A battle for China

by Arvin Donley
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With many analysts speculating that China will significantly increase corn imports in the coming years, the world’s major corn producers are looking to position themselves to become the supplier of choice for that lucrative market.

The United States, which by a large margin is the world’s top corn producer and exporter, has been working on strengthening its trade relationship with the world’s most populous country.

“We just had a couple of powerful regulators from China here for a couple of weeks to show them the complete integration of the U.S grain system. I think it was a revelation to them and should give them some confidence in us,” Wendell Shauman, chairman of the U.S. Grains Council (USGC), told World Grain on Aug. 31 at the 2011 Farm Progress Show in Decatur, Illinois, U.S. “We are certainly working hard to build our relationship with them.”

He said the U.S. has several advantages over other potential corn exporters, such as Argentina, including a logistical edge in regards to shipping.

“It is a shorter distance for us to deliver the corn to China and therefore the shipping expenses should be lower,” said Shauman, also noting that the U.S. has a good track record in terms of being a reliable supplier.

“One of the questions we get from any country that’s going to be importing our product is: ‘Are you going to be a reliable supplier?’” he said. “Look at what happened to Russia last year when they had to shut off their wheat. Those types of things can have repercussions for years.”

The U.S. Department of Agriculture (USDA) forecasts China to import 2 million tonnes of corn in 2011-12, up from 1.5 million in 2010-11, 1.2 million in 2009-10 and 47,000 tonnes in 2008-09.

Shauman said that because of the growth in China’s middle class, which can now afford to consume more meat products, he believes it’s inevitable that the country will become a significantly larger corn importer in the near future.

He recalled a conversation he had with a Chinese farmer five years ago in which the man said, “Last year I could afford to eat meat three times a month and this year I can only eat meat once a month.”

“It’s the way he measured wealth,” Shauman said. “If he can now eat meat five times a month, look at the increased market you’ve got with 300 million people now in the middle class.”

Shauman said the USGC sees other opportunities for increased corn imports in that region of the world.

“The Southeast Asia market is not nearly the opportunity that China is, but it is a rapidly growing economy and a market that’s going to develop,” he said. “India is potentially a huge market. It’s a lot like China was. We had worked with China for 30 years before we finally got a market, and I hope it’s not going to take 30 years to get the market in India.”

Like China, India has a growing population with a high gross domestic product.

“It has a rapidly growing middle class society that’s going to eat better, and there’s a pretty significant number in that population that will eat meat,” Shauman said.

FTA and Doha disappointment

While there’s increased optimism about making inroads in the Chinese and Southeast Asia markets, U.S. farmers are experiencing growing frustration about Congress’ reluctance to ratify free trade agreements (FTA) that have been negotiated with Colombia, Panama and South Korea, all of which have been important markets for U.S. grain.

“We’ve talked recently with the Colombians and Panamanians, and they feel it’s an insult to them,” Shauman said. “It’s frustrating to them and it’s frustrating to us as farmers. The Colombian market was largely ours and we’ve lost a good share of it now, and we’re losing more all the time.”

They’ve lost some of it to Canada, which on Aug. 15 implemented an FTA with Colombia. Ten days after the agreement was ratified, Colombian buyers had placed orders for 125,000 tonnes of Canadian feed wheat.

“The wheat market has pretty well gone to Canada,” Shauman said. “If we get an FTA passed, I think we’ll get it back but it won’t be easy.”

Kurt Shultz, USGC regional director in Latin America, said because the United States has not ratified the pending U.S./Colombian FTA, U.S. corn, which is taxed at a 15% duty, faces stiff competition from Brazilian and Argentine corn with a duty of 6.7% and from duty-free Canadian feed wheat.

In 2007, Colombia imported 3 million tonnes (118.1 million bushels) of corn with the United States enjoying a 93% market share. In 2010, however, U.S. market share shrunk to only 20%.

Shauman said he is also disappointed that the Doha Round of trade negotiations have gone nowhere, with many predicting that they will soon end without accomplishing anything to liberalize trade in agricultural commodities.

“It was easier when you had 20 countries involved,” Shauman said. “Now you have over 100, and trying to reach a consensus has turned out to be an almost impossible task.”

DDGS developments

Finding new markets for distillers dried grains and solubles (DDGS), a byproduct of ethanol production, is another top priority for the USGC, as is working toward a resolution with the largest DDGS importer, China, which in December 2010 launched an anti-dumping probe of U.S. DDGS imports.

China imported nearly 3 million tonnes in 2010, up more than 500 percent compared to the prior year, when 600,000 tonnes were shipped to China.

Shauman said the Chinese investigation, which is expected to conclude by, if not before, the first quarter of 2012, has slowed DDGS shipments to that country, although it has begun to increase recently.

“It’s hurt some but hasn’t totally stopped the trade,” he said. “It’s certainly made the trade nervous, and we aren’t going to have the year we had a year ago.”

When ethanol production was increasing at a remarkable rate just a few years, it was hard to imagine a scenario in which the U.S. would have difficulty producing enough DDGS to meet demand. But as DDGS becomes more popular as a feed product and with the “blend wall” (no more than 10% ethanol can be added to a gallon of gasoline) putting a cap on the amount of ethanol needed to meet demand, a supply-and-demand issue could arise, said Shauman.

“We’re a little fearful that we’re developing more market than we have supply, which is basically good for producers because it’s going to increase the price,” he said. “DDGS has gone from being a byproduct that the ethanol plants wanted to get rid of any way they could to being a byproduct that’s a pretty significant factor on the balance sheets.”

One of the markets the USGC is looking at for increased shipment of DDGS is Southeast Asia. This summer, the Council sent nutritionists, feed mill managers and quality control staff to Malaysia, Thailand and Indonesia to provide technical training and encourage DDGS users to optimize inclusion rates. Further technical visits are scheduled this fall for Vietnam, Thailand, Malaysia and Indonesia. The highest demand for DDGS in Southeast Asia comes from the poultry sector, and U.S. DDGS exports to the region have increased 18% since 2010.

“Southeast Asia is not a huge market but one that we can increase our market share,” Shauman said. “India is another market that we’re looking at. We’ve got some biotech issues there and some political issues.”