Chinese demand key to prices

Reports differ on size of Chinese corn crop | Lower than expected demand may hurt corn prices

Demand from one of the main buyers of U.S. corn might not be as strong as expected, says an export promotion group.

The combination of a good-looking Chinese corn crop and a temporary slowdown in meat consumption in that country has the U.S. Grains Council (USG) questioning the demand outlook from that important region.

The U.S. Department of Agriculture forecasts seven million tonnes of Chinese corn imports, up from three million tonnes the prior year.

If China doesn’t need as much corn as analysts thought, it would put further downward pressure on corn and other grain prices.

Dick Kasting, director of strategic relations with the USG, recently returned from China where he toured crops in the country’s northeast and attended conferences on feed grain supply and demand.

The council dispatches a team yearly to assess prospects at the start of China’s corn harvest.

What the team saw conflicts with reports circulating that the crop is in trouble.

Wayne Brownlee, executive vice-president of PotashCorp, recently told investors about his impression of China’s corn crop.

“We are seeing a real weakness in wheat and corn production there,” he said during a Sept. 24 presentation at the Scotiabank Agriculture and Fertilizer Conference.

“You are probably going to see record corn imports in China over the next year or so. The combination of drought in some areas and flooding in other areas has really diminished that crop.”

Kasting said that is not what the group saw during its tour of China’s most prolific corn producing region.

“The quality of the crop looked very good. Ears were full and well formed. We saw very little insect damage and minimal amounts of lodging,” he said.

“The folks that have done this tour for a number of years all thought that the crop looked to be in pretty good shape and that China would probably get some increase over last year’s figures.”

The U.S. Department of Agriculture forecasts a record 211 million tonnes of Chinese corn production, up from 205.6 million last year.

Kasting said production estimates are difficult because there is considerable uncertainty about seeded acreage. However, the group did get hints about plantings.

“There were some reports that China’s corn belt has expanded a little further north than some of the analysts on the trip had anticipated, so there may be more acreage coming into play,” he said.

If China has a good crop on ex-panded acreage you wouldn’t know it by looking at domestic prices for corn, which are above world prices.

“There’s some tightness there from some source. Whether that’s government rebuilding reserves we don’t know,” said Kasting.

While in China, Kasting attended the ninth JCI Autumn Conference on China Feed Raw Materials Market and the 2013 U.S./China Swine Industry Development Forum.

“There was a lot of discussion of China’s domestic demand being a little soft at this point,” he said.

A number of feed millers said demand is down due to the lingering effects of bird flu and a trough in the hog cycle.

There was also talk of slumping meat demand due to China’s economic slowdown and a government crackdown on lavish entertainment functions.

Kasting said China has gone through a leadership transition and the new government is responding to corruption concerns by reining in government expenditures at official functions.

“It would be an overstatement to call it an austerity thing but they’re trying to tone it down a little bit,” he said.

“Several of the people we spoke to said that’s actually significant enough to have an effect on aggregate demand.”

Another factor that could influence Chinese corn demand is its growing appetite for grain sorghum. Sorghum costs less than Chinese corn and is not subject to tariff rate quotas.

Kasting also expects a rebound in Chinese corn demand but he’s not sure of the magnitude.

“If the crop is coming in looking good and feed demand is a little soft it may temper their import demand to some extent,” he said.

Arlan Suderman, senior market analyst with Water Street Advisory, is far more bullish about the outlook for global corn use.

“I think demand is going to surprise. I think demand is going to be stronger than what the trade thinks,” he said.

Global corn stocks shrank last year due to short crops in the U.S. and South America. “In terms of days of supply globally, we’re really not that far away from the tightest supplies of the last 40 years,” he said.

Suderman noted Middle Eastern and African governments have been toppled because of rising food costs.

“There’s a lot of important customers who would like to rebuild their reserves this year,” he said.

The Wichita, Kansas, analyst also anticipates pent-up demand will materialize from the livestock and ethanol sectors.

“Cheap prices do buy demand and relative to where we’ve been the last four or five years, these are cheap prices,” said Suderman.

However, he’s not convinced that stronger-than-expected global demand will be enough to reverse corn’s downward price trend, spurred by the USDA’s forecast for a record U.S. corn crop and 1.86 billion bushels of carryout.

“Until I can say that stocks are going to be below one billion bushels there’s really no reason for the market to get too concerned and I can’t do that at this point,” he said.