China expands storage, boosts stocks

Bumper crops | Analyst expects China won’t help consume a record American corn crop

Grain markets are heading for trouble with China awash in corn and wheat and a massive U.S. corn crop on the way, says an analyst.


China announced last week that it will boost government grain reserves by 25 million tonnes this year and build 50 million tonnes of new storage over the next two years.


“They’ve got so much grain they’re choking on it,” said Dan Basse, president of AgResource Co.


China said June 1 that it already has 100 million tonnes of corn in government reserves. Basse estimated there are another 40 to 45 million tonnes of wheat. 


“Unless they have the development of a dire drought later in the summer or next year, I wouldn’t be expecting the Chinese to be significant in the world grain market for 12 to 24 months,” he said.


A drought appears unlikely because the weather in China has been nearly perfect this year.


The country was the world’s second largest corn exporter from 1999 to 2002 and would like to be a major seller once again. 


However, World Trade Organization accession rules don’t allow it to subsidize exports and flood the market.


As a result, the government either has to let the grain rot or build new storage and figure out how to get rid of its excess grain in the years to come.


The Chinese government has been conducting weekly grain auctions to help reduce reserves, but they haven’t been well received. The government recently announced it would pay processors a $17 per tonne subsidy to buy grain at the weekly auctions.


It was once hoped that China would be the saviour for grain markets in the face of slumping biofuel demand, but Basse said markets have been guilty of overestimating Chinese grain demand and underestimating its production. 


His sources in China say the U.S. Department of Agriculture is also understating China’s 2014-15 wheat crop at 124 million tonnes. He be-lieves it could be as high as 129 million tonnes.


China on the sidelines of the world grain market will make it difficult for the United States to find a home for what is expected to be a massive 2014 corn crop.


“We’re going to have some Illinois corn fields that will do 300 bushels per acre, but there’s a good chance that Illinois corn averages over 200,” said Basse.


“I mean, it is that kind of year we’re seeing right now.”


Crop conditions have been ideal in many areas. Basse wouldn’t be surprised if the national average was 170 to 180 bu. per acre, which is well above the USDA’s projection of 165 bu.


“We’ve had four years of less than favourable weather here in the central U.S. This is the first year in which weather looks to be pretty good,” he said. “We think this is one of those years in which corn yields can do 15 percent over trend.”


Basse said that would be shocking because slumping biofuel demand has boosted global grain stocks around the world.


“It means lower prices and lower profits,” he said.


“I don’t know how else to say it.”


In the meantime, China announced last week that it is scrapping its minimum support price program for grains and replacing it with a more market-oriented target price subsidy program. The new policy will be tested on soy and cotton before being applied to major crops such as rice, corn and wheat.


Basse said the goal is to reduce the gap between what China pays for crops such as corn versus the world price. Last year’s minimum price contract for corn in China was $10.20 per bu.


Offering prices that are higher than the world price is leading to in-creased imports and contributing to China’s bloated grain reserves.


Basse said China has also been taking other steps to reduce imports, such as banning shipments containing Syngenta’s Agrisure Viptera trait known as MIR 162. 


The trait is still awaiting approval from Chinese regulators despite gaining approval in the European Union, which is the toughest market to receive approval for genetically modified crops.


“You can’t play the MIR 162 lever forever,” he said.