China Floods And Drought Mean Less Corn

[Jim Meade / Iowa City]

"China’s corn harvest is poised to decline for the first time in four years after flooding in its biggest-producing province and drought in its fifth largest cut yields, easing a global glut as the U.S. reaps a record crop.

Output by the world’s second-biggest corn grower fell 3.2 percent to 199.1 million metric tons, according to SGS SA (SGSN), which carried out 302 interviews in the seven largest growing areas during the harvest in September and October for Bloomberg. The state-owned China National Grain & Oils Information Center expects a 4.6 percent advance to 215 million tons, and a unit of the U.S. Department of Agriculture projects a 2.1 percent gain to 210 million tons.

Smaller harvests and benchmark prices that slumped 50 percent from the record set in 2012 signal Chinese buyers will import the maximum 7.2 million tons allowed by annual government quotas."

http://www.bloomberg.com/news/2013-11-06/floods-to-drought-curbing-china-corn-harvest-commodities.ht...

I was at a Pro Ag Outlook presentation by ISU last night and Chat Hart said exports are the main hope for U.S. corn prices.

[Palouser]

Keep in mind that the government 'quotas' for imports aren't hard lines. They will allow as much corn to be imported as they see the need for but, they need a handle to avoid too many imports to undercut market prices and discourage acres planted or normal movement of domestic product, especially at certain times.

It's a crazy game China plays w/ foreign vs domestic prices. On one hand they want domestic prices to be high enough to encourage planting and lower reliance on it's huge internal subsidies, and on the other hand they want to control price spikes and hoarding. Then again they need a handle to control imports to avoid surges that would undercut domestic prices. And yet the government holds periodic auctions of reserves (which it faithfully replenishes) to keep hoarders off balance and keep a lid on prices.

But they seem to manage.

[roarintiger1]

Palouser,  That sounds strangely similar to the USDA.......................

[teaspoon73]

   If you are a private party in China and want to  import corn you need to get an import license and pay a 14% import duty to the Chinese Gov't. The Chinese Gov't will also import corn to keep their reserves stocked, which they auction of at different times to keep prices under control. The gov't doesn't pay itself a duty. What has really picked up is importing DDG's, shipped in containers or bulk from US to China. You don't see this on the USDA weekly exports. At  this time you do not need an import license to import DDG's and here is the real kicker you can ship the DDG's for half the cost in a container to China vs. shipping corn by traditional means. DDG's prices have not slipped a lot since this summer as export demand is holding prices strong. The importers have locked onto this,since the claim by the Chinese gov't two years ago raised in World court of the US dumping DDG's in China was resolved. So when some expert from the commodities industry says we aren't exporting very much corn to China, that's not true. This year will be record DDG's exported to Asia!

[roarintiger1]

I didn't know this about the import difference of corn and DDGs to China. That is very interesting.  One would think that China would close that loophole sooner or later.

[Palouser]

China's import exports are active hands on policies requiring permissions, exceptions, tariffs, active intervention of physical supply, movement and imports and prices.

USDA is just an information provider which one can accept or ignore for the most part.

[roarintiger1]

The similarity of the two is in the resulting prices.

[hanktbd]

Teaspoon,

Thanks for the DDG info. Is grain sorghum also unresticted like DDG's?? Sounds like China is buying bunches of grain sorghum for feed.

[Palouser]

If the prices react to USDA figures then it has to be because they are considered reliable. If not then they would be discounted one way or another. There are evaluations of the final results and it really is fairly impressive how reliable the figures are and how low the error percentage is. These evaluations can be looked up and form trends of their own.

This year had to be an acid test. So many criticisms of being too high and yet they were pretty much on it in the end. The Chinese manipulate the market, for better or for worse and the USDA just tries to evaluate the situation. The price is the price and will continue to change as demand becomes clearer this year.

On the other hand the market can get it wrong even when they have reasonable numbers. I keep going back to 2007 for wheat because it is such a good example of the futures price being off and NOT sending the market signals to producers given the risks. The market blew it. I warned many times and the saying 'the market is always right' was the response. Well, we layed that proverb to rest. Along with 'volatility is your friend' and a few others. I just watched and waited as the inevitable became a fact. But the result was certainly not the fault of the USDA. The trends were in.

[teaspoon73]

   hanktbd, don't know about grain sorghum, the Chinese are value buyers. Right now the value of corn in central China is about twice the value of corn at my local elevator in the Dakota's.   3.69 is our local cash bid. Palouser is right the rules can change over there without notice, however the Chinese economy is still growing at about 7% and their huge hog herd isn't getting any smaller.