Digging into China’s Corn Situation
China has been buying large volumes of U.S. corn the past several months, which is unusual. Some cite the trade deal as to the reason, but others lean more toward the fact that China needs corn and thus it is buying the cheapest corn it can find. This year, USDA sees China’s imports at 7 million tonnes, which would be flat, year over year. We lean toward a higher total. China has more than 7 million tonnes of U.S. corn on the books.
The domestic situation is tightening
China’s corn production has essentially been flat for several years following years of growth. The government altered its domestic policy a few years ago to reduce the incentive for planting corn thus reducing its piling domestic stocks. But this year, the government issued a reversal to the policy anticipating the shortages that could arrive as its hog herd rebuilds plus concerns that fall armyworms could cause production damage. There also have been concerns of flooding that may have damaged stocks and caused losses in fields.
Prices across the country have hit four-year highs this spring/summer. China’s government holds auctions for corn stocks, and the auctions held the past several months have sold 100 percent of what was offered with premium prices being paid. At the most recent auction, held on Sept. 4, the prices paid slipped from the previous highs thanks partially to harvest season being underway. State-owned stocks are one way to help offset current shortages but imports are another.
Comments on China’s TRQ/import policy
China limits low-tariff rate import volumes for corn, wheat and rice with volumes exceeding a certain target being subject to high tariffs. For corn, the tariff rate quota (TRQ) volume is set at 7.2 million tonnes. Of that total, 40% is allocated to the private sector while 60 percent is allocated to the state, and all of that volume is subject to a 1 percent tariff rate. When the private sector exceeds imports of 2.9 million tonnes, imports are then taxed by 65 percent. State-owned enterprises can import 4.3 million tonnes at a tariff rate of 1 percent, but anything exceeding that volume is taxed at the 65 percent rate. China’s domestic corn prices are at a notable premium to landed U.S. corn prices, which is not unusual, but the premium is at multiyear highs. This is one reason buyers are seeking corn imports.
The latest U.S. CIF price is around $230, which that value times a 1.65 (tariff rate) equals $379.50 per tonne. The latest average internal corn price in China is about $349 per tonne. Domestic quotes range from $346-$352 per tonne; in other words, including the extra 65 percent tariff, U.S. prices are not at a substantial premium to China’s prices.
China’s buying behavior
This week, China and unknown destinations accounted for 37 million bushels of U.S. export sales with total commitments to China at 386 million bushels or 9.8 million tonnes. That volume exceeds USDA’s import forecast for China and tops China’s low tariff rate quota at 7.2 million tonnes. That means China’s importers could be paying a tariff rate of an additional 65% on imports that exceed that volume if cancellations are not forthcoming. Typically, China imports corn from Ukraine and passes on corn from the U.S. and Brazil. This year, China has purchased more U.S. corn than what the U.S. has exported to China before, dating back to at least 2000.
FBN's take on what it means for the farmer
China’s feed grain demand is strong, as the country continues to recover from African swine fever. The U.S. is benefitting; however, buying could switch to Ukraine soon or slow down once China’s harvest is well underway. Some in the market wonder if China could cancel sales on the books, especially since sales exceed the TRQ limit. FBN does not anticipate that. While buying could switch to Ukraine, China will still need product, and this could pull other demand to the U.S. The tightening of stocks in China is forthcoming unless imports continue to climb and feed demand declines, which is not expected.
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