May 31, 2007

 

High corn prices blamed for China's rising pork costs

 

 

The skyrocketing price of China's pork has turned the spotlight on a brewing problem of soaring corn prices which has risen 17 percent since May 2006 despite a bumper harvest.

 

The increase has reflected the growth in China's corn processing industry, and raises the possibility it could turn into a large corn importer.

 

The State Council said on Wednesday (May 30) that China will "strictly control" blind expansion of the corn processing industry to regulate the escalating price of pork.

 

The industry-including manufacturing of corn sweeteners and ethanol, including food ethanol-expanded to 70 million tonnes in 2006, up from 50 million tonnes the year before. The industry consumed 35 million tonnes last year, 10 million more than in 2005.

 

A grain analyst said some areas are still hoping to expand corn processing due to good profits but it remains uncertain as to how many of these projects have actually started and how many remains on the drawing board.

In a visit to a Shanxi pig farm this weekend, Chinese Premier Wen Jiabao has pointed the rising corn prices and widespread pig disease on the increase of pork costs.

 

High grains prices-along with a pig shortage caused by disease-helped lift pork prices by 29 percent annually in April.

 

Pork prices have hit 10-year highs, sparking Wen's pig tour amid fears that inflation would surpass the government target and that high prices would hit the poor that could trigger unrest.

 

China aims for 3 percent inflation growth this year, but economists say inflation could rise further after climbing 3.3 percent in March and 3 percent in April on an annual basis. Goldman Sachs sees annual inflation could reach 4 percent during the summer months.

 

Grains prices began to drive inflation figures in November, after a glitch in wheat sales from reserves in autumn and as corn consumption rose. China responded with regular wheat and rice sales from reserves, stabilising the prices of those grains, but did not sell corn.

 

Chinese corn prices are now up by 30 percent compared with two years ago, and most industry analysts believe national reserves are low with the exact level is still a state secret.

 

China issued only 1.5 million tonnes in corn export quotas this year, compared with over 5 million tonnes of quotas last year. More quotas would only be issued if corn prices moderate and feed demand stays sluggish.

 

China exported 3 million tonnes of corn in 2006, and 3.5 million tonnes in the first four months of 2007, mostly delayed shipments from last year.

 

It has also imported corn in small lots totalling 71,598 tonnes since January 2006 to supply corn sweetener and feed producers.

 

Heavy corn imports have alleviated by pig disease which kept corn demand for feed relatively weak this year. Corn demand for feed could fall by 2 million tonnes this year, to 95 million tonnes.

 

Higher corn prices have led planners to shift the national biofuels plan away from grains in favour of non-food biomass, and crack down on investment flows into the corn processing sector.

 

UBS analyst Jonathan Anderson said in a May research report that shrinking agricultural land, less clean water and rising food consumption in China could lead the country's relaxation of import target by 5 percent of its grain requirement.

 

He said the country's corn and other grains imports have no clear indication as to when it would increase but on a medium-term, China's greater import penetration would lead to the country's willingness to import fuel, its current account surplus and its status as a net exporter of all food, not just grains.