September 10, 2008

 

Traders want exports opened up as China reaps bumper harvest

   

 

China's grain belt provinces are lobbying to resume exports following this year's bumper corn and wheat harvests, but central planners worried about inflation and food shortages seem unlikely to relent.

 

A record corn harvest expected next month, coupled with lower than expected summer demand from processors and pig and poultry breeders, could drag prices below farmers' break-even point, discouraging them from planting as much next year, officials in major corn-growing regions warned.

 

They are lobbying for authorities to allow exports of excess grain in order to support prices, and are joined by traders saddled with overflowing silos after a near-record wheat harvest in the world's biggest producer of the grain.

 

China was at one time the second-largest exporter of corn before it halted exports this year for fear of fuelling domestic inflation at a time when global prices were surging. Resumption in sales could weigh on benchmark US corn prices, which have already slumped by nearly a third since late June.

 

Instead of re-opening the door to exports, Beijing will continue to buy corn from farmers for reserves in order to stem the decline in prices after next month's harvest, traders said.

 

Government reserve manager Sinograin bought more than 6 million tonnes of corn from the 2007 harvest to support prices in the northeast and about 40 million tonnes of wheat after the second-largest harvest ever in May, a trade source at a state-owned trading company said.

 

China exported 2.3 million tonnes of wheat last year, more than double that in 2006; cheap wheat drove a five-fold increase in exports of flour.

The corn harvest is expected to come in at a record 156 million tonnes, up 2.7 percent from last year, as better weather brought higher yields, despite a slight drop in planted acreage.

 

China has only allowed corn exports to Taiwan and North Korea this year, and that trickle of trade is expected to continue.

 

Grains to meat

                       

Wheat is so cheap that it is being used for poultry and pig feed instead of corn, while a 20-percent fall in demand for chicken feed compared with last summer has also cut corn demand.

 

Curbs on corn-processing industries, whose rapid expansion severely constricted corn supply in the last two years and a higher export tax on products such as starch and flour, have squeezed margins.

 

A record sugar harvest has also reduced demand for corn sweetener.

 

China closed many polluting corn starch plants near Beijing to ensure cleaner air during the Olympic Games.

 

Beijing also curbed new investment into corn processors, most of which were located in the grain belt provinces in the northeast.

 

But instead of selling grain cheaply to feed mills in the south, these provinces are trying to develop their own meat industry, to get more value out of the grain they produce.

 

Jilin governor Han Changfu said last month the province would transform itself into a "meat storage house" from a "grain silo" and try to export more high-value poultry.

 

Second-largest corn producer Heilongjiang has an ambitious plan to almost triple pork production in five years.

 

"After the central government banned more corn-based ethanol projects, the meat industry is the only solution for local governments to boost tax revenues," said a trader in Jilin.