November 17, 2011

 

 

China may cut back on buying corn and sugar to rebuild state reserves because of easing domestic prices and a bumper harvest, but imports are likely to resume next year due to ever-growing demand, analysts said.

 

To ensure food security, China uses its vast reserves of agricultural commodities to regulate domestic prices and to encourage farmers.

 

With a record harvest now pressuring domestic corn and sugar prices, the government will now shift its attention to local farmers, even though import-exempt rates for US corn and Brazilian sugar work out to be cheaper than domestic supplies at present.

 

"We do not expect China to turn to imports in the near term, but it may start to buy from overseas again by the end of March because there is still a lot of stocks that need to be filled," analysts said.

 

Physical prices in top corn growing area of Jilin have fallen more than 7% over the past five weeks to RMB2,140 (US$337) per tonne, dragged down by expectations of a record harvest of 185 million tonnes.

 

To support prices and safeguard farmers' interests, state stockpiler Sinograin may scoop up domestic corn, should prices fall below RMB2,000 (US$315) in the major growing areas, traders said.

 

"US corn prices are still high and it is risky to import at over US$6 per bushel especially since domestic prices are on a downtrend," said one analyst with an official think-tank.

 

"But if there is a big correction in US prices, then Sinograin will obviously jump in as it did in recent months."

 

The same scenario holds for sugar and cotton.

 

The government has already imported large volumes of sugar. With China entering the crushing season and sugar prices falling, the government will hold off imports for now, experts said.

 

China's aggressive imports of US corn this year have helped push up Chicago prices. A temporary retreat in the coming months could weigh on futures, although expectations of further stockpiling would give strong support.

 

Sinograin, which has imported US corn thrice this year, has established its reputation as shrewd buyer. Its most recent purchase of US corn in early October came when prices dropped to a 10-month low of below US$6 per bushel, which offer it a steep discount of RMB400 (US$63)/tonne versus domestic supplies.

 

With production growth that has for years struggled to keep pace with soaring demand, Beijing's prompt return to the global market is certain.

 

It once held more than 50 million tonnes of corn, 2.5 million tonnes of sugar and three million tonnes of cotton in its reserves.

 

The government does not publish its grain reserves and considers them a state secret, but analysts said the country's sugar and cotton reserves are only half-filled, while corn stocks are hovering at 10 million tonnes - enough for less than one-month of consumption.

 

With Beijing deeming a three-month corn consumption as a safe reserve level, its appetite for imports could easily triple to four million tonnes in the 2012 crop year.

 

Sugar imports are expected to climb to 2.5 million tonnes, while cotton imports is seen to top 800,00 tonnes.