China's DDG cancellations not GMO related
June 11, 2014
by World Grain Staff
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KANSAS CITY, MISSOURI, U.S. — China’s decision to stop buying U.S. distillers dried grains (DDG) has engendered a number of possible explanations, none of them having to do with the official reason given by the Chinese government, according to market observers.
China, heretofore the purchaser of about 34% of the U.S. output of DDG, a byproduct of corn ethanol production used in animal feed, said no further permits allowing importation would be issued because of the possibility some of the U.S. DDG may have come from a bioengineered strain of corn (MIR 162) not approved for import by China.
This news, along with favorable Corn Belt weather, helped prompt a sell-off in corn futures on June 9. In the meantime, there were signs the Chinese had increased their imports of U.S. sorghum somewhat, which could be a reasonable substitute for DDG.
Reasons offered by market observers for the decision ranged from deterioration in China’s overall relationship with the U.S. to narrow, corn-market considerations in China.
Rich Nelson, director of research at Allendale, Inc., in Chicago, Illinois, U.S., told World Grain’s sister publication, Milling & Baking News, he thinks China’s decision was “retaliation against the U.S.” and was a symptom of worsening relations between the U.S. and China. He said the most recent catalyst for China’s action regarding DDG was an April meeting by President Barack Obama with Vietnam, Malaysia, Japan and the Philippines that indicated his support for countries other than China regarding disputed claims to islands in the South China Sea.
China was excluded from that meeting, and, in Nelson’s opinion, President Obama “sent a clear message backing the claims” of countries other than China over these islands, which may contain valuable natural resources such as oil.
It did not make market sense for China to eliminate DDG purchases because domestic corn prices are high, Nelson contended, which he said supports his theory the Chinese are showing their displeasure with U.S. foreign policy by cancelling orders for DDG. He noted the U.S. had no alternative but to abide by the Chinese decision, which would cause prices of U.S. DDG to go down and could affect other U.S. markets such as millfeed, which competes with DDG as animal feed.
Nelson said China may expand its program of retaliation through agriculture by cancelling imports of chickens from the U.S. He said the Chinese government could claim justification for such a move by protesting against the practice of chlorine washing of the birds in the U.S.
Other analysts’ explanations of China’s decision to cancel DDG shipments are more mundane, though.
Don Roose, president of U.S. Commodities, West Des Moines, Iowa, U.S., said he thinks the Chinese are averse to using agriculture as a diplomatic ploy because of the importance of maintaining food security in a nation with more than a billion mouths to feed.
China currently has large stocks of old-crop corn they are selling internally at auction, limiting demand for imported corn byproducts, Roose said. In addition, he said, China’s importing of soybean meal was aggressive compared to their DDG imports.
“They’re bloated on soybean imports,” Roose said. Soybean byproducts such as soy hulls can be used as animal feed just as well as DDG.
Michael Cordonnier, Ph.D., president of Soybean and Corn Advisor, Inc., Chicago, Illinois, U.S., took a middle road in offering an explanation for the Chinese decision to cancel importation of U.S. DDG. While he acknowledged diplomatic issues relating to the South China Sea islands might account for 20% of the decision, he saw agricultural considerations as being the dominant cause.
Cordonnier said China was seeking to become self-sufficient in both corn and rice production and the country’s corn supplies were extensive. He said China, as has happened before, didn’t want to pay current prices to import corn and were using their buying muscle to try to drive prices down. If the country achieves success, he expects China will come back in the market and buy DDG at lower prices.
“Half the time they are just trying to drive down the price,” Cordonnier said.