China has been able to put aside its growing tensions with the United States at least in the area of agricultural purchases, with a record purchase of US corn reinforcing the phase one trade deal as well as Beijing’s need to bolster its food security.
The US Department of Agriculture (USDA) said on Tuesday that China bought 1.762 million tonnes of corn for delivery in the 2020-21 marketing year beginning in September, its largest-ever daily purchase of US corn and the fourth-largest US sale overall.
Having started to make purchases in March, China has ramped up its purchase of US corn since the start of July, having not made any in June, placing orders totalling 4.19 million tonnes this year for delivery over the next two years.
Get the latest insights and analysis from our Global Impact newsletter on the big stories originating in China.
China also bought 1.17 million tonnes of US soybean this month, after having bought the same amount in June, according to data from the USDA.
Fulfilment of the phase one deal is one reason. Besides, the Chinese government also has the intention to import US corn to replenish state reserves since destocking is taking place faster than expected
These most recent purchases have been made amid a backdrop of escalating tensions which started with the coronavirus, and have escalated over Xinjiang and the national security law in Hong Kong.
“Market participants were sceptical about the future of the phase one deal because of rising US-China tensions, so recent record sales came as a surprise for many of them. However, it should be noted that the news failed to underpin the market, which has been under pressure from expectations for a huge US crop,” said Alexander Karavaytse, an analyst with the International Grain Council.
Analysts believe China is likely to stick with its pledges for buying US farm products, including corn, which is a key ingredient for animal feed, driven by a depleting inventory at home as its hog population recovers from the deadly African swine fever.
“Fulfilment of the phase one deal is one reason. Besides, the Chinese government also has the intention to import US corn to replenish state reserves since destocking is taking place faster than expected. And the US is no doubt the largest corn exporter in the world,’ said Lief Chiang, China grain and oilseeds analyst at Rabobank.
“[China’s corn purchases are] related to political and geopolitical uncertainties, which definitely play a role to some extent.”
The market believes that the geopolitics will have minimal impact on China’s decision as they are in need of corn and will have to import to safeguard their food security
S&P Global Platts
China had previously placed tariffs on American corn and soybeans imports in response to US tariffs on Chinese-made products, and the US made up just 6.6 per cent of China’s overall corn imports of 4.79 million tonnes in 2019.
Since the beginning of 2020, corn futures on the Dalian Commodity Exchange for delivery in September have jumped 7 per cent to around US$300 per metric tonne despite China releasing stock from its state reserves, according to S&P Global Platts.
“The market believes that the geopolitics will have minimal impact on China’s decision as they are in need of corn and will have to import to safeguard their food security,” said S&P Global Platts.
Nxin, an agriculture data provider based in Beijing, said in a report Wednesday that corn prices in China were likely to stay elevated in the coming months, driven by limited supply as recent orders from the US would only begin to be delivered in October.
“The auctions have helped to relieve overall tight supply, but the quality of fresh corn supply remains very tight, the prices are more likely to go up rather than go down,” said Nxin on Tuesday, adding that the issue showed how imported corn remained the preferred choice and why it is able to command a premium price.
Prices of corn in China have been hitting record highs since the start of the year, driven by a recovery of the hog population, with sales from its state reserves since May aimed at bringing down prices.
A reduction in farmland, especially in the key farming regions in the northeast of China, and losses due to adverse weather have recently led to demand exceeding supply.
“Chinese corn inventory has been declining since 2016-17,” added Rabobank’s Chiang. “The Chinese government promoted corn destocking by ending state stockpiling in northeastern China, as the state reserve held massive corn inventory at that time.”
China does not disclose its total corn inventory, and as a result, estimates are wide-ranging, said Karavaytse.
“In early-2020, some local sources in China stated that inventories could be as low as 50 million tonnes, equivalent to just two months of domestic consumption,” said Karavaytse.
“Our estimate for the 2018-19 end of season carry-over stocks from the end of September 2019 is around 200 million tonnes. However, there is no information about the quality of those stocks, with some sources suggesting that some supplies may be unfit for food or feed purposes.”
The state-owned China Grain Reserves Corporation published a notice on Tuesday denying that there were quality issues in its corn inventory after a farmer uploaded a video online that showed discoloured corn bought at an auction.
Karavaytse from the International Grain Council said that as global maize prices have been under pressure from the impact of the coronavirus pandemic, in particular due to a plunge in industrial demand for grains, China may attempt to take advantage of the lower prices to purchase more stock.
But analysts believe the US is unlikely to replace Ukraine, China’s number one corn supplier, due to the lower price offered by the European nation.
“Around 60 to 70 per cent will typically come from Ukraine, with slightly more than 2 million tonnes expected from the US, and smaller amounts from Russia, the European Union and Vietnam,” added Karavaytse, who forecasts that China could import 7 million tonnes of corn this year.
Purchase the 120+ page China Internet Report 2020 Pro Edition, brought to you by SCMP Research, and enjoy a 30% discount (original price US$400). The report includes deep-dive analysis, trends, and case studies on the 10 most important internet sectors. Now in its 3rd year, this go-to source for understanding China tech also comes with exclusive access to 6+ webinars with C-level executives, including Charles Li, CEO of HKEX, James Peng, CEO/founder of Pony.ai, and senior executives from Alibaba, Huawei, Kuaishou, Pinduoduo, and more. Offer valid until 31 August 2020. To purchase, please click here.
More from South China Morning Post:
- Hong Kong security law: how will US sanctions affect China’s plan to turn the yuan into a widely used global currency?
- Hong Kong Autonomy Act: US tariffs, sanctions, export bans ‘all on the table’ after Donald Trump signs law
- US-China decoupling is already happening, says Donald Trump’s former security chief John Bolton, also calling for open borders for Hongkongers
- Hong Kong will remain ‘extremely important’ financial centre despite short-term security law fallout: Andrew Sheng
- China’s trade economy roared back to growth in June, as coronavirus lockdowns eased abroad
This article China puts US tensions aside to boost phase one trade deal, food security with record corn purchase first appeared on South China Morning Post