SHANGHAI (Interfax-China) -- China will cancel the current export tax rebate on grain and grain flour products, including wheat, rice and corn, on Dec. 20 this year, the Ministry of Finance and the State General Administration of Taxation announced Monday evening.
Rice, wheat and corn currently enjoy a 13% export tax rebate.
The new grain export policy is aimed at restraining China's grain exports and ensuring domestic supply. It will also help cool domestic grain prices and ease inflationary pressure, Chinese state media reported today.
"The cancellation of the grain product export tax rebate will only have a limited effect on China's grain sector, as current tight supply in the domestic market does not leave much surplus for export," a grain expert from Xiamen Grain Group Shuangshan Trading Co., who wished to remain anonymous, told Interfax today.
"The long-term trend is that China will become a grain importer, due to the country's large population but lower-than-average per capita farmland resources. China's grain imports, rather than its exports, may well be a talking point in the future," the expert said.
Although China currently exports rice, corn and wheat, the exports only account for a small proportion of national production each year.
China can essentially meet its own grain demand for the moment. However, because the country has to support 20% of the world's total population with only 7% of world's farmland, it is likely to see large increases in grain imports given the rising pressures from a growing population, increased urbanization and possible poor harvest seasons.
The below table shows China's grain exports this year against total grain output in 2006.
Source: General Administration of Customs, the National Grain and Oil Information Center
Wheat futures fell on the Zhengzhou Commodity Exchange on Tuesday, following Chinese agricultural authorities' announcement. Wheat prices closed at RMB 2,033 ($275.12) per tonne, down RMB 14.
"Without the export tax rebate, wheat exports will be less lucrative. As a result, some wheat suppliers might shift to the domestic market, although China's total wheat exports only account for a small proportion of its annual production," said commodity analyst Chen Yike from Zhongtian Futures.
China's wheat exports in the first ten months of this year stood at 1.85 million tonnes, while the country's total wheat output in 2006 stood at 104 million tonnes.
Corn futures dropped on the Dalian Commodity Exchange (DCE) on Tuesday, in reaction to the government's announcement. The most traded May 2008 contract dropped 1.71% to end at RMB 1,725 ($233.90) per tonne, and the open interests of this contract sharply reduced today.
"The abolishment of export rebates for grain and grain products hit the market greatly today, as corn exports will be restricted in the future. At the same time, the stockpiled corn auction held by grain reserve authorities today also impacted corn priced, despite the auction flopping," Cui Weijie, a CIFCO Futures analyst, said.
Commentary
"China may cancel export tax rebates for corn and corn products in the near future," was our headline in yesterday's daily report, although the measures talked about now are of a broader range.
This is an important step as it reinforces our oft-implied warnings that China's grain security is not as certain as authorities lead us to believe. Rice seems to be safe enough, as does wheat. The latter needs to be watched though, as the once very healthy stockpiles are now being eroded.
Corn is the most vulnerable and it is wrong to assume that impact will be limited. If exports are allowed to continue at this year's rate of nigh on 5 million tonnes, it is highly likely that a shortfall will occur. Should this happen, China's entry into an already very tight market will have a huge price impact.
Finally, it is a foolhardy claim that these actions will help to contain inflation by cooling domestic prices.
(c) Interfax-China 2007. Commentary provided by Interfax analyst David Harman. For further information regarding Interfax China Commodities Daily Reports, contact David Harman at david.harman@interfax-news.com or (852) 2537-2262.
