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China Demand: Real or False Hope?

September 1, 2010
 
 

T10133 chartFor several years, corn traders and analysts, farmers and grain organizations have eagerly awaited China’s switch from a net corn exporter to importer. With U.S. exports to China now more than 1 million metric tons (mmt), it would seem that day has come.

Indeed, a strong case can be made that China is seeing increasing demand and is unable to domestically meet that demand. However, deeper investigation suggests that a strong dose of caution is in order.

"The immediate issue is that a drought in the main corn-producing areas of northeastern China reduced production quite a bit and official statistics overstate last fall’s production," says Fred Gale, USDA economist. "There was a surge in hog inventories over the past few years and a shift to larger farms that use a higher proportion of grain-based feeds. This may have expanded corn and soymeal demand, but no one knows for sure."

The longer-term bullish argument involves China’s growing middle class, a shift to more protein
and constraints on production. Estimates vary, but in the next 10 years, China’s middle class, which is already the size of its counterpart in the U.S., could grow almost fivefold.

Another less publicized demand factor is industrial products. In fact, the use of corn to make starch, sweeteners, ethyl alcohol and other industrial products has accounted for most of the growth in China’s corn use during the past decade.

The Chinese government is attempting to walk the line between promoting corn production and keeping prices to consumers and processors affordable.

The rapid growth in processing reflects a combination of robust demand and the government’s
strategic plan for the corn industry from 2008 through 2015, which calls for increased processing, "industrialized" supply chains and the development of "production bases" of farmers to supply the plants.

When commodity prices spiked, enthusiasm for grain processing waned due to growing concerns about domestic food security, pollution, water supplies and energy use.

Stocks Question. Despite conjecture that stocks have been reduced, China still had a substantial surplus from the 2008 crop as of last summer. Industry news reports indicate that at least 22 mmt of government corn reserves were still in ware-houses, Gale reports. That allowed the government to sell 5.7 mmt out of reserves in 2009 and another 5.7 mmt so far this year.

"The current imports reflect mainly the shortfall in production last fall," Gale says. "If China has a normal harvest this fall, which looks likely, and domestic prices fall, the corn imports are likely to stop."

Paul Bertels, director of economic analysis for the National Corn Growers Association, also is skeptical. "Back in 1995, when China bought between 4 mmt and 5 mmt, everybody thought happy days were here to stay," he says. "Two years later, they were a net exporter again, and that status lasted 10 years."


Top Producer, September 2010

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FEATURED IN: Top Producer - September 2010

 
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