November 3, 2011
China's GM corn on the cards
An eFeedLink Hot Topic
By David LIN


Facing corn production limitations and a hungry market with growing appetite, China does not have many options - controversial genetically-modified (GM) corn could be the easiest way.


In late May 2011, China Grain Reserves Corporation (Sinograin) officially announced its purchase of one million tonnes of corn from the US, which reached the port of Zhejiang in June. Based on CBOT corn future prices during that time period, the estimated import prices were about RMB2,758/tonne, RMB388/tonne higher than locally-produced corn.


Sinograin said that the US corn imported by its Zhejiang and Guangdong subsidiaries is used to rebuild state reserves rather than as animal feed. Such large import purchases pointed to two facts - China's internal corn supply has reached critically low levels, and that domestic corn prices are poised to rise further.


From exporter to net corn importer


China is the world's second largest corn producer and used to be the No. 2 corn exporting country. According to China's custom statistical data, China's corn export was as high as 16.4 million tonnes in 2003. It dropped drastically to 270,000 tonnes in 2008 and reached no more than 130,000 tonnes in 2009.


On the other hand, China's corn import has been rising rapidly. It reached 65,400 tonnes in 2006 from under 10,000 tonnes in the previous years. It was in the same year that Xiwang Group imported 50,000 tonnes of corn to alleviate the supply crunch in China. This had paved the way for an influx of foreign corn into China. However between 2006 and 2008, China's annual corn import still fell below 100,000 tonnes.


In 2010, due to tight domestic corn supplies and escalating price pressures, COFCO and New Hope Group imported tens of thousand tonnes of corn from the US, bringing the total import volumeto around 1.57 million tonnes. This compared with 127,300 tonnes of corn exported by China over the same year. China has therefore, effectively become a net corn importer in 2010.


Fast rising demand; slow growing output


One major reason behind China's vault into a net corn importer is its rapidly rising corn consumption. According to eFeedLink statistics, China's corn demand was 158 million tonnes in 2009, 10 million tonnes more than corn production volume. Corn demand is expected to exceed production by 4-5 million tonnes in 2011.


China's fast developing feed industry since the 1980s led to a rapid growth in feed corn consumption over the decades. Statistics showed that feed corn demand reached its peak in 2000 and started to ease slightly following the startup of China's corn processing industry. However, feed consumption continued to climb steadily.  China National Grain and Oil Information Centre revealed that industrial corn demand was 36.5 million tonnes in 2006. By 2010, this figure is estimated to have reached 50 million tonnes, a gain of 37 percent in four years.


Rocketing sugar prices since early this year have seen rising use of starch sugar as a substitution. Wide profit margins of Chinese spirits had also stimulated demand for corn ethanol. As such, the corn processing sector is bound to be a major corn consumer in China this year.


However, the catalyst for China's 2010 corn import spurt was a drastic output cut in China's northeastern corn producing regions in 2009 due to a severe autumn drought. Statistics showed that total corn production volume in 2009 was 148 million tonnes, down 18 million from 2008's levels. While corn production showed consecutive rises between 2004 and 2008, demand was also growing at a fast pace. As such, a sharp output decline in 2009 was able to reverse the demand-supply situation, exposing the inherent weakness in China's corn fundamentals.


In order to maintain the balance in demand and supply, China has to increase its corn production. There are only two ways to do this - expanding corn planting areas and improving corn yield per unit. The former proves difficult as more land is acquired for infrastructure building in recent years as China undergoes rapid urbanisation.


According to figures from the Department of Agriculture, China's corn acreage has been growing at an annualised rate of 4 percent since 2004. In fact, a considerable portion of soy acreage in northeastern province of Heilongjiang had been ceded to corn planting over the last few years due to its price premium over soy. Still, the paltry increment in corn growing areas is ineffectual in raising corn production in any significant way.


In addition, the goal of improving corn yield per unit is equally hard to achieve in the absence of major breakthroughs in corn seeding and planting technologies. Between 2000 and 2011, the annual growth rate of corn yield is less than 1.68 percent.


Another way to restore market balance is through the auction sales of state corn reserves. However, China's corn stockpiles are increasingly unable to keep up with booming demand. eFeedLink estimated China's ending corn stocks in 2010/11 at less than 35.7 million tonnes, with stocks-to-use ratio at around 21%. Moreover, Sinograin's move to import record amount of high-priced US corn to replenish state reserves is a clear indication that country's corn inventories are depleting. This means that it is nearly impossible for China to achieve corn market balance through state auction sales.

Low hog inventory eases feed demand pressure


According to eFeedLink forecasts, China's 2011 corn production and demand are estimated at 162 million tonnes and 167 million tonnes, respectively. The demand-supply gap will reach five million tonnes, half of 2010's levels. But it should be noted that this is only due to weaker feed demand.


eFeedLink statistics showed that in the first half of the year, China's hog inventory totalled 245 million head, down 3.35 percent over the same period in 2010. On the other hand, layer inventory dropped significantly from 773 million birds in 2008 to 690 million in 2010, although supply recovered slightly this year. All this pointed to reduced feed consumption, which affected demand for feed corn.


Over the long run, hog, layer and broiler inventories in China are expected to expand further, but corn supply is unlikely to show much growth. One way to resolve this is through massive corn imports, but this will not be a long term solution and runs counter with China's grain security policy with its 12th Five-Year Plan for agricultural development, which stipulated self-sufficiency in rice paddy, wheat and corn.


Given limited room for expansion in crop growing areas, China can only turn to ways to raise corn yield per unit through technological innovation, and one feasible option is the commercialisation of genetically-modified (GM) corn.


While the government has ruled out commercial planting of GM rice and wheat in the next five to 10 years due to public worries and the country's lack of experience in GM grain research, promotion and regulation, GM corn will likely be an exception as supply is unable to keep pace with demand, a source close to the Ministry of Agriculture revealed.


In addition, the government may face fewer obstacles in promoting GM corn as most of the grain is used in animal feed or as raw material for food products, unlike rice and wheat, which form the staple diet of most Chinese, it said.


Globally, GM corn had also brought about social and economic benefits. The GM corn market was valued at US$3.2 billion in 2007. Before switching to GM corn, the US used to suffer a loss of US$1 billion each year from bollworm infestation, which damaged almost half of its corn fields. It now enjoyed a 9% rise in corn production and an income gain of US$148 per hectare.


On top of economic benefits, the reduction in the use of fertiliser had also benefited the environment. According to Hallauer, 60% of US corn yield gain was attributed to genetic improvement in corn seed. This may help explain the vast difference in corn unit production growth between the US and China over the past years.


Although the Chinese government is edging closer to approving the commercialisation of GM corn, it still faces various restrictions in terms of seed breeding, selection and total planting areas.
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