September 23, 2011


China's corn shortages bolster use of feed wheat


China's corn imports for animal feed sector is likely to soar in the next crop year, but its purchases will be limited by the amount of wheat it uses for rations from its large reserves.


With strong domestic demand eating up what is forecast to be a bumper harvest, and state reserves running low, corn prices have shot up in China, stoking pork prices that in turn have helped propel overall inflation to a three-year high of 6.5% in July.


With corn reserves estimated at less than one month's consumption, traders say Beijing will have to abandon its self-sufficiency policy, take advantage of relatively low US prices, and import large volumes.


It will also have to start feeding its animals more wheat, tapping into reserves that at the end of the 2011/12 crop year are seen at a copious 64 million tonnes.


"China has massive undisclosed stocks of wheat which will be helping it offset some of the deficit in corn," analysts said.


China does not release figures related to grain stocks or consumption, but traders expect it will use an additional 15 million tonnes of wheat for the livestock industry on top of the five million it regularly uses.


Diverting more wheat for animal feed could be bullish for prices, as China is estimated to hold almost a third of the global surplus.


Livestock breeders worldwide have turned increasingly to wheat this year since US corn became more expensive than wheat for the first time in 11 years in April.


The landed cost of US corn in China is around US$340 a tonne, including cost and freight, while Australian feed wheat can be supplied to the country at US$295 a tonne, traders said.


US corn prices have fallen around 15% from a record of nearly US$8 a bushel in June. Chicago prices recovered from a five-week low on Monday as rumours swirled about China's purchases.


"Domestic supply will remain tight, so any correction in US corn prices will be a good import opportunity," analysts said.


China's state corn stocks are estimated at just 12 million tonnes, or about one month's consumption. Beijing likes to maintain reserves equivalent to three months' consumption to be on the safe side.


Food security concerns are behind China's drive to maintain self-sufficiency in corn, but with demand for grain likely to continue to dwarf supply, relying on the harvest appears to be fading away.


An executive with a state-owned trading house said China would become a regular corn importer in the future, adding that the increase in this year's harvest - 4.25 million tonnes - could not meet demand growth estimated at 11.6 million tonnes from 2010.


Some analysts believe China is likely to hit the market by March for a bulk of its corn purchases for 2011/12, giving it time to assess its needs after the domestic crop is harvested.


"I think even US$7 a bushel is too high for China, by February or March they will have a much better idea about prices and the supply gap," experts said.

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