Doctor Fan Shenggen, director of the International Food Policy Research Institute (IFPRI), did not expect his comments criticizing China’s soybean policy of having double standards regarding GM soybeans at a meeting in China to incite resentment from America.

After the meeting upon returning to IFPRI headquarters in Washington, he received numerous calls and emails from American governmental organizations, representatives of grain giants and grain associations, informing him his words had gone against WTO principles of free trade.

Fan Shenggen is also the director of the international agriculture and rural development research center under the Chinese Academy of Agricultural Sciences. An internationally renowned grain expert, he believes China has made a strategic error regarding soybean policy which has led to the defeat of China’s non-genetically-modified (GM) soybean by its imported counterparts.

Actually, Fan Shenggen believes worries about China’s corn sector are more urgent and realistic. China’s corn imports increased by 56 times in the first seven months of this year on the level of the same period last year, totaling 282,000 tons. It imported 194,000 tons of corn in July, 148 times more than the previous July.

A Surge in Imports

Though this may not sound like much, this is the first time in 15 years that China has imported corn on such a large scale. The Financial Times has stated that, “the high growth rate of China’s corn imports has triggered people’s fears about the potential influence of China’s grain safety on the global agricultural commodity markets.”

Chicago corn futures have increased by over 50 percent in the past three months, reaching a historical high. Futures experts believe that this price increase is unreasonable and triggered by speculation.

However, other market players, the United States Department of Agriculture, and its Soybean Export Council and Grain Council, are full of high expectations. They even believe that China’s corn market will be as huge as its soybean market.

According to public reports, Thomas C. Dorr, President and CEO of the US Grains Council said recently that American corn providers might use their many years of experience opening China’s soybean market to open China’s corn market and eliminate Chinese people’s concerns about the safety of GM corn.

However, Chinese people’s views on GM corn are still greatly divergent.

In April the media reported that the New Hope Group, China’s largest private feed grain producer, imported a large amount of GM corn from America, which aroused public concern. Meanwhile, industry insiders are questioning the official figures on China’s corn storage.

The EO has learned from an anonymous source with the Ministry of Agriculture that up until now, China has imported 1.5 million tons of corn from America and has reached an agreement with the Argentinean government to import 5.5 million tons of corn in 2011.

America and Argentina are the two largest corn exporters in the world and almost all of their corn exports are GM corn. America’s corn exports account for 50 percent of global corn exports while Argentina accounts for less than 30 percent.

According to the above source, all of China’s corn imports for this past year and planned for next year are genetically modified. China’s largest state-owned corn importer is China National Cereals, Oils and Foodstuffs Corporation (COFCO) and its largest private corn importer is New Hope Group.

While the National Development and Reform Commission, the Ministry of Agriculture and the State Administration of Grain have attributed the explosion of China’s corn imports to the price gap between foreign and domestic corn, an anonymous high-level executive of the China Grain Reserves Corporation attributed the high imports to the official corn reserves being less than those of wheat and rice.

Fan Shenggen hopes China will not make the same mistakes regarding corn policy as it did with soybean. Latest statistics show, the dependence on foreign imports of China’s soybean sector has risen to 78 percent, and as early as several years ago foreign companies accounted for over 70 percent of China’s oil processing capacity.

The Myth of China’s Corn Reserves

China’s corn output and consumption volume have both exceeded 150 million tons in recent years. Around 90 percent of corn is used for feed and industrial consumption. Compared with wheat and rice, it is easier for corn to be influenced by the macro-economy.

The National Bureau of Statistics has revealed that China’s corn output reached 329.7 billion jin (a unit of measurement equal to 0.5 kg) last year, 3.9 billion less than that of 2008 while its corn consumption volume was 296.7 billion jin, a 7.8 billion jin increase on the level of previous year. A China Grain Net report has predicted that this year China will have a corn output of 330 billion jin.

Though it was widely believed that China’s corn output would be greatly reduced last year due to the major droughts suffered by China’s main corn production areas, data from the National Bureau of Statistics has shown that China’s output still exceeded demand. However, the data was kept secret until May and its accuracy was widely doubted when it was finally released.
Since March, the price of corn has increased progressively following the price surge of garlic and mung beans. It reached such a high price by April that even the National Development and Reform Commission and the State Administration of Grain were surprised. To rein in the corn price, the central government started a temporary auction of corn reserves on April 13. However, despite the sale of all corn reserves up for auction, the price of corn kept rising.

In the last ten days of May when the auction of corn reserves had been halted, the central government revised the trading rules of corn reserves so as to prevent corn processing companies from blindly hoarding corn, and continued releasing corn reserves; the price of corn decreased slightly. But less than a month later the price of corn resumed its upward climb and in August reached a new historical high of 1,976 yuan per ton.

Although at that time the price of wheat and rice also increased, the EO has learned from the National Development and Reform Commission, the Ministry of Agriculture and the State Administration of Grain that the central government is more concerned about the increase of corn prices. These three ministerial agencies have released dozens of policies to rein in the corn price increase.

The Strength of Downstream Sectors

What continued to drive up corn prices despite the Chinese government’s successive measures to tackle the increase?

While the National Development and Reform Commission and the State Administration have attributed the price rise to hot money, companies’ hording practices and farmers’ deciding to keep corn off the market, the EO has learned from many industry insiders that China’s corn demand now exceeds its domestic output.

Whether or not reserves are adequate is only one part of the whole picture. According to a high-level executive of New Hope Group, the volume of corn consumption increases every year thanks to the development of the livestock industry and its demand for feedstuff.

Another market player is foreign companies. Based on statistics from the China Feed Industry Association, by the end of 2008, there were 153 feed companies registered in Hong Kong, Macao and Taiwan, and another 282 foreign feed companies operating in mainland China. Compared with their Chinese counterparts, foreign feed companies usually possess large-scale investment, are larger in scope, and have high-level technology; most foreign companies are strategic investors.

