Despite rhetoric, China positions for rising corn imports

Dominique Patton and Niu Shuping
Wednesday, 30 Oct 2013 | 5:00 PM ET

BEIJING, Oct 31 (Reuters) - China says it will remain self sufficient in corn. Thing is, most analysts think that it will struggle to meet that goal, and the government's actions seem to show that it agrees.

Despite the rhetoric, the government has been positioning itself for an increasing corn shortfall, approving Argentina and the Ukraine as new suppliers and opening the door to substitutes. Given China's growing demand for meat, and thus feed for animals, it could just be bowing to the inevitable.

If imports of corn substitutes are added, China is already pushing up against its target of growing 95 percent of the corn it uses.

With that target China would import 10 million tonnes of corn, 3 million tonnes more than expected this year. But analysts expect it to blow well past that to become the world's biggest importer of the grain before the end of the decade.

The shift will support higher output in countries like the United States, Argentina and Ukraine, boosting international prices that hit the lowest in more than three years on Tuesday.

"Growth of demand is largely driven by the livestock sector, increasing corn imports is inevitable," said Jiang Changyun, research director at the Industrial Development Research Institute, a think-tank under the powerful planning body, the National Development and Reform Commission (NDRC).

Jiang said a 90 percent target would be acceptable. This would see China import 20 million tonnes, topping the 14.9 million current number one Japan bought in 2012.

Despite the pressure on supply, policymakers are unwilling to modify or abandon the 95 percent target. Food security remains a highly political issue in the world's most populous country, where many still remember devastating famine in the late 1950s and early 1960s and the ruling Communist Party is keen to maintain stability amidst an ever-widening wealth gap.

China's agriculture minister Han Changfu last month reaffirmed Beijing's determination to stick to its long-established target.

Yet demand for corn is growing at a pace that cannot be met by local production, recent import data shows.

China is estimated by the U.S. Department of Agriculture to import 7 million tonnes of corn in the 2013/14 season, up from just 3 million tonnes in the prior year. It is also bringing in record volumes of substitutes such as sorghum and distillers dried grains (DDGS).

Some 4 million tonnes of DDGS could be imported this year to plug demand from feed mills, says the China National Grains and Oils Information Center, surging past record imports of 3 million tonnes in 2010.

Sorghum orders for 2013/14 are expected to reach 1.5 million tonnes, estimates Fan Zhenyu, an executive at the country's top corn trader, COFCO. This is about 15 percent of the harvest in top grower the United States.

"If we include substitute products, the absolute volume of our feed raw material imports is 10 million tonnes. Given this trend, the self-sufficiency ratio could be 93 percent by 2018 and 90 percent by 2020," Fan told a corn conference last month.

DDGS and sorghum are free of the fixed volume of quotas that limit corn imports. Also, DDGS is not subject to the 13 percent value-added tax levied on other other farm products and the government dropped an anti-dumping investigation into U.S. DDGS imports last June after lobbying by the feed industry.

Meanwhile the first of this year's large sorghum orders has arrived in China, unhindered by regulatory issues that often plague new imports.

Yet supply of corn alternatives will be limited. The U.S sorghum harvest is only 10 million tonnnes in a bumper year. DDGS is highly dependent on ethanol production, which looks set to drop if the U.S. reduces the amount of the biofuel required in gasoline.

To widen its options Beijing has approved two new corn suppliers this year. Argentina's exports to China may reach 1 million tonnes next year while Ukraine recently shipped 120,000 tonnes of the grain to China in exchange for loans.

Brazilian agriculture officials said in September they expect China to approve corn imports sometime this year.

But the United States is likely to remain China's dominant corn supplier.

"I don't think either Argentina or Ukraine or Brazil will become a major supplier. These countries all have growing domestic demand from the poultry and other industries," said a foreign expert who did not wish to be quoted by name.

Driving corn demand is China's meat consumption, set to increase 20 percent over the next ten years, according to an OECD-FAO Agricultural Outlook published in June.

Less heralded but accounting for about a third of total corn use is an expanding processing sector, which makes byproducts like starch, glucose and alcohol and according to the State Council's Research Office exports much of its value added output.

This hints at possible wiggle room if the government doesn't include corn used for exports in its self sufficiency target.

"We can keep the 95 percent self-sufficiency ratio already published unchanged and maintain a kind of 'strategic ambiguity' around the target," Xu Xiaoqing, a government researcher with the State Council's Development and Research Center, told a conference last month.

(Editing by Michael Urquhart)