If Chinese farmers have ditched corn in favour of planting soybeans as some recent forecasts suggest, this is the most favourable scenario for a drawdown in global stocks of both commodities.
The idea is that China cannot possibly increase soybean output in a way that would seriously threaten its need for imports, at least in the near term, and a decrease in its corn harvest could continue reducing the country’s burden on world inventory.
China is the No. 2 producer of corn, though it imports and exports very small quantities relative to its output and historically large stockpiles.
On the other hand, China’s soybean harvest pales in comparison with what it consumes. The East Asian country is the world’s leading soybean buyer and is slated to account for 64 per cent of global imports in 2017-18,
However, China’s Agriculture Ministry has projected the country’s soybean imports to decline slightly in 2018-19, which would be the first year-on-year dip in 15 years. Some analysts are skeptical of this pessimistic outlook.
The forecast suggests that higher meal prices stemming from the ongoing trade dispute with the United States may force Chinese hog farmers to seek alternative protein sources, curbing the need for growth in soybean imports. An increase in domestic soybean production – at the expense of corn – is also seen suppressing imports.
Whether Chinese farmers would widely replace soybean meal as feed for the world’s largest pig herd is yet to be determined. But if they do look elsewhere, one option is dried distillers grain (DDGs), a byproduct in the production of ethanol, which could increase corn demand.
Regardless, an increase in Chinese soybean production would have a very small impact on global soybean supply and cannot single-handedly reduce the country’s need for imports. But the outcome for China’s corn harvest could have a big influence on global stocks, which are already expected to fall sharply into 2019.
As recently as mid-March, Chinese farmers had been expected to increase corn plantings in 2018 since corn profits were set to easily outpace those of soybeans. And this was to come despite Beijing’s recent efforts to curb excessive corn production.
But larger-than-expected government subsidies for soybeans may have threatened those corn plans, according to a forecast from China’s Ministry of Agriculture and Rural Affairs.
In terms of productivity, corn is a more efficient use of Chinese farmland than soybeans.
This means that a decrease in China’s corn production impacts global supplies to a much more significant degree than an increase in its soybean output. This is particularly important given trends in both China’s corn use and global supplies.
China has made an effort in the last couple of years to reduce its huge corn stockpile. Although many analysts believe the volume to be much larger, USDA predicts China’s 2018-19 ending stocks at 60.5 million tonnes, down 24 per cent on the year.
This is projected to coincide with a 23 per cent drop in U.S. carry-out, sending global ending stocks to a six-year low.
If China does significantly reduce its corn harvest in 2018, without a decline in corn use, Chinese end-users could end up looking overseas for corn.
Karen Braun is a Reuters market analyst. The views expressed here are her own.