December 13, 2012 1:17 pm

China on a cereal buying spree

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Nebraska, a landlocked state in the middle of the US, has never felt closer to China. As more and more of the state’s crops are shipped across the Pacific to meet Chinese demand, Nebraska is on the front line of a structural shift in global grain markets: China is importing more cereals than ever before.

“China represents a huge export market . . . [and] a growing export destination,” says Greg Ibach, Nebraska’s top agricultural official, on a recent visit to Beijing. The state’s crop exports to China have doubled over the past five years.

Nebraska is hardly alone in taking note. From Chinese officials to global trading house executives, the industry has quietly started to acknowledge that China is in the midst of a structural shift as it becomes a net importer of grains.

Until recently, China only imported small amounts of premium-grade rice, minor quantities of wheat and almost no corn, insisting on self-sufficiency. But that is changing: already the world’s biggest importer of soyabeans, China is now adding cereals such as corn, wheat, barley and rice to its shopping list.

The shift could have profound implications for global food markets because China’s total demand for grains is vast relative to the size of globally traded markets.

“For China to lose even a little bit of self-sufficiency means a lot on the trade front,” says Jean-Yves Chow, analyst at Rabobank, one of the largest lenders to the agribusiness industry. “Even if China imports 5 per cent of their corn, that is equivalent to one third or one half of the corn trade in the world.”

Chinese grains imports have already tripled so far this year, rising to 13.4m tonnes from January to November, up from 4.5m tonnes during the same period of 2011. The buying spree has made Beijing the world’s second-largest importer of rice and barley, a top 10 buyer of corn and a top 20 of wheat.

The key drivers of the trend are dietary changes as more Chinese move to cities, where they typically consume more meat, requiring more animal feed crops. The shift has added to the strain on China’s agricultural sector, which is already trying to feed one-fifth of the world’s population with scarce farmland and water.

Ever since China entered its phase of high economic growth more than three decades ago it has faced apocalyptic warnings that its increasing demand for food would lead to shortages worldwide. By and large, these warnings have turned out to be wide of the mark as Beijing injected billions of dollars into its agricultural sector to maintain self-sufficiency in three key crops: corn, rice and wheat.

Although China still has an official policy that mandates 95 per cent self-sufficiency in those crops – a policy known as the “red line” – recent comments suggest that insistence on self-sufficiency could be starting to wane.

Chen Xiwen, a top Chinese agricultural official, recently acknowledged that higher imports of grains and oilseeds would be inevitable. “Making full use of international resources and international markets has become very necessary,” he said at a conference in Beijing. “China’s agricultural output has been rising, but demand has been increasing even faster.”

The world’s top trading houses are already jockeying for position to profit from Chinese cereal imports. Louis Dreyfus Commodities, one of the largest food traders, describes the surge in Chinese corn imports as a “game-changing move”.

Industry executives say Marubeni, the Japanese trading house, is in a leading position to profit from Chinese cereal imports. The company this year bought Gavilon, a privately-held US grain trader, for $5.3bn, including debt, with the aim of supplying corn to China. The acquisition complements a deal in 2009 with Sinograin, the state-owned company in charge of China’s strategic reserve of food commodities, for “comprehensive collaboration”.

Others are also preparing. Archer Daniels Midland, the New York-listed trader, this year launched an unsolicited A$2.8bn (US$2.9bn) bid for Australian-based GrainCorp, one of the remaining independent wheat and barley traders in the Asia-Pacific region. Patricia A. Woertz, chief executive at ADM, told investors recently her aim was to “connect Australia’s productive growers with rising global demand for crops and food, particularly in Asia”, suggesting an interest in the growing Chinese market.

Cargill, Bunge, Louis Dreyfus Commodities, Noble Group and Glencore are also investing in businesses that will be more profitable if China starts importing large amounts of wheat, barley, rice and corn in the next few years.

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