Finance

China’s declining appetite for grain spells danger for the global market

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3 weeks ago

June 12, 2024

China's declining appetite for grain spells danger for the global market

(Bloomberg) — Chinese demand for overseas wheat and corn is declining rapidly, likely increasing pressure on global grain markets that have grown accustomed to robust demand from the world’s largest agricultural importer.

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According to a number of traders, buyers in China have not made major purchases for several months. With domestic prices so low, this trend is likely to continue through the third quarter, they say, and sensitive commercial issues will no longer be discussed.

Global forecasters such as the International Grains Council and the US Department of Agriculture still estimate strong Chinese purchases this year and next. If imports fall, a key pillar of demand affecting farmers worldwide would be at risk.

Chinese apathy towards imports stems from a sluggish economy and successive record harvests. The government has been forced to stockpile both wheat and corn to support local farmers, while overseas corn shipments have been curtailed or even canceled to support the domestic market.

That should worry China’s foreign suppliers, especially after Turkey, the world’s fifth-largest buyer of wheat, dealt a blow to demand last week by halting grain imports for four months to protect local producers. Weak consumption for similar reasons from China, the second largest importer, would only increase market unrest.

“The economy is really bad and overall demand from the whole society is declining,” said Ma Wenfeng, a senior analyst at BOABC, a Beijing-based consultancy. “The government wants to raise grain prices and increase agricultural incomes to activate rural demand. Instead of buying grain from abroad, it is better to buy domestically.”

China has long been a big buyer of soybeans, mainly to feed its huge hog herd, and is actively booking more shipments. But the explosive growth of wheat and corn, which also include animal feed, only began with diplomatic commitments to the US during the trade war with the Trump administration.

Imports of wheat and corn from January to April were even ahead of last year’s pace. That makes the sudden drop in activity all the more surprising, and could leave international markets vulnerable to declines if China indeed changes its foreign purchasing strategy.

As of the last full week of May, the U.S. had just 86,300 tons of corn left to ship to China in the current marketing season that ends in August, drastically less than last year’s 631,600 tons, according to the USDA. There are no outstanding corn sales for next season – which hasn’t happened for five years – and only 62,500 tons of wheat.

While the situation could change quickly, especially if bad weather were to affect harvests, China’s grain glut is unlikely to decline dramatically as long as consumption remains so weak. In addition, another year of huge wheat and corn production is planned.

Improved harvest conditions are likely to help reduce China’s wheat shortage from nearly 17 million tons in this marketing year to less than 7.5 million tons in 2024-25, resulting in reduced import demand, said Charles Hart, senior commodities analyst at BMI, a division of BMI. Fitch Solutions. Corn imports will also decline in 2024-25 as production increases, he said.

Ask for food

On the demand side, China’s pig herd is shrinking and meat consumption remains moderate. Mysteel Global expects the need for animal feed for the new wheat harvest to shrink by half compared to a year ago, according to a report from the Chinese consultancy last week. Margins at factories that produce flour for cakes and bread are also suffering from the cuts, Mysteel says.

That means less imports. For corn, China’s Ministry of Agriculture has forecast cargoes to fall by a third to 13 million tonnes in the new marketing year, compared with an estimated 19.5 million tonnes for this year. The USDA is still pegging 23 million tons, although it could revise its figure later Wednesday when it releases its monthly forecasts.

But there is pressure on shipments to fall even further. China manages its imports under a quota system that would allow just over 7 million tons of corn and almost 10 million tons of wheat at the lowest rate of 1% this year. After that, import duties shoot up to 65%.

While buyers are eager to use up their quota, it makes much less economic sense to import more than that, says BOABC’s Ma.

“We don’t need such large imports anyway, given the huge harvests and, most importantly, the significant declines in consumption,” he said.

On the wire

Chinese consumer prices rose in May, remaining above zero for a fourth month after the country suffered its worst deflation in more than a decade.

Australia is realistic about the challenges in its diplomatic relationship with Beijing, Treasurer Jim Chalmers said, as the country prepares for the first visit by a Chinese prime minister in more than seven years.

A surprise tax change in Brazil, the world’s largest soybean exporter, is pushing Chinese buyers to stock up on U.S. supplies.

This week’s diary

(All times Beijing unless otherwise noted.)

Wednesday June 12: