Drought may see China use corn stockpile

Little effect on markets | The drought area is significant but the country has massive reserves

A severe drought in some of China’s key corn producing states will likely have no impact on markets, says an analyst.

Chinese newspapers are reporting that the worst drought in decades is hitting 12 provinces. It is centred around Henan and Hebei in the North China Plain.

Bloomberg news service reported last week that Shanghai JC Intelligence Co. forecast the drought would cause China’s corn crop to slip to 200 million tonnes from 203 million tonnes last year.

It would be the first time since 2009 that China would not post an annual increase in corn production.

Fred Gale, senior economist with the U.S. Department of Agriculture’s Economic Research Service, said the drought area is a significant corn growing region.

About half of the drought stricken area is in Henan, which is the fifth largest corn producing province, accounting for about nine percent of the country’s annual production. Summer precipitation in that province has been the lowest since 1951.

But Gale hasn’t paid too much attention to the drought.

“It doesn’t seem to be a catastrophic event that would really have a negative effect on markets,” he said.

Chinese newspapers are reporting the drought is affecting between 2.5 and 10 million acres of land.

That is a drop in the bucket for a country with about 310 million acres of cropland.

The second reason he isn’t overly concerned is that China has massive reserves of high-priced corn that the government is having trouble selling. A drought might help reduce stockpiles.

China’s policy of buying corn from its growers at inflated prices has resulted in huge stockpiles of the crop. That has reduced the need for imports, which has market repercussions around the world.

Two million tonnes of corn that China imported in 2011 has recently been sold through government auctions, said Gale.

That provides some indication of how much corn is on hand and why China is less than enthused to be importing more of the product.

China has essentially banned corn imports by rejecting shipments containing Syngenta’s MIR 162, a genetically modified variety that has been awaiting approval from Chinese regulators for more than four years.

Some people in the trade think the government’s reluctance to approve the trait is actually a non-tariff trade barrier for a country that is already overstocked in corn.

Traders were getting around the ban on MIR 162 by importing dried distillers grain, but the government has also put restrictions in it, de-manding certification that DDG imports do not contain the MIR 162 GM strain.

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