Chinese grain companies have purchased over 4.0 million metric tons (MMT) of corn from the U.S. this marketing year (September 1, 2011 to August 31, 2012) and the U.S. corn industry is expecting more activity yet this year and for the 2012/13 year starting on September 1, 2012. This comes after a record large harvest in China in 2011 and record high internal prices close to $400 per metric ton (MT).
According to estimates by the Foreign Agricultural Service (FAS) of USDA, China is the world’s second largest producer and consumer of corn in 2011/12, with production of 191.8 MMT and consumption of 188.0 MMT. The U.S. is the largest producer and consumer at 313.9 MMT and 279.5 MMT, respectively. The EU-27 is the third largest in both categories with production of 64.5 MMT and consumption of 65.9 MMT. Brazil was a close fourth with production of 62.0 MMT and consumption of 52.0 MMT. The U.S. is the largest corn exporter this year at 43.5 MMT followed by Argentina and Ukraine each at 14.0 MMT and Brazil at 9.5 MMT.
China was an importer of corn in the mid-1990s taking 4.3 MMT in 1994/95 and 1.5 MMT in 1995/96. They returned for 0.3 MMT in 1997/98 and again in 1998/1999. They were expected to be major buyers in following years, particularly after joining the WTO in 2001. Rather than importing, China was a corn exporter topping out at 15.2 MMT in 2002/03. The last significant year of exports was 5.3 MMT in 2006/07. They did not buy significant amounts of corn again until 2009/10 when they purchased 1.3 MMT, followed by 1.0 MMT in 2010/11.
The biggest change in recent years has been in consumption. Since the last year of significant exports in 2006/07, yearly consumption according to FAS estimates has increased from 145.0 MMT to 188.0 MMT this year, a 29.7 percent increase in five years. Corn consumption increased to 153.0 MMT in 2008/09, 165.0 MMT in 2009/10 and 180.0 MMT in 2010/11. Corn for livestock and poultry feed increased from 104.0 MMT in 2006/07 to 131.0 MMT in 2011/12, a 26.0 percent increase. Non-feed uses grew by 39.0 percent.
Corn production in China has been increasing, but there are uncertainties about by how much. Area harvested was estimated at 33.4 million hectares for 2011, increasing recently about 1.0 million hectares per year. Yields had held constant for three years at an average of 5.4 MT per hectare before increasing to 5.7 MT last year and producing a crop of 191.8 MMT, up 26.5 percent from production of 151.6 MMT in 2006/07. As in most countries, there is considerable dispute about yield in China and high prices for corn are seen as an indicator that yields has been overstated for at least last year and maybe for several years.
The most critical unknown in the corn equation in China is grain inventory. Production and consumption estimates are often reconciled by looking at the supplies on hand at present versus inventories at a previous time. The FAS end-of-year stocks estimates are based on estimates of beginning-of-year inventories and estimates of production and consumption. There are no official Chinese government grains stocks estimates. Until stocks are counted in a systematic way and results are made widely available to Chinese analysts and others throughout the world, it is difficult to reconcile production, consumption and import estimates.
The best indicators of market conditions are cash and futures prices that result from actions of buyers and sellers, including government agencies buying for government stockpiles or releasing them. Market prices are signaling that corn supplies are tight and Chinese buyers are importing corn and close substitutes.
Looking further ahead, most of the opinions about future annual purchases of corn on global markets by Chinese companies fall in the 10 MMT to 20 MMT range. The assumption is that government-controlled stocks have been reduced enough that at least 10 MMT per year will be needed to meet consumption and rebuild government stocks. That level of purchases is expected to be reached in the 2012/13 or 2013/14 marketing years. Some analysts believe that once corn prices in China do decline, demand will grow more rapidly and imports will quickly reach 15 MMT by 2015/16. A few think that acreage has reached its maximum or may decline a little necessitating imports of closer to 20 MMT within five years. That would still be only about 10 percent of annual Chinese corn consumption.
Those increases in imports, if spread out over a few years, can be met with minimal impacts on markets. Purchases of 15 MMT per year would be about the same as the current largest importer, Japan, which has averaged 16 MMT per year recently. Mexico has averaged over 9 MMT and South Korea over 8 MMT. Egypt and the EU-27 each import about 5 MMT per year with Taiwan over 4 MMT. Global trade in corn is estimated at 96 MMT for 2011/12 and 15 MMT would be 15.6 percent of current global trade. A return to trend yields in U.S. would add about 30 MMT to the corn supply for the 2012/13 year. Exports have been trending up in Brazil and Ukraine. In the short run, supplies may be tighter because only the U.S., Peru and Thailand are approved to ship corn to China, but that is expected to change.
Increasing corn imports for China may be tempered by other factors. The trend to more wheat feeding could continue as world wheat stocks remain ample and prices near corn. China could decide to import more pork, beef and poultry rather than importing additional feed. The government could continue to restrain the growth in corn processing and related industries. Corn yields per hectare are a little over half U.S. yields and further improvements in hybrids, the adoption of biotechnology and new farming practices could increase yields and total production.
The most important factor for integrating China’s corn import needs into the global market is more market information, particularly about the level of corn stocks in China at the end of the year and by quarter. This would give market participants some idea of the size of the corn crop, the rate of consumption and the potential for imports. As a G20 country, China has committed to increasing transparency in agricultural markets by increasing the quantity and quality of information available, especially stock levels and harvest forecasts, covering wheat, corn, rice and soybeans. If market signals can be correctly communicated, farmers around the world can produce the needed corn import requirements.
Ross Korves is an Economic Policy Analyst with Truth About Trade & Technology.