CHICAGO (Reuters) - China may be a minor participant in global grain trade, especially relative to the volume it consumes, but recent policy changes, the trade war with the United States, and the spread of African swine fever in its hog herds have drawn traders’ attention to all things China.
The general theme of large grain stockpiles in China is not expected to change anytime soon, according to a recent report from the U.S. Department of Agriculture’s attaché in Beijing, but the prognosis is more encouraging for corn than for wheat when it comes to reducing inventory.
If Chinese corn demand continues outpacing production at the same rate, corn stocks could normalize relative to the rest of the world in a few years. But wheat demand is stagnant and smaller than total output, which will continue to pad supplies.
According to USDA, about 65 percent of the world’s corn and 51 percent of the world’s wheat will be in China this year, but the country imports and exports very little.
USDA plans to highlight the global impact of China’s large grain stocks in its next monthly report due on May 10, which will offer the first official projection of 2019-20 supply and demand. The agency will add a “World less China” line on all its global balance sheets to exclude China’s massive inventories.
However, analysts should have already been performing this simple subtraction problem each month as the data has always been available and the growing stockpiles in China have been a big issue for several years now.
USDA’s attaché projects China’s 2019-20 corn ending stocks at 182.425 million tonnes, down 11 percent on the year and the smallest in five years. This includes a 255 million-tonne crop, down only 1 percent on the year, but the stock cut is driven by the pace of consumption versus output.
Total domestic corn consumption in China is set to outpace production by 27 million tonnes, the widest-ever margin. But the slowing rate of growth in domestic demand could be a bit concerning for the continued cutback in corn stocks in future years.
Projected by the attaché at 282 million tonnes, Chinese corn consumption in 2019-20 would be up only 1 percent on the year versus a yearly gain of 6.5 percent in the previous year. Expanded corn processing will outweigh lower feed use because of African swine fever.
In 2017, China announced it would require gasoline supplies nationwide to be blended with ethanol by 2020, which would require about 15 million tonnes of the biofuel annually. China had an ethanol production capacity of about 2.8 million tonnes in 2017, though that has recently expanded.
However, the attaché notes that processing capacity expansion has outpaced demand for processed corn products, and that will limit the upward expansion in corn demand for now.
The uncertainty around trade between the United States and China has left farmers in both countries unsure over plantings. Government subsidies in China’s primary corn and soybean growing regions currently favor soybeans, but farmers are worried that profits at harvest could slip if soybean trade resumed with the United States.
The attaché sees China’s harvested corn area dropping by 500,000 hectares in 2019 to 41.6 million hectares or 102.8 million acres, the largest corn area in the world.
The report also forecasts China’s 2019-20 corn imports at 5 million tonnes, unchanged from last year, but it says some industry forecasts peg this number as high as 50 million. It also says that grain analysts throughout China agree that corn imports will rise over the previous year, though USDA’s counterpart likely maintained the conservative view because the more aggressive forecasts depend on a positive outcome from the U.S.-China trade talks.
As it stands, U.S. corn is still uncompetitive into China because of tariffs. In 2017-18, Ukraine supplied 80 percent of China’s corn imports.
The attaché places 2019-20 Chinese wheat ending stocks at a record-high 149.7 million tonnes, some 7 percent above the previous year. Domestic consumption is seen at 124 million tonnes, meaning that China has more than one year’s worth of its wheat needs stored away.
Production is seen outpacing consumption with a crop of 131.5 million tonnes, up fractionally from a year ago on better yields.
In November, Beijing cut the minimum support price for wheat for the second year in a row, though the first cut in 2017 did not turn farmers away from wheat in a significant way. In the fall of 2018, prior to the second price reduction, Chinese farmers planted 24.1 million hectares of wheat for the 2019-20 year, down from 24.3 million a year earlier. The latest price reduction will potentially influence planting decisions later this year.
China’s price support system was originally enacted for the country to be self-sufficient with grains and not rely on imports, but without major crop losses, this has led to overproduction and enormous stockpiles. The recent price cuts are intended to reduce this side effect and to also encourage Chinese farmers to grow higher-quality crops.
It is uncertain why China would still be concerned that its wheat self-sufficiency might be at risk, especially now with large supplies and reliable production trends. Minimum support prices had certainly encouraged the steady uptrend in production, but the yields have not been subject to extreme volatility.
It has been 17 years since the last time China’s wheat yield was lower than the average yield of the previous four harvests. At the global scale, it has been seven years since the last time that happened.
In 2018, the Chinese wheat harvest was smaller than the previous year’s crop for the first time in 15 years.
According to USDA, spot prices for wheat in major Chinese markets were above the minimum purchase price as of early March. The government purchases wheat from farmers at the guaranteed rate when the market price drops below that level.
One of the criticisms of China’s price support system is that it inflates domestic price relative to world prices, at least in recent years of ample global supply. China’s 2019 wheat support price of 2,240 yuan per tonne ($332 per tonne) is well above the most-active wheat futures contract on the Chicago Board of Trade, which has recently traded around $160 per tonne.
($1 = 6.7418 Chinese yuan renminbi)
The opinions expressed here are those of the author, a market analyst for Reuters.
Editing by Matthew Lewis