A source from a Chinese feed company told the EO, foreign feed companies frequently expand their business in China through two methods: one is by being sole-owners and establishing subsidiary companies nationwide, a method preferred by Cargill Inc. and CJ Feed; the other is by conducting mergers or buying shares of other companies, a method used by ABN and Nutreco.

According to reports, foreign feed giants, including Cargill Inc. and CJ Feed, have been exploring investment options in the interior of China for the past few years, including large-scale agricultural investment.

For example, the Chia Tai Group has established over 130 feed companies, accounting for around 20 percent of China’s feed market. Other foreign feed giants, such as the Continental Grain Company, Purina and Cargill Inc., started establishing their position in China’s feed industry long ago.

The main downstream sectors of the corn industry are the cultivation industry and the processing industry, which have also been targeted by foreign countries.

In March 2009, the Chia Tai Group started a project in the Pinggu Distrcit of Beijing to raise three million layer hens. With a total investment of 582 million yuan, they can produce one-fifth of the total egg consumption volume of Beijing. The Chia Tai Group has also signed a contract to invest in the cultivation of 1.5 million layer hens, 15 million chickens and 50,000 pigs in Xinjiang.

The recent increase in meat and egg prices has further promoted the increased demand for corn. Conversely, the price fluctuation of corn will directly influence the prices of the above products. Without a doubt, this trend will continue even after the Spring Festival

Soybeans and corn edged higher after losses in the previous session on prospects of better harvest weather next week.

“We have seen the dollar claw back some ground and that is in conjunction with a negative turn in macroeconomic sentiment,” said Toby Hassall, an analyst with Commodity Warrants Australia.

“We had such a significant move in wheat last week, really there wasn’t a huge degree of fundamentals behind that rally in terms of global demand and supply.”

Wheat surged last week to a four-month high, propelled by fund buying and rains that delayed sowing of the US winter wheat crop. Corn and soybean also rallied as wet weather slowed the harvest of this year’s big crops.

But forecasts of favourable weather and a strengthening dollar knocked down the grain markets on Monday, with corn dropping 5 per cent, wheat losing 3.8 per cent and soybeans 1.9 per cent.

The US Agriculture Department said that soybean harvest was 44 per cent complete as of October 25, well below the five-year average for late October of 80 per cent. Corn harvest was 20 per cent complete compared with the five-year average of 58 per cent.

Traders had been expecting the USDA report to show that soybean harvest was 50 to 55 per cent complete and corn harvest was 20 to 25 per cent complete.

“If we do start to see a favourable outlook for harvest than that harvest delay risk premium is going to be wiped out,” said Hassall.

The highest price paid was 3,790 yuan ($555.3) per tonne, down nearly 100 yuan compared with last week, when the market was concerned about a drought in the major soy-growing area of northeast China.

“It came as no surprise to the market,” said Xia Tian, a dealer at Zhejiang Yongan Futures. “Buyers won’t have interest in domestic soy reserves unless the U.S. soybean price goes up by $12 per tonne. Crushers hold enough stocks of imported soybeans. They can wait for the new soybean harvest.”

Beijing set the bidding price for domestic soy reserves at 3,750 yuan per tonne, about 4 percent higher than the U.S. crop for next January’s shipment.

“China has to sell the state reserves at the current price, otherwise it will suffer a loss as the government purchased soybeans from farmers at 3,700 yuan per tonne last year,” said Dong Shuangwei, an analyst at Capital Futures.

China has started to sell state soy reserves as part of efforts to reduce stockpiles and free storage ahead of the new domestic harvest, due next month, but only 85,300 tonnes were sold out of the large state reserves in the nine auctions.

China purchased about 7.3 million tonnes of soybeans for state reserves last year.

“The market is closely watching the overseas markets and controversial forecasts of a fall in output, ranging from 4 percent to 20 percent. However, as Beijing has enough reserves at hand and it has a policy of supporting farmers, the domestic soybean market will have a limited decline,” said Dong.

The following table shows the results of soybean auctions starting from July (volumes are in tonnes, prices in yuan per tonne):

Date Volume sold Highest price Volume

September 16 15,500 3,790 500,000

September 9 29,300 3,880 500,000

September 2 10,600 3,820 500,000

August 26 9,600 3,750 500,000

August 19 400 3,750 500,000

August 12 15,000 3,800 500,000

August 5 4,900 3,790 500,000

July 29 no bidders 500,000

July 23 no bidders 500,000

Total 85,300

Source: www.grainmarket.com.cn.

Some market watchers have been concerned that the China might curtail its buying on the export market until clearing the reserves it has built up during the past year.

Private exporters reported the sale of 1.9 million tonnes of U.S. soybeans to China, with 1.8 million tonnes for delivery during the 2009/10 marketing year, and 120,000 tonnes for delivery during 2008/09, the U.S. Agriculture Department said on Thursday.

In June of 2008, the USDA reported sales to China of 2.24 million tonnes for the new crop year. China booked 2.092 million tonnes of U.S. soybeans for the new crop year in May of 2007 and 1.752 million tonnes for the new crop year in April 2006.

China’s buying will support soybean prices because it shows demand will be out there even if questions remain about the availability of new-crop supplies.

Tight stocks of soybeans have supported futures prices throughout 2009, even as prices for other agricultural commodities have faltered. The nearby CBOT soybean contract was up more than 15 percent for the year.

U.S. farmers were heavy sellers of soybeans in 2008 as record prices caused them to unload larger-than-usual amounts of newly harvested supplies, leaving them with little left in their storage bins during the past few months.