Chinese corn shortage could cause rally

While a corn deficit in China may eventually lead to a sustained grain price rally, this could be offset by Brazil and the Black Sea region bringing new land into production or pulling it out of wheat and into corn.  |  File photo

Analysts believe demand is outstripping supply, which could deplete the country’s reserves and boost grain prices

China’s corn market has shifted from surplus to deficit, which is drawing down the government’s stockpile and could eventually lead to a sustained price rally for corn and other grains, say analysts.

According to the Dim Sums web blog, futures markets analysts in China estimate there will be a supply-demand corn deficit of 48 million tonnes in China in 2017-18.

“These analysts think China’s corn stockpile could be cut nearly in half from its 2016 peak after a further 60 million tonne sale of corn reserves this year,” stated the blog.

The analysts attribute the large deficit to declining domestic production, reduced sorghum imports and an increase in industrial use of the grain.

Arlan Suderman, chief commodities analyst with INTL FCStone, agrees with the assessment that demand is outstripping supply in China by nearly 50 million tonnes. The collapse of corn prices in 2016 spurred demand for the crop.

“That’s why I’m friendly to the corn market long-term,” he said.

“The only question is, what’s the size of the reserves and the quality of the reserves.”

That will determine how quickly China’s deficit becomes a significant market factor, said Suderman.

There is plenty of debate even within his own company about how long China will be able to offset the growing annual deficit with its own reserves. He believes the stockpile will run out sooner rather than later.

However, China’s agriculture minister recently warned farmers not to “blindly” expand acres this spring because the government’s stockpile is still substantial and international prices are low.

“To me, that’s the one thing that tends to hold me back and say, ‘wait a minute, maybe the reserves are bigger and they want to hold this rally off another year so that they can get rid of more of their reserve corn,’ ” said Suderman.

Farmers are keen on planting corn because prices have been rising. But according to Dim Sums, the government will likely resume auctioning off its corn reserves later this month, relieving price pressure.

Suderman said the rumour is that the government will sell its corn at the same price as last summer, which would be $1.25 to $1.50 per bushel below the current cash price in China.

“That would suggest to us that the quality of the reserves they are going to put out to auction are not good, which would be no surprise,” he said.

Suderman said the mounting corn deficit in China will eventually lead to a rally in corn and other grain prices once the government’s stockpile is depleted or of such poor quality that it is useless.

Soybeans have been buying acres around the world at the expense of corn. China’s deficit will eventually cause corn to fight back.

He does not believe corn prices will rocket to $8 per bu. or anything near crazy levels like that because commodity booms like what happened in the 2000s only come around every 30 years or so.

And any rally could be tempered by Brazil and the Black Sea region bringing new land into production or pulling it out of wheat and into corn.

China’s new 10 percent ethanol mandate will help bolster corn prices but it could have a negative impact on soybeans.

According to China’s agriculture ministry, 64.8 million tonnes of the estimated 224 million tonnes of corn consumption in 2017-18 will be for industrial purposes.

There is no slowdown in sight for that category of demand. Another 12 million tonnes of processing capacity will be added in 2018, according to Dim Sums.

Suderman said much of the industrial demand is due to all the additional ethanol processing required to meet the ambitious government mandate.

Those plants will dramatically increase China’s production of distillers grains, which could displace soy meal demand that has been climbing exponentially.

“That could flatten out significantly with all this additional DDG production coming online,” said Suderman.

But that all depends on the quality of the reserve corn that would be used by the ethanol plants. If the corn is high in aflatoxin, the distillers grains would not be unusable for feed.

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