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Rumors & facts: Is China making its grand entrance to the U.S. corn trade?

Agriculture.com Staff 04/28/2010 @ 9:23am

Rumors about a possible corn-buying program by China -- one that, if realized, could add a huge new demand factor to the U.S. corn trade -- received more fuel Wednesday morning with the announcement the nation will buy 2 cargoes of corn, amounting to 115,000 metric tons, from the U.S.

China's been hurting for corn in the last year; the nation lost 10-14 million tons of corn to drought last year, and after prices responded with an upswing, Chinese leaders released grain from the nation's reserve, which had dwindled to around 35 to 40 million metric tons (MMT). Some say a large corn purchase may be inevitable to maintain the nation's supply and stabilize prices that have skyrocketed beyond $7.00 per bushel.

"At that point (when the Chinese corn reserve bottomed), we started thinking China may need to import one day because they are a net-deficit food country. And this deficit is growing as their economy grows," a CME Group floor trader, who asked to remain anonymous, tells Agriculture.com. "Their rice, high quality wheat and corn prices are making new highs. All of these are food products, functions of human consumption not feed."

Rumors have been swirling around the CME Group trading floor in recent weeks that one way China might be in the market to buy 1 to 2 MMT of U.S. corn to meet its domestic supply needs, which would amount to around 40 to 80 million bushels.

Looking further out, what might the news mean to corn prices later this spring and summer? While many traders and market-watchers acknowledge a long-term corn-buying program by China could be huge to the U.S. corn market, some hesitate to call Wednesday's news the kickoff of this larger program.

"It's a test program so far. This is the start of a program people didn't think would happen," says Don Roose, market analyst with U.S. Commodities in West Des Moines, Iowa. "Is this something? If you look at it, it's 4 1/2 million bushels of corn they're buying. That doesn't change the balance table yet."

In the least, Wednesday's news will put a floor under the corn market for the time-being, and even in the absence of any more buying in the future, it "does give us a bull-bear story to keep going back and forth on," Roose says. "It will keep the sellers at bay."

But, if Wednesday's purchase announcement is followed up by others in the coming weeks, that could foreshadow a longer-term program and more influence on the CME Group corn futures. "If you see more purchases later this week or next week, then it's back-to-back, and that's going to mean more," Roose adds.

"Think about China and soybeans 10 years ago, they hardly bought any soybeans from the U.S. and now they are the largest buyer by far. What if they start buying corn like that?" says Northstar Commodity Investment Company market analyst Jason Ward.

There's a lot of potential in a possible longer-term purchase agreement, traders agree. But, even if Wednesday's buy unfurls