol, including food-grade ethanol.

 

Considering the current situation, the National Development and Reform Commission, the country's top planning body, has ordered local governments to stop approving new corn processing projects. The organisation now wants to encourage plantation of non-grain crops.

 

Incidentally, despite efforts by local suppliers to execute their contracts, China might not be able to deliver its 4-million tonnes contracted for export by March due to dwindling government stocks. The corn export programme thus seems to have fallen into rough weather.

 

The traders and officials estimated Chinese corn stocks, including state reserves, at 20-25 million tonnes, well below the 35.26-million tonnes target estimated by the USDA.

 

China has also embarked on a campaign to auction corn stocks. However, the auctions have been too small to turn around the grain prices. Agriculture vice-minister Zhang Baowen also said last week that China's grain output could only meet 97 percent of the nation's needs.

 

However, many still feel the only way to restore balance between corn demand and supply in China would be to stop exports.