T.
Marc Schober
submits:
China is entering a "new era" of corn buying. The world's most
populous country may import as much as 15 million tons of corn in
2015, according to the US Grains Council. China has historically
been self-sufficient in corn production, but demand is starting to
outpace supply as the nation continues to consume more protein.
Chinese imports of corn will grow from 1.7 million tons in 2010
to 5.8 million tons in 2011, and to 15 million tons in 2014-15
according to Hanver Li, Chairman of Shanghai JC, speaking to the US
Grains Council. 15 million tons of corn translates to the US
exporting roughly 600 million bushels of corn, which will have a
substantial impact on corn stocks.
Mr. Li expects that meat consumption per capita will grow 6.9%
by 2015, and milk consumption will grow by more than 50% over the
same period. Rural areas will drive meat demand, while urban
centers will drive milk demand.
Historically, China has been self-sufficient in corn production
and a net exporter, but strong demand and poor weather this year
has led to production shortfalls. As the population continues to
expand and diets transition to more protein, Mr. Li believes that
"China's ability to produce corn can't keep up with that growth."
To ease domestic prices, the Chinese government has been selling
reserves. In 2010, the government has sold 5.7 million tons of corn
from reserves so far and sold 9.6 million tons in 2009. The amount
of government supplies is unknown, but the government can only
temper prices for so long. Imports of corn will be the primary
solution to solve the shortfall.
Substantial Imports of Soybeans
We see China's transition to a net importer of corn very similar
to China's transition to becoming a net importer of soybeans.
Before 1995, China was a net exporter of soybeans but by 2010, it
is the world's largest soybean importer and is expected to import
more than 40 million tons of soybeans this year.
Soybean imports have become more attractive to China as domestic
production is at a cost disadvantage compared to overseas
production. Oil extraction rates for Chinese soybeans are 17-18%
compared to 22% for imported soybeans. Average Chinese soybean
yields are expected to be 25.3 bushels per acre (1.7 metric tons
per hectare) in 2010/11, according to the USDA, which is
substantially lower than the estimated US average of 42.9 bushels
per acre for 2010/11.
Over the past few years, Chinese soybean yields have not changed
much; yielding 1.72 MT per hectare in 2006, and 1.67 MT per hectare
in 2009, according to the USDA. China's priorities shifted away
from soybeans and towards corn in the late 1990's and into the
2000's. Since South America and the US were producing soybeans much
more efficiently than China, the Chinese decided to focus on
boosting corn production, and importing soybeans instead.
Lack of IP protection
Although Chinese soil and climate is not quite as fertile for
agriculture as it is in the US Corn Belt, yields could be higher in
China if intellectual property rights were stronger and genetically
modified seeds were permitted. Strong patent protection in the US
allows companies like Monsanto to sell their genetically modified
seeds in the US, which are designed to tolerate droughts and weeds.
Monsanto and its competitors will not enter markets with poor
intellectual property laws, such as China, in fear that their
patented traits will be copied.
China currently does not allow genetically modified seeds to be
planted, but they do import genetically modified grains and
oilseeds. Once China revises its policy to allow biotech seed use,
US companies will still be leery of entering the market due to the
lack of intellectual property rights.
China's Insatiable Appetite for Grains
Rapid population and economic growth in China has driven the
country's insatiable demand for grains. Economists have long shown
that as GDP rises and a middle class develops, consumption of
protein also rises. The transfer to protein will have a significant
impact on the demand for grain as roughly one pound of meat
requires seven pounds of grain.
The Brookings Institution estimates that by 2021, China's middle
class could grow to over 670 million, compared to only 150 million
in 2010. As the world's middle class continues to develop over the
next decade, the demand for grains will grow exponentially.
China has overtaken the US as the world's dominant meat
consuming market in 2000. China's meat intake per person went from
25kg per year in 1990 up to 50kg in 2000 and is at roughly 53kg in
2008 according to the World Resource Institute. The increase in
meat consumption has led China to consume four times as much
additional grain since 1995.
Despite the drastic increase in meat consumption, on a per
capita basis, China significantly lags behind the US, which
averaged 123.8kg of meat per capita in 2000. As China's economy
continues to develop, China's meat consumption per capita will
catch up with developed economies.
China's Income Elasticity
Economists have recorded the effect on demand for goods as
incomes rise among consumers in both developed and developing
economies. For every dollar rise in income, demand grows rapidly
when incomes are low and less rapidly when incomes are already
high. China has an income elasticity of 0.47 while the US has an
income elasticity of 0.15. Historically, rises in income have
precipitated rises in the consumption of higher protein foods
including meat, dairy, eggs and poultry products.
China's State Council predicts that China's annual GDP growth
rate will increase roughly 7% per year from 2010 to 2020. This
could lead to a per capita GDP of $5,900 in 2020, compared to
$4,000 per capita in 2009. The USDA estimates that of every new
dollar spent in China, 40% is allocated to food.
China's Land Imbalance
The primary problem facing China's ability to feed itself is its
land imbalance. China has roughly 20% of the world's population
although only 7% of the world's arable land. The supply of arable
farmland in China is decreasing rapidly as well. China has lost 20%
of its arable land due to erosion, desertification, and
development, and is expected to lose 10 to 15 million more hectares
by 2020.
To solve this imbalance, China committed $5 billion for
agricultural development in Africa in 2008. China is sending
expatriate farmers to Africa to cultivate the land and export the
grain directly back home to ensure a consistent supply of grains.
According to the Chinese Ministry of Commerce, over one million
Chinese are farming in Africa dispersed throughout 18 countries.
US to Benefit From Chinese Imports
Where will China import all this corn from? The first place they
will turn to is the US, which is the world's largest corn exporter,
accounting for 60% of global corn exports in 2009. Argentina and
Brazil only account for roughly 10% of global exports each.
If China imports an incremental 600 million bushels of corn in
2014 from the US, using the USDA's baseline projections, US corn
ending stocks would be 960 million bushels. This would put the
Ending Stocks to Use Ratio at 6.3%, the lowest level since
1995.
2010 is a major turning point in the grain market. The Chinese
transition to becoming a net importer of corn will have a
substantial implication on the world's corn supply.
Disclosure:
No positions
See also
Today in Commodities: Edibles Rule
on seekingalpha.com