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Hackett Advisors in the News


Corn harvest may push China to use its stocks

By MICHELE F. MIHALJEVICH
Indiana Correspondent
10/14/2009

WASHINGTON, D.C. — Despite projections of a drop in corn production, China probably will be able to replenish those losses from stock already on hand, according to a report from the U.S. Grains Council (USGC).

Officials with the USGC toured China in September to look at corn area planted, yield and production. Their report was released Sept. 28. This is the 10th year for the Chinese corn tour.

China’s corn production is expected to be 148.79 million metric tons (MMT), or about 5.86 billion bushels, said Cary Sifferath, USGC senior director in China. Last year, the country’s corn growers produced 165.92 MMT, or about 6.53 billion bushels.
“China has experienced drought conditions, especially in the northeast section,” he said. “We’re currently seeing some fairly high corn prices in China.”

The country’s projected corn yield is about 79 bushels an acre, he said, also down from last year.

China isn’t expected to import corn to make up for potential shortfalls in the corn crop, Sifferath said.

“They have fairly large amounts of corn stock on hand, and probably will continue to have enough corn to meet their needs,” he said. “Right now, I don’t think they will see corn imports, at least in the short term.”

China probably won’t export much corn either, despite rumors the country is offering export subsidies, Sifferath said. “From what I understand, even with subsidies, Chinese corn would not be competitive,” he said. “Nothing has really moved because it’s too expensive, even with the government offering subsidies.”

The price per bushel of corn in China ranges from the equivalent of $5.58 to $6.96, depending on factors such as location, he said.
China might be selling some of its corn reserves domestically but will not be exporting corn this year, said David Kohli, commodity representative with Allendale Inc., of Fort Wayne, Ind. Because of the drought and potential damage to its crop, China could eventually become a buyer on the world market, Kohli said.

“They recently bought 3,000 metric tons from Taiwan, and could eventually be looking at other Asian countries for more,” he said. “I definitely see the potential for China buying corn from the U.S., but we’d be a last resort. They’d buy from their Asian partners first.”
If China opts to purchase corn from the United States, Kohli said he doesn’t see it happening before the first of the year.

If the projections are correct and China’s corn crop ends up below 150 MMT, it would be the country’s smallest crop since 2003, said Shawn Hackett, president of Hackett Financial Advisors, Inc.
“They would have to start eating from their reserves, and then they would start to buy because they’d be worried about not having a reserve,” he said. “They would use the reserve in part to try to keep prices from escalating too much.

“China will say, ‘Our crop’s not that bad,’ to keep the market from running away. If they buy, they’ll probably start buying quietly to not attract attention. They wouldn‘t want to tip their hand.”

The U.S. market may sense something is about to happen because of China’s projected smaller crop, Hackett said.

“The market isn’t going down, and it may know, or may be realizing, something isn’t right over there. If they have the crop they say they have, and if we have the crop we say we have, there’s no justification for $3.30 corn,” he added.

While China’s participation in foreign corn markets is uncertain, what is certain is the country is buying large amounts of dried distillers grains with solubles (DDGS) from the U.S., Sifferath said. Last year, China bought about 8,000 metric tons of DDGS, and this year, purchases are projected to be in the 250,000-300,000 metric tons range.

“There are opportunities here for U.S. field grain producers,” he said. “In June and July we started to see very rapid imports of DDGS from the United States.”

DDGS are imported by larger feed companies and trade companies in China and used in poultry and some dairy rations in the coastal areas, Sifferath said. In the last few months, swine and other livestock industries have started using them.

“The U.S. product tends to be a superior quality, and is cheaper than domestic DDGS in many cases. China does have some domestic DDGS available but they tend to be a different product,” he said.

The China corn tour also gives U.S. farmers a chance to observe Chinese farming techniques. This year, Guy Davenport, a corn grower from North Carolina, participated in the tour.

“It wasn’t what I expected or envisioned,“ he said. “Each farmer has about five acres and there’s a lot of hand planting. Because of that, there are inconsistent planting distances.“

There was little evidence of disease, but Chinese farmers don’t always take advantage of technology that U.S. farmers use regularly, he said.

“They don’t take soil samples. They just applied whatever their neighbors did. But this does give us a better idea and better perspective on how much corn can be grown in that part of the world,” Davenport added.

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