China's grain hunting to continue amid growing uncertainty: analysts

New Delhi — China is expected to continue buying grains at a faster-than-expected pace in the coming months as the country looks to meet its internal demand and ensure stable domestic reserves in the backdrop of uncertain market factors like food supply scare and trade tensions, according to analysts.

China's accelerated purchase of grains in recent months have pushed up its import estimates for corn, wheat, soybeans, sorghum and barley, according to an analysis of data from market monitoring agencies.

The increasing reliance on imports come in the midst of growing concerns around shortage of supply, rising domestic prices and fear of pandemic-induced logistical challenges, analysts said.

For example, top exporter Russia could likely place curbs for six months on its grain shipments starting from January 2021 in an aim to maintain local price balance. Also to tackle surging prices, Brazil and Turkey have canceled import duties on wheat, soybeans, corn and barley recently.

China's soybean import estimates for 2020-21 marketing year (October-September) have risen to a record 100 million mt, up 3.5% from last year, according to Beijing-based analytical firm Cofeed.

Similarly, corn and wheat import projections for 2020-21 have jumped 136.1% and 51.4%, respectively, year over year, according to the company. Shipment projections of sorghum and barley have also risen from a previous estimate.

"There appears to be a clear mandate from the Chinese government to rebuild domestic stocks in most commodities," said Nicholas Hoyt of US-based hedge fund Imbue Capital.

Surprising corn move

China's purchases of US soybeans have risen in recent months, but what comes as a surprise to the markets is its pace of buying grains like corn and wheat at a much faster pace than expected.

China's commitments for US corn in the 2020-21 marketing season (September-August) have already crossed 10 million mt as of Oct. 8, compared with only 59,343 mt during the same point of time last year, according to USDA data .

The last time China purchased larger-than-expected volume of corn was in 2014-15, at 5.5 million mt, largely driven by a state approval of a biotech corn variety that opened barriers to import the coarse grain from the US, Brazil and Argentina.

China has in place a tariff-rate quota system that allows imports of 7.2 million mt of corn at 1% duty, while out-of-quota duty is 65%.

"The situation in corn is a bit more confusing. China kept it's 2021 calendar year import quota unchanged at just 7.2 million mt, however based on the purchase volume we've seen in Ukraine and the US, China's buying has exceeded that level already," said Darin Friedrichs, senior analyst at StoneX Group Inc.

"It is our assumption Chinese demand is outpacing official figures and import needs will be much greater. For example, our assumption is that Chinese corn import demand is likely to exceed 27 [million mt in 2020-21], yet the USDA has this pegged at 7 million mt," said Hoyt from Imbue Capital.

China recently cut its corn production forecast for 2020-21 (October-September), after a series of typhoons flattened crops and flooded fields in the northeastern region few weeks back.

The typhoons struck China's Heilongjiang, Jilin and Liaoning provinces, which have been expanding their corn planting area since 2017, and account for 32% of the country's total production, Cofeed said.

As domestic supply remains tight and local corn prices remain on an upward trend, importing corn has emerged as a cheaper option.

Prices of duty-paid US corn on Oct. 21 were seen at Yuan 2,234/mt, delivering a healthy margin of Yuan 386/mt to buyers over domestic prices, according to Cofeed.

"For the 2020-21 marketing year, China's corn demand will be around 30 million mt higher than production. This will continue to support imports," Friedrichs said.

However, the supply gap in corn production and demand would not be solved by imports alone, he added.

"It's more likely that we'll see a diversified approach with higher corn imports, higher imports of alternatives like barley and sorghum, some targeted sales of wheat or corn from reserves, and some reduction in demand from industrial processors," the analyst added.

China's diversification

China traditionally is not a big wheat importer and holds more than 50% of total global inventories. However, it has been accelerating its purchases of wheat, with analysts suggesting stockpiling measures as the reason behind the move.

China is likely buying to ensure its reserves remain at full strength, Cofeed said.

China bought large volumes of wheat from France, and earlier from Australia, but the country has taken several trade measures against Australia in recent months.

China's trade relations with Australia look in a tight spot after it placed an 80.5% import duty on Australian barley, followed by bans on exports from certain beef abattoirs and lately, targeting the Australian cotton industry.

While China bought 1.15 million mt of wheat from Australia between January and August, almost 99% of that volume was imported by July, and shipments dropped 96% on the month in August to just 5,516 mt. China's barley imports from Australia between January and August are also down 34% on the year.

For barley, China has diversified its import sources, with imports from Ukraine and Kazakhstan between January and August rising multifold year over year, according to China customs.

China has purchased wheat from France and Canada, while its commitments for US wheat have now neared a four-year high.

"Everyone needs to eat and the recent escalation in the Australia political tension likely shifted some business to the US and other major wheat exporting countries," said Terry Reilly, analyst at Futures International.

An incredibly robust Chinese demand for most commodities is underpinned by a Chinese economy that is normalizing much faster than the rest of the world, Hoyt of Imbue Capital said.

China's gross domestic product in the third quarter of 2020 grew 4.9% year over year, compared to other major global economies which have struggled to gain any momentum.