INTERVIEW: China grain demand reflects structural change: US Grains Council

New Delhi — The explosive growth seen in China's grain demand this year has not been caused by just a temporary supply shortage but signals a structural change in domestic consumption levels, US Grains Council (USGC) China director Bryan Lohmar said in an interview with S&P Global Platts.

China's corn imports hit 7.8 million mt between January and October, a sharp 1,151% increase from last year, latest data from China customs showed. China's import volumes are already above the set annual tariff rate quota level of 7.2 million mt, breaching the quota for the first time.

Similarly, China's wheat imports have hit 6.69 million mt in January-October, up 127% year on year, while barley imports during the same period rose 98.3% on the year to 6 million mt, customs data showed.

The US Department of Agriculture in November said it expects China's corn imports in 2020-21 (October-September) to be 13 million mt, up from the previous estimate of 7 million mt.

Domestic corn demand and imports have been rising because production is relatively stable and temporary reserves from the price support program earlier this decade are more or less depleted, Lohmar said.

The Phase 1 trade deal probably generated some preference for US corn, particularly earlier in 2020, but at the same time US corn is priced competitively in global markets this year, so US corn imports make commercial sense as well, he added.

Demand sustainability

Market players have started looking beyond 2020-21 and have been debating whether this increase in demand is sustainable for the longer term.

"It is difficult to assess China's corn import demand, but my sense is that this is more structural than just a temporary supply shortage and therefore I think we will see China procuring more corn from global markets in future years," Lohmar said.

A bulk of China's grain demand comes from the pork industry. The outbreak of African Swine Fever in 2018 led to a dramatic fall in the swine population.

According to the USDA, China's swine beginning stocks fell to 310.4 million in 2020 from 428.1 million in 2019. Herd loss at this scale reduced demand for corn and soy meal.

China has been working to rebuild hog stocks, which is expected to increase feed demand.

Feed demand in China will continue to grow as swine inventories are rebuilt over the next several months and "I expect they will continue to recover and may even be fully restored as early as the end of 2021," Lohmar said.

Cancellation fears

While US producers are buoyed by the increase in demand for grains, there is also fear that commitments to buy grains could be canceled.

Outstanding US corn sales to China for the 2020-21 season were at 8.27 million mt as of Nov. 12 compared to just 500 mt during the same period last year, according to USDA data.

"I am not worried about cancelations. Again, these imports make a lot of commercial sense, there is a large import margin and strong commercial incentives for China to import corn right now," Lohmar said.

Corn imports into China have been cheaper than domestic corn, as prices have shot up amid production shortages and smaller reserves.

Moreover, China's leaders want to maintain a good relationship with the US, which is transitioning to a new administration, he added.

China wants the large state-owned importers to develop into globally competitive companies and thus would not want them to engage in behavior that would adversely affect their reputation in the industry, and so there is no incentive to cancel these contracts, Lohmar added.