More questions are being asked about the size of China’s usable corn stocks and how quickly they will be drawn down.
The big story in the past two years was the Chinese government’s decisions to:
- stop price supports and move to a market orientation
- stop government buying and stockpiling
- create a 10 percent ethanol content requirement in gasoline by 2020
The goal is to reduce stocks that had grown to unmanageable levels and encourage production of more valuable crops such as soybeans and vegetables.
The latter move is supposed to spark a big increase in the ethanol refining industry that would start to consume the huge stocks.
China does not publish its corn stocks estimates. The U.S. Department of Agriculture at the end of 2016-17 estimated them at a little more than 100 million tonnes but some Chinese sources suggest they were closer to 200 million tonnes or almost a one-year supply.
There is also speculation on how much of the total is spoiled to the point that it can’t be used and how quickly livestock feeders and the expanding ethanol industry could reduce the total to a manageable level.
The USDA’s agricultural attaché in China in a report issued in February drew attention to the uncertainty.
“As recently as six months ago, there was widespread industry consensus that China’s state inventory liquidation program would take two to three years to return to normal levels.
“Today, industry sources report that there is no consensus about the timeline for a reduction of China’s massive corn stocks to normal levels as estimates vary widely from 18 months to seven years.”
But any way you look at it, it is clear that China’s consumption of corn now tops annual production by a significant margin.
The USDA estimated that in 2016-17 China grew 219.6 million tonnes and consumed 232 million tonnes. Its 2017-18 production estimate is 215.9 million tonnes, the import estimate is four million and the consumption estimate is 241 million, meaning a shortfall of about 21 million tonnes that must be taken out of long-term stocks.
So that takes the USDA’s year-end stocks number down to about 79 million tonnes from 100 million at the end of 2016-17.
Indeed, there are reports that supply of quality corn grown in the past year is tight and the local price has increased to the point that farmers could be encouraged to increase corn seeding this spring, going against the government’s efforts to shift production in favour of soybeans.
The situation was such that China’s agriculture minister, Han Changfu, held a news conference in early March to warn the corn price rise was temporary and to remind growers of the government’s goal of reducing corn production.
The agriculture ministry said that with the Chinese New Year holiday over, it would resume sales of government-owned corn stocks, relieving the upward pressure on prices.
But it should also be noted that China has launched an anti-dumping and countervailing duty investigation on American sorghum exports to China.
If that results in less sorghum being imported, it could put more emphasis on feeding corn, which would exacerbate the gap between production and demand.
China could pull grain out of long-term storage more quickly, so long as it is not too mouldy, or it could turn to Ukraine, currently its largest offshore corn supplier. America is unlikely to get any extra business until it tamps down its trade aggression.
Getting back to the uncertainty about China’s corn stocks, I noted that the USDA has estimated a draw down of 21 million tonnes. But to underline the uncertainty, China’s official statistics show a draw down of only 6.7 million tonnes, while futures markets analysts noted by the DimSums blog think the draw down could be as much as 48 million tonnes.
If the latter is true, that once enormously daunting pile of Chinese corn could be shrinking quickly.
Of course, it also has more than 100 million tonnes of wheat in storage, but maybe that could disappear quickly too.
But the whole situation makes one wonder about the sustainability of China’s ethanol policy.
Those corn stocks it was designed to reduce could be mostly gone by the time the ethanol mandate fully engages in 2020.
Beijing might have high hopes for raising corn yields to feed the ethanol demand. Yields currently trail those in the U.S., but Beijing expects to end its ban on growing genetically modified crops in 2020. Perhaps GM varieties might provide a yield boost.
Also, the government has hopes for ethanol produced from biomass, such as corn stalks and stover, but that has not yet been a big success in the U.S.
Rising corn imports are another possibility and that has been a dream of the U.S. corn export industry for years.
But will Beijing consider a modest environmental benefit of running cars on an ethanol blend worth a major increase in its already huge crop imports?
I would not bet the farm on it.