CHICAGO, March 29 (Reuters) – Grain traders worried on Tuesday about the risk for reduced demand from China after the government said it would scrap its corn stockpiling program at a time when global markets are awash with excess supplies.
Traders said importers in China would likely reduce purchases of livestock feed grain and products, including sorghum and the ethanol byproduct distiller’s dried grains (DDGs). They said the policy shift is expected to bring China’s corn prices in line with cheaper foreign supplies. China also said it would let the market decide the price of corn domestically and would support farmers through direct subsidies.
Last year, China imported about 40 million tonnes of substitutes for corn, including sorghum, DDGs and barley, from the United States, Ukraine and other countries, said Fred Gale, a senior economist for the U.S. Department of Agriculture. At times, corn prices in China were double those of the imports.
China has accumulated an estimated 250 million tonnes of corn in its reserves, more than it can consume in a year.
As China meets its feed needs by drawing down its domestic stocks it will likely reduce imports of foreign feed, eliminating a demand source as global markets grapple with record supplies that are weighing down prices, economists said.
The release of the reserves will be “one more factor adding to the bearish outlook for feed grain markets in general,” Gale said.
China’s imports of U.S. DDGs have already softened amid a trade dispute, after reaching a record high in 2015. China relies on imports for almost all its DDG needs, with most of the shipments coming from the United States.
“The good things we saw a couple years ago are over,” said Mike O’Dea, a U.S. trader for INTL FCStone Inc.
It will likely take China years to eat through its massive stockpiles, economists said.
However, the country may need to keep importing feed grains if the quality of the reserves is poor or domestic prices remain too high, said Tom Sleight, president of the U.S. Grains Council, an industry group that promotes exports.
Demand also may return once the reserves are gone, said Florentino Lopez, executive director at the United Sorghum Checkoff Program, which promotes the U.S. commodity.
“They’re going to continue to require an extremely large volume of grain, whether that is domestic or international,” he said about China.
“Long term, that opportunity does exist for our commodities to flow in.”
As China’s domestic price for corn falls to the world level, it might result in lower domestic production.
