China March Commodity Review: Part 3

Corn

The ongoing reserve purchase of corn has helped keep prices stable to slightly higher for the month of March. As the chart for DCE’s corn contract illustrates, the price rise began in mid December, but really took off in the middle of February, once the effects of the surplus withdrawal took hold. The total allocated amount to be purchased is 40 million tons, of which there have been 4 separate rounds designated at 10 million tons each. We are now in the fourth round. The contributing provinces thus far are Jilin, Heilongjiang, Liaoning and Inner Mongolia.

Similar to cotton and soybeans, the government has used a higher than average spot price—in this case 1,500 yuan/ton— to encourage farmers to steer their corn towards the reserves. Spot prices have also held steady to slightly higher since early February. Traders note prices will likely hold for the next few months until the reserves began releasing corn on the open market.

While the removal of surplus corn has helped improve farmers’ incomes, it has also given them every incentive to plant corn for the coming planting season. Outside of political stability, grain production is a huge concern of the government. Plus, in the current economic climate the government has a desire to have sway of the prices of basic commodities. In this case, the mission has been accomplished. However, the complications—and there always are—will come once planting season is over and the southern regions began demanding more corn deliveries. What could easily result with this amount of corn under the control of one entity and not in traders’ hands is a potential logistical nightmare. While the auctions are scheduled to take place in late April to early May, the corn, once sold, must still be transported out of the northeast. One should not forget that the May 1st holiday, as well as the Dragon Boat Festival, is just around the corner. It will be interesting to see if the government can handle the release as easy as the purchase has been.

In other relevant monthly news, custom statistics revealed a sharp drop off in January through February’s corn exports to 2,696 tons, a whopping 96% year on year reduction. For the same period a year ago, China had exported 62,497 tons of corn.

Wheat

Drought concerns which had consumed the country since the beginning of the year were finally brought under control in March. According to information provided by the Ministry of Agriculture, by the first half of the month, roughly 2.17 million ha of winter wheat covering 8 provinces was suffering drought conditions. Approximately 461,000 ha of winter wheat were rated as suffering “serious” drought conditions. Compared to peak values, these were reductions of 8.63 million ha and 4.11 million ha for each category, respectively.

The marketing of wheat remains active as a result of the government’s decision to release wheat from the state reserves in order to keep prices in check. Weekly amounts have continued to rise since February and are averaging about 1.3 to 1.5 million tons. The increase in volume has also seen a corresponding rise in the transactional price. This is due to several reasons, beginning with an expected reduction in total winter wheat output. On March 12th, the China National Oil and Grains Information Center estimated the total area for wheat cultivation in 2009 would be about 24.01 million ha, an increase of 110,000 versus 2008. Total output, however, is expected to reach 111 millions, which would be a drop of 1.5 million tons year on year. The agency attributed the reduction in output as a result of the drought in the early part of the year. Second, traders around the country are actively buying wheat released to the market with expectations of higher prices in the forward markets. Most point to the premium commanded in the wheat contract at the Zhengzhou Commodity Exchange, where the nearby contract is trading between 2,100 and 2,200 yuan/ton. Third, sensing an opportunity, farmers have been unenthusiastic about selling any wheat they still have in storage.

Despite the relative success of the wheat release program, there is concern that prices may have topped and are on their way down. The rapid rise in available stocks is meeting a curtailed demand by flour producers, who have seen their market remain in a sluggish state. Many smaller flour producers are rumored to have shut their doors until raw material prices come down. Still, the return of children to school should help stimulate demand in the current school period.