The Billion Dollar Corn Question.
Darin Friedrichs, StoneX
Published on January 8, 2021
This year, China is projected to use 286 million tons of corn, but it only grew 260 million tons. That's a difference of 26 million tons. And that's a problem, because the largest importer of corn in the world, Mexico, only imports 17 million tons.
Right now, US grain exporters have outstanding sales of 6.5 million tons of corn they have sold to China, but not shipped yet. The market is expecting China to import massive amounts of corn with USDA estimating China's 20/21 imports will be 16.5 million tons, and USDA's attaché office in Beijing estimating imports of 22 million tons.
In some sense, those are reasonable numbers. Even China's own government estimates that corn demand this year will be 23.5 million tons higher than the production. If demand is higher than supply, shouldn't China import more to increase supply?
But I think what is missed in these estimates is an understanding of how China uses corn, and what the government's priorities are.
China has seen massive growth in its corn processing industry in the past decade. When the government was stuck with massive stocks of corn, there was a lot of support to create corn processing facilities. These make everything from ethanol, lysine, corn starch, MSG, and many other products. This has meant that China is now in a situation where it has the highest corn price in the world and is also the largest exporter of products derived from processing corn.
This is an odd situation, and I think the market isn't appreciating that this imbalance between supply and demand doesn't have to be solved by increase supply (i.e. imports), but can be solved by decreasing demand.
Back in November, I wrote a long report for my subscription research offering, China Direct, which covers agriculture trade in China and how it affects global markets. In that research piece, I noted that FSI (food, seed, industrial) corn demand within China has increased by 40% since 2014 as part of the government's efforts to use up excess corn stocks. I also mentioned how the government was willing to cancel the IPO of Ant group, which was on track to be the biggest IPO ever, because of concerns about risks and stability.
China has been the largest global exporter of corn starch since 2017. That doesn’t really make sense. Why is China, a country that is dealing with $10/bushel corn, processing it and then exporting it? It’s hard to imagine the government having much concern that high corn prices might cause industrial processors to slow down a bit and reduce their consumption. Why would China’s leadership want to increase its dependence on the US for a key staple grain just so that some processors can continue to export starch to Indonesia or Malaysia? Political security takes priority over SOE [state-owned enterprise] profits. If regulators are willing to block the largest-ever IPO because of worries about risks and stability, the government is probably ok with letting industrial corn processors have bad margins for a while.
As we ended 2020, a state-run newspaper, Economic Daily, ran a piece titled "Developing corn industry from the perspective of food security".
The piece gets right to the point in the first paragraph by saying: