China’s grain auction and meat production patterns point to rising imports

China's grain demand has been a focal point for agriculture markets since 2020 and suppliers continue to look for clarity, especially on corn for which global supplies are expected to tighten further and in light of recent announcements by Beijing all of which point towards jitters around food security.

Forecasting China's grain demand is a challenge due to opacity of information on crop conditions, production, consumption, and stock levels. This was why when China suddenly placed huge orders for corn from the US in 2020, above its annual tariff quota, it took the market by surprise.

But trends and patterns in grain auctions, local meat production and corn production are all indicative of stronger imports in the coming years.

China's imports of grains such as barley, sorghum, and wheat also rose in 2020 and continue to grow in 2021.

China has been facing a corn supply deficit since at least 2016, which has been addressed by auctions of huge corn reserves acquired before 2016.

China sold about 57 million mt of corn in its 2017 auction, over 100 million mt in 2018, about 22 million mt in 2019 and 58.05 million mt in 2020, data from China's National Grain Trade Center shows.

While not all of the auctioned corn would have been consumed, the sheer size of volumes of corn bought by traders and end-users indicates the extent of corn supply deficit in the country.

As long as the supply deficit was being met from reserves and imports remained well below the annual quota, there was limited focus on China's corn market, but the recent surge in imports has now got the attention of big suppliers, especially the US.

Apart from the US, other key global corn exporters are Brazil, Argentina, and Ukraine. But China's market is currently open only for the US and Ukraine. So until the time imports from Brazil and Argentina are allowed, US and Ukraine exporters will retain an edge.

And if China's buying is sustained over the coming years, the global prices could be very stable or move considerably higher depending upon the supply situation. Generally, corn prices on CBOT in most parts of 2015 to 2020 have been below $4/bushel level. But this changed with China buying corn in large quantities. Currently, the most active futures corn contract on CBOT is at $5.38 /bu.

Absence of corn auctions

The answer to China's appetite for grain imports may well be unfolding in 2021. This in turn could lead us to a more reliable estimate for 2022, a caveat being the absence of big corn auctions that distort the demand picture.

But it is highly unlikely that China will come up with any big corn auctions in 2021 given that it continued to buy corn from the US even when prices were at multi-year highs.

China has auctioned some imported corn so far this year but at much smaller volumes while imports are surging. China's corn imports during January-June 2021 was at 15.3 million mt, up by 318.5% year on year.

If China has stocks as high as 198.18 million mt as reported by the US Department of Agriculture in its July report, the absence of grain auction announcements in 2021 is puzzling for the markets as the country relied on auctions over imports to meet the supply gap over the last 5 years.

"China may have such huge stocks of corn [as reported by the USDA], keeping the food security issues in mind during [the] pandemic or it is possible that their stocks are very low. Nevertheless, it is clear that there is a structural imbalance in the corn supply," said Pete Meyer, head of Grain and Oilseed Analytics at S&P Global Platts.

China's corn production has been stagnant around 260 million mt over the last five years, while consumption continues to grow; unless corn production increases to the level of 270-272 million mt in 2021-22, "we see a 32 million mt structural corn imbalance for China in 2021-22," said Meyer.

Moreover, China's recent announcements such as urging livestock and poultry producers to reduce use of soymeal and corn by replacing them with alternative feeds, increasing the acreage available for planting for the first time in several years, and for the first time adding grains output to its macroeconomic control targets underscores the deficit in feed grains.

In April, the National Animal Nutrition Steering Committee suggested that wheat, sorghum, barley, rice, cassava, can be some good alternatives for corn in pig and chicken feed, and in the case of soymeal, rapeseed, cottonseed, peanut, sunflower, and sesame meal.

The guidelines also recommended feed mixture for different regions of China. For example, in Northeast China, corn in pig feed can be reduced by at least 15% by replacing it with rice and rice products, while soymeal can be reduced by at least 10% by increasing the use of distiller's dried grains with solubles, or DDGS, and corn gluten meal, according to the report.

Rising meat production

China's total meat production has been dropping since 2018, following the outbreak of African swine fever, but the impact on feed grain imports has been mixed with the presence of big corn auctions muddying the supply-demand picture.

Most of China's grain imports are used to feed its vast hog population.

China's total meat production in 2018 was 86.24 million mt and the country's total import of three major grains–corn, barley, and sorghum–was at 15 million mt, data from China's customs and statistics departments showed.

In 2019, China's meat production fell to 77.59 million mt, while imports of the three major feed grains was at 11.8 million mt; this was also the year when China was struggling to rebuild pig inventories lost to ASF.

Meanwhile, over 100 million mt of corn were sold in Chinese government auctions in 2018 as compared to 21.8 million mt in 2019.

In 2020, when China's total meat production was at 77.48 million mt, corn, barley, sorghum imports surged to 24.3 million mt. In addition, 58.05 million mt of corn were sold in government auctions in 2020 and auction sales of wheat, which can also be used as feed, rose to 23.23 million mt from a mere 2.67 million mt in 2019.

The above data indicates that feed grain demand in China has not been met through local production and the government has had to dip into reserves along with imports to bridge the demand-supply gap even when meat production fell.

If we look at China's meat production prior to 2018, the last time it was below 80 million mt was in 2010. The five-year average of China's meat production before 2018 was at nearly 87 million mt. Even a conservative estimate of the future meat production will be considerably higher than the levels seen in 2019 and 2020, which would also mean higher demand for feed grains.

Without the periodical grain auctions and increase in production, import of feed grains in the coming years could easily go post-2020 levels.

It should also be noted that the option of replacing corn with wheat may not be always available, since wheat is usually expensive than corn.

Replacing corn with wheat is not a straightforward process in livestock feed ingredients. Typically, livestock producers do not make any major changes to the diet of livestock in the middle of the production cycle as it can negatively impact the weight of livestock when it is time for slaughter, Meyer said.

Finally, pork production in China has greatly changed the structure of the supply chain as the share of industrial-scale farms have grown at the expense of smaller farms. Since the proportion of corn used in the feed is higher among the industrial-scale hog producers, the demand for corn could only go higher from here.