Corn feed substitution by wheat likely to continue in China in 2021

New Delhi — China is expected to continue substituting corn with wheat in 2021 as high corn prices keep pushing local millers to secure a cheaper feed alternative amid signs of pig herd recovery in the country, according to analysts and market participants.

Local corn prices in China have been trending higher than wheat since December 2020, making it easier for the livestock producers to shift from corn to wheat.

As of March 22, the weekly corn price in China was at Yuan 2,806/mt ($428.57/mt), while wheat was at Yuan 2,519/mt. This was also around the time when domestic corn prices shot to multi-year highs in March.

China has been aggressively selling wheat from its state reserves to combat soaring corn prices. Both corn and wheat are used in livestock rations.

Between January and March, China sold 26.06 million mt of wheat in government auctions, which is 2.83 million mt more than the quantity sold in the entire 2020, China's National Grain Trade Center data showed.

Moreover, China's wheat imports along with other food and feed grains continue to see a strong uptrend in 2021 as well.

During January-February, China's wheat imports were up 265.1% year on year at 2.48 million mt, while corn purchases jumped 414.4% on the year to 4.8 million mt. Similarly, barley imports rose 79.4% on the year to 1.32 million mt.

China's recent grain purchases come on the back of aggressive imports made in 2020.

The country imported 11.3 million mt of corn in 2020, up 136% on the year, while wheat exports increased 140% to 8.38 million mt, and barley imports were up 36% at 8.08

Recently, corn prices in China have eased from highs and the markets are keeping a close watch on how long the substitution of corn by wheat will continue.

According to local feed millers, the proportion of wheat used in feed increases and that of corn reduces when the price difference between the two commodities narrows to Yuan 100/mt ($15.27/mt).

Currently, the global supply and demand outlook for corn points to higher prices this year, which would mean the price spread between corn and wheat is likely to stay smaller overall.

"We believe that Chinese corn prices will stay at a high level this year," Rosa Wang, grain market analyst with Shanghai-based JCI China, told S&P Global Platts.

Corn planting cost has increased significantly in China for the current crop year and a considerable volume of corn stocks, which were bought at high cost, are in the hands of merchants, said Wang.

Recent policy announcements in China have also indicated that government may not be too uncomfortable with firm prices.

In January, China said that it intends to increase the corn area in 2021 after years of decline. So, it is highly unlikely China would allow a sharp drop in corn prices despite the strong inflow of imports and wheat sales.

The US' corn exports sales to China were at 23.2 million mt as of March 25 in 2020-21, according to the US Department of Agriculture.

Even though US corn sales are high, a large amount of corn is yet to be shipped.

The US corn exports to China were at 8.46 million mt, while the outstanding sales were at 14.72 million mt as of March 25.

Meanwhile, China's wheat auctions continue to see decent demand from local buyers. This indicates corn substitution by wheat in China is here to stay for the foreseeable future.

"In 2021, high imports of feed grains, such as corn and sorghum, are expected, mostly from the US. Meanwhile, China's state reserve is offering stale/old wheat, as well as paddy rice, to feed mills at lower prices. Wheat use in feed will have a significant boost in 2021," Rabobank said in a report.

ASF, a rising threat?

While there is optimism about China's grain demand, the rise in African swine fever cases in the pig farms has raised some doubts over the ability of hog producers to restock hog stocks which were decimated by the ASF in 2018.

However, despite the fresh outbreaks, analysts believe that cases are likely to be contained and demand for feed will remain strong in 2021.

According to Rabobank's estimate, the sow herd in China dropped from December 2020 to February 2021, down 3%-5% month on month in each month, but the sow herd was still 10%-15% higher than a year ago.

"We consider this a setback during the upward trend of restocking rather than a turning point. Moreover, the impact of ASF on overall pork production is lower than in 2019 and early 2020. Strong piglet and sow prices suggest that many farmers have sufficient confidence to restock," Rabobank said in its outlook.

JCI's Wang also echoed a similar view. The recurrence of ASF in China has caused concerns, but the impact is not as big as some market reports indicate, Wang said.

"We still expect a slight growth of hog feed demand in 2021 from 2020 given that there is no serious disease (outbreak) again," Wang said.