November 27, 2015
China's intimidating, world changing corn stockpile
Once rapid feed demand growth has stalled and bloated inventories hang over an otherwise balanced world corn market.
An eFeedLink Exclusive Commentary
China has been an obsession with feed crop traders and it still is important –except that its mode of influence is now changing –from being an inflationary force to one of potentially great deflation. This is most true in the feed commodity that everyone once thought China would run short of, corn.
A small step towards deregulation
China's government, noting that its feed mills prefer importing foreign grain over using costly domestic supplies, has cut its floor price for corn and may decrease it further. From as high RMB2,220/tonne (US$9.20/tonne) a few years ago, Beijing looks to buy reserve corn this year at about RMB2,000/tonne.
While still more than double the world market price, after the recent devaluation of China's currency, it leaves domestic corn slightly above US$8.00/bushel, or a tenth less expensive than before.
The move is designed to discourage imports of wheat and sorghum as it is corn, whose import volume is some 12 million tonnes or 80% less than analysts had forecast just a half decade ago. But while it impacts corn substitutes, it leaves a wide gap between Chinese and world corn prices –and keeps the country's large feed corn surplus from having a serious impact on world feed costs.
Even before the price cut, the International Grains Council (IGC) had slashed its China barley import estimate from 8.4 million tonnes to 6.5 million. Sorghum imports were also revised downward, from 10.5 million tonnes to 8.3 million tonnes. With China's corn closing inventory estimates having been recently revised by the USDA from 91 million tonnes to 114 million, the price cut could bring more deflationary pressure on the world corn market, but will not at this time.
A glut in China, balance in the rest of the world
This is because China's corn market is separate from the rest of the world, but may not be in the future. Moreover, when we compare China's corn market to the rest of the world, we notice some very large and growing discrepancies. First, corn inventories started growing in China in 2010 and in the rest of the world after 2012 –but there reasons for doing so are altogether different.
After leading world feed demand growth for over 30 years, the past five years has seen China's feed production first decelerate and then marginally decline. In a manner no one anticipated, everything from bird flu outbreaks to slowing consumer income growth caused China's once rapidly growing feed demand to stop expanding.
After decades of expanding at near 10% rates, China's corn consumption actually fell 3% or 6 million tonnes in the 2014-15 marketing year that just passed, to 202 million tonnes. This, as much as Chinese government corn subsidies, is the reason why inventories are accumulating much faster –and import volumes are much lower– than anyone anticipated.
In the rest of the world, corn inventories only grew after America's 2012 drought ended, as this coincided with the aggressive growth in North American ethanol production. But while both Chinese and world corn inventories grew after 2012, they did so for entirely different reasons.
Outside China, from 2012-13 to 2014-15, corn consumption rise 16.4% or 92.5 million tonnes, from 664.7 million tonnes to 757.2 million. Over that same period, consumption only rose by 1% or 2 million tonnes in China. In fact, the USDA was recently forced to scale its 2015-16 Chinese corn consumption estimate from 219 million tonnes to 214. –Do note this is a completely opposite situation from most of the last two decades, when China's demand for feed inputs equaled or exceeded that in the rest of the world.
This also means that while corn inventories outside China topped out at 107 million tonnes this year and look poised to fall back nearly 10% to 97 million by the close of this marketing year, in China, corn stocks look set to rise another 14% or 14 million tonnes, to 114.44 million tonnes.
The discrepancy can also be seen when we deconstruct the world corn stock-to-use ratio, which is slated to rise from 21% to 22%. Outside of China, corn's stocks-to-use ratio is falling from 13.9% to 12.9% -an inventory level on the border between modest and tight supplies. In China however, the corn stocks-to-use ratio has nearly doubled, from 27.5% in 2010-11 to a USDA estimated 53.5% in 2015-16.
Will deregulation bring deflation?
Hence, whereas China was once the inflationary threat that moved grain markets upwards, these days, it is a deflationary drag. Whereas the import walls put up by China's government once kept the world corn price from rising higher, the fact China's inventories are not allowed to become part of the world trading system now keeps corn from falling to US$3.00/bushel.
-But this situation is itself fluid: China's government has announced its intention to liberalize its corn market. At this time, it is doing so in gradual, incremental steps –a floor corn price in the US$7/bushel to US$8/bushel range will, after Chinese trade restrictions and import duties, do little to bring the 53% of world corn inventories into the global market.
But over the medium to long run, it does raise an interesting question: Will China bring its corn price in line with world levels before it can run down its massive, deflationary inventories? Can China's corn inventories even be run down unless its government brings its domestic corn price in line with that of the world market –and what would that mean, for the world corn market?

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