The perils of forecasting the Chinese agricultural market came to the fore earlier this month when the US Department of Agriculture slashed its predictions for Chinese corn imports.
Last year, the USDA reckoned China was set to become the largest importer of grain. But mounting evidence of rising inventories and falling demand triggered a rethink and it has dramatically cut its forecasts. Last year’s long-term import forecast of 22m tonnes for 2023/24 has been reduced to just 6.5m.
“The whole picture has really changed over the past 18 months or so,” said Fred Gale, senior economist at the USDA’s economic research service.
Stronger demand for overseas, especially US, corn in 2011 and 2012, saw analysts both inside and outside China predict the country would become a net importer of the grain, which is mainly used for livestock and poultry feed and processed foods.
So what happened?
After record crops in 2012 and 2013, and an abrupt drop off in consumption, China has found itself with a huge corn stockpile.
“It could take years for China to dispose of such large surpluses,” says the USDA in its latest report on the country’s agricultural imports.
Apart from the favourable weather, the story behind the rise in Chinese inventories will be familiar to traders in sugar and cotton. Beijing’s farmer support policies mean a higher support price for corn compared with international prices. Not only does it encourage domestic production but also purchases of cheap imports as global grain prices plunged.
Reserves also ballooned as authorities bought domestic corn to support the market during the 2013/14 crop year, raising official corn stocks to 100m tonnes, about half of the country’s annual consumption.
Another factor has been a surge in Chinese imports of sorghum and barley, a corn substitute, says Mr Gale. Sorghum and barley — which have no import quotas unlike other grains — jumped to 11.5m tonnes in the 2014/15 crop year from 1.7m in 2010/11, according to USDA data.
Although authorities placed 63m tonnes of corn through auctions to try to reduce its stockpile, only 25m tonnes were purchased, says the USDA. In spite of this, Beijing has announced that it would buy corn from the 2014 harvest to support prices. Current stock levels for corn are at a 14-year high.
Even when China does eventually turn to imports, it is likely to try to keep this to the minimum. Government officials view agricultural imports as unavoidable but also appear to distrust international markets, according to the USDA report.
“The food security strategy is strongly influenced by the perceived dominance of imports and foreign companies in China’s soyabean industry, which has been described as a potential threat to the country’s soyabean supply,” it says.
This stance helps explain China’s actions over food trade over the past few years. First, it has diversified food import sources in order to give the country’s importers greater price negotiating power as well as reduce risks from a potential trade embargo. For example, China’s authorities opened up its market to corn from Argentina and Ukraine in 2012 as imports from the US began increasing.
Second, China is looking to gain greater control over its agricultural import supply chains through overseas investments. The move by COFCO — or China National Cereals, Oil and Foodstuffs Corp — where the state-owned group took a stake in an agriculture joint venture with Noble Group, and separately purchased a controlling stake in Dutch agricultural trading house Nidera, seems to follow that strategy.
A rise in overseas investments will offer a larger share of profits for Chinese companies, establish reliable supplies for the domestic market, and gain more influence over international prices, says the report.
The Commodities Note is online commentary on the industry from the Financial Times
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