SHANGHAI (Interfax-China) -- China is the world's second largest corn producer, but a growing appetite for grain combined with ambitious fuel ethanol targets may make the country a net corn importer, possibly as early as this year. At present, grain accounts for about 80% of bio-fuel feedstock, and consumers are finding themselves in increased competition with the country's burgeoning energy needs for limited domestic resources.
Although China can essentially meet its own grain demand for the moment, it is a tight balance that could easily be thrown off. With 20% of the world's population but only 7% of global farmland, the country's grain supply is under long-term pressure from a growing population, and rising incomes, while urbanization gradually nibbles away at cultivatable land.
By 2010, China plans to consume 6.7 million tonnes of blended ethanol fuel gasoline and 11 million tonnes of biodiesel-blended diesel annually, which would meet 10% of forecasted demand for transport fuel. Government targets caused demand for corn from the ethanol industry to explode, which has raised concerns about how the policy will impact the country's grain supply safety and price inflation.
Although the government has suspended the approval of new corn-based fuel ethanol projects and encouraged the use of non grain feedstock for ethanol plants, industry insiders remain doubtful.
"China has just started on its mass plantation plans for cassava and sweet potato for industrial use, and it takes time for such crops to grow and mature," said an official with a foreign equipment manufacturer whose products include those used in bio-fuel production. I believe that within three years time, grains such as corn and wheat will still be the leading feedstock for ethanol fuel."
Henan Tianguan Enterprise Group Co. Ltd., one of the country's four major ethanol producers, currently uses a mix of 60% wheat, 20% corn, 10% cassava and 10% sweet potato to produce the fuel.
China has just started large-scale production of crops such as cassava, sweet potato and sweet sorghum. However, the country lacks mature technology to produce cellulosic ethanol, which is seen as the future of large-scale ethanol fuel industry.
China's concerns about rising food prices and grain supply concerns are not unique. A report published last year by the Sri Lanka-based World Water Management Institute said bio-fuel production will increase demand for land at the expense of the environment, and will also require large quantities of water, already a major constraint to agriculture in many parts of the world, including China. Other reports have said that ethanol production may severely impact upon the food industry, since, at excessive levels, it can use the food industry to feed energy needs.
The International Monetary Fund has said higher bio-fuel demand will push up food prices, especially for the world's poor, and increase food import costs, thus curbing economic growth. In the last 15 years, China went from being the world's largest soybean exporter to the world's largest importer. With similar trends emerging in soy meal, edible oil, and grains, rising import costs will affect the lives of hundreds of millions of people.
China began promoting the production of corn-based ethanol in 2001, when the country's corn production was booming, and net corn exports increased from 10.47 million tonnes in 2000 to a high of 16.4 million tonnes in 2003. After peaking in 2003, imports began to fall rapidly. Last year, China's corn exports reached 4.8 million tonnes, but this was mainly due to the fulfilling contracts signed in 2006.
Grain Output from 1997 to 2007
Source: National Bureau of Statistics (NBS)
The dramatic reduction of export quotas for this year from 3 million to 1 million tonnes, the ongoing introduction of stricter usage policies, and the cancellation of all tax rebates on grain exports belie the official stance of grain security, especially insofar as corn.
Consumption in 2008 is estimated at 141.5 million tonnes, of which nearly two-thirds is for animal feed. In January, pork prices surged 58.8% year-on-year. Rapid price growth, coupled with government support to the industry, pig production may increase at a faster than anticipated and it is likely that livestock feed estimates are too conservative. An increase of 5% in this area could put severe strains on domestic supply. Note that these figures have not yet been adjusted for damage and losses caused by the current storm crisis.
The USDA estimates China's state corn stockpiles are in the region of 35 million tonnes, but it is difficult to verify this figure. However, given China's aggressive state auction policy designed to stabilize market prices, this figure may be optimistic, although it could serve as a cushion in the event of a production shortfall.
Planting intentions, whilst difficult to predict as farmers tend to delay decisions, may be affected by corn ethanol restrictions. The tendency may be to shift to wheat and, where possible, soybeans which are more profitable, and China may have to resort to significant corn importation; possibly this season. This may be a continuing trend, given the scarcity of arable land and water resources.
If China does become a net corn importer this year, the impact on the price, both domestically and globally, will be dramatic and a price of $6 per bushel, up from current price of $5 is probable. The question now is how China will impact other agricultural commodities, like wheat, soybean and edible oils, in the year ahead.
© Interfax-China 2008. This article is an except from our four part series written from the Interfax-China China Commodities Report – Grains & Softs 2008 special report, due for release on 10 March 2008, and the China Commodities Daily. To receive the other parts of the series, or for further information regarding Interfax China Commodities Daily Reports, contact David Harman at david.harman@interfax-news.com.
