Bet on China

April 1, 2014 09:32 PM
Bet on China

Emerging as the third largest U.S. corn customer but a wild card in 2014 

By Ed Clark and Sara Schafer

No quick solution was expected on the stalemate over China’s ban on GMO corn from the U.S. in mid-March. Despite cancellations of nearly 35.4 million bushels of booked sales, China has quietly emerged as the No. 3 destination for U.S. corn. (China imports more corn from the U.S. than any other competitor.) 

The long term looks even brighter. From 2013 to 2022, USDA projects China’s corn imports are going to more than triple. "Chinese buying is the demand wild card for 2014," says Sterling Liddell, senior vice president, food and agribusiness research with Rabobank. 

The current USDA projection of 197 million bushels would likely support prices near $4.20 to $4.30 per bushel, according to a Rabobank analysis. "If imports from the U.S. drop much below that (due to the GMO dispute), prices could drop to $4 per bushel or lower." 

Reports suggest the GMO dispute might be a smoke screen to protect Chinese corn producers in the wake of growing supplies and a short-term waning of demand because of bird flu and declining hog numbers. 

"Short-term imports will be constrained, but the long term likely will show significant Chinese import growth in feed grains," says Brian Lohmar, U.S. Grains Council director in China. 

Imports to Triple. The latest long-term USDA forecast points to Chinese corn imports of 236 million bushels in 2014/15. From there, exports steadily ratchet up to reach 866 million in 2023. 

The challenge for the Chinese market is the short term, and not just its issues with GMO corn. Perhaps most important is whether China is beginning to transition to more corn imports, paving the way for a trajectory similar to soybeans.

While some see nothing but good news on Chinese corn imports, others are more circumspect. In recent decades, China, which has the world’s largest corn acreage and is the No. 2 corn producer—has vacillated from being an importer and exporter, notes Frayne Olson, ag economist at North Dakota State University. As recent as 2003, China was responsible for 9.6% of the world’s corn exports. 

Although Chinese policy is one of importing the lion’s share of its soybean needs from the U.S. and South America, it remains committed to self-sufficiency in feed grains, Olson says. In addition, once GMO corn seed is approved—most think it’s not a matter of if but when—China could see a yield bump, he adds.

For example, when China approved Bt cotton in 1996, yields rose 50% to 60%, although not immediately. No one knows the yield impact of GMO corn, but it could go a long way to supplying China’s corn needs, potentially turning it from a customer to competitor, Olson notes.

Economic Growth Engine Slows. It will take more than GMO seed alone to provide a yield bump, says Darrel Good, University of Illinois ag economist. Still, he does not expect China’s corn imports to follow the growth rate of soybeans. Furthermore, China’s economic growth has slowed to 7.5% as it faces a multitude of internal economic challenges. 

China’s increase in production won’t likely keep pace with demand, says Brian Grete, editor of Pro Farmer. "Even if global exporters must supply just 15% of Chinese corn needs over the next five to 15 years, there will be good demand for corn." China started farming out its soybean needs decades ago and is just now starting to farm out more of its corn needs, Grete notes. Presently, China’s goal calls for 95% corn self-sufficiency, but that could drop to 85% in the future, he adds.

The focus on commodity corn exports to China presents a somewhat skewed picture because it doesn’t include dried distillers grains with solubles (DDGS) from the U.S., which are up sharply. China emerged as the world’s top importer of DDGS in 2013 at 177 million bushels, valued at $1.4 billion.

Further complicating the Chinese import issue is the conflict in Ukraine. China has ramped up corn imports from Ukraine and invested in its agricultural infrastructure. 

"We hope for a peaceful and speedy resolution of Ukraine’s crisis, but the instability is creating opportunities for U.S. exports to North Africa, the Middle East and China," says Tom Sleight, CEO of the U.S. Grains Council.

Ultimately, when it comes to China, there are more questions than hard answers. "Nobody really knows what is going on in China," says Vince Malanga, LaSalle Economics. "Their purchasing indexes are about as low as they’ve been in the last six to eight months."

Officials are trying to negotiate a transition from manufacturing/investment-led growth to a consumer-led growth process, Malanga notes. "When a large economy attempts to make those kinds of transitions, they don’t occur very smoothly. The result is a slowdown in economic growth. From what I can see, the transition is occurring much smoother than a lot of people were thinking."
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China’s corn imports might rise if strategic reserves that have declined are rebuilt as prices have declined. Source: Rabobank

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