What will China do?

by Meyer Sosland
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While grain prices have steadied following the volatility of recent years, presenters at Sosland Publishing’s 33rd Annual Purchasing Seminar, held June 6-8 at the InterContinental Hotel, Kansas City, Missouri, U.S., cautioned delegates to remain vigilant in their research of the many factors in the global economy that can impact prices.

Matt Beeson, Beeson & Associates, Inc., said during a panel discussion that "$12 to $6 wheat volatility will probably not occur again, but if the E.U. does recover from its current economic mess, wheat prices will probably go up."

A primary consideration noted by multiple presenters was: What will China do and what will China buy? Just as the as the global grain markets once focused on the size, quality and potential imports of the former Soviet Union, the markets now view China the same way. Speculation over the size of China’s grain imports causes fluctuations in the soy, corn (maize) and wheat trading pits around the world.

"If China’s corn crop comes in below estimates, they will make a large purchase," said Steven A. Freed, vice-president of research, Archer Daniels Midland Investor Services, Inc., Chicago, Illinois, U.S. "This would push up the prices of corn, and soy and wheat prices would follow."

While grain buyers have welcomed the recent market stability, Freed warned them that a return to the rollercoaster ride of 2007 and 2008 is certainly possible over the next few years.

"While prices and volatility have declined, I foresee those 2008 prices coming back at least a couple of times over the next decade," he said.


During his presentation on the corn, feed grains and millfeed markets, Al Smiley, senior merchandiser Gavilon L.L.C., said that following the volatility of recent years, corn prices have steadied. Smiley said the most significant events that impacted prices in 2009-10 were: the large U.S. corn crop, which was delayed by flooding that led to some quality issues; volatility in the equity markets; recovery of crude oil prices; and the volatility of the currency markets.

Other events relevant to the grains markets in 2009-10 were:

• an increase in ethanol and DDG production as idled ethanol assets changed hands to stronger companies and more ethanol plants were completed or expanded;

• comfortable stocks being built in wheat and corn, but soybean stocks tightening;

• strong export demand for soybeans and products in China; and

• the difficult livestock environment over the past 24 months.

Smiley said that record corn production, led by the U.S. and China, is expected in 2010-11. The increase in production has been shadowed by an increase in demand for corn for dried distillers grains (DDG) and ethanol.

In 2010-11, U.S. corn usage is expected to rise to 13.3 billion bushels led by an increase in demand for ethanol. Corn-for-ethanol use is forecast to reach 4.6 billion bushels, which represents a 25% increase since 2008-09.

DDG consumption through domestic use and exports is also expected to increase to 30 million tonnes in 2009-10. Both domestic use and exports have seen notable increases. Between 2009 and 2010, DDG exports from the U.S. increased 61% to 4.19 million tonnes. A new entry to the DDG marketplace, China purchased 784,000 tonnes of DDG in 2010.

In his presentation, Smiley emphasized several important facts to consider about the ethanol market: 2005 versus 2010.

• Corn usage: 1.6 billion bushels versus 4.6 billion;

• Percent of total corn crop: 14% versus 35%;

• Ethanol plants: 83 versus 201 (16 additional under construction or idle);

• Gasoline sold containing ethanol: 33% versus 84%;

• DDG produced: 9.5 million tons versus 30 million tons; and

• DDG exports: 1.2 million tons versus over 4 million tons.

Smiley forecast that in 2010-11 the key drivers for millfeed will be the corn price, competing ingredients (DDG, corn gluten feed, soy hulls and corn screenings), millfeed production, livestock profitability and exports/imports of both millfeed and DDG. Millfeed production has been decreasing since its high in 2000 of just under 7.4 million tons. In 2009, production was around 6.5 million tons.

In summarizing his presentation, Smiley emphasized several keys to the feed grains markets. He said market volatility has forced more short-term decisions and that outside market influences can have a significant impact on the grains markets. He noted that while corn and soybean production has steadily increased, the demand for these crops has equaled the supply.

Smiley stressed the importance of China’s impact on the global grain markets. That nation’s demand or lack of it can shift the markets in substantial ways, he said.


Freed noted that over the last decade, Russia’s wheat production has seen long-term increases while U.S. wheat production has fluctuated from lows of 1.6 million bushels in 2002 to highs of 2.5 million bushels in 2008. For the most part, U.S. production has followed a "W"-shaped pattern. While U.S. production has been up and down, its planted acreage has decreased from above 65 million acres in the late 1990s to below 55 million acres in 2010.

The decrease in planted acreage has occurred at the same time farmers have become more efficient. Since 1990, U.S. wheat has seen its yields increase to 43 bushels per acre. In 1990, the average per acre was 33 bushels.

In discussing the future of the global grains markets, Freed speculated that over the next 10 years the U.S.’s share of the global wheat marketplace will decline as the Black Sea (Russia/Ukraine) region’s share increases.

"When we look at trends going forward, it looks like the U.S. will grow the majority of the world’s corn, South America will grow the majority of the world’s soybeans and Russia will grow the majority of the world’s wheat," Freed said.

Freed noted that U.S. acreage dedicated to corn and soybeans is well above the acreage dedicated to wheat. "To satisfy growing demand, GMO wheat must be developed and planted," Freed said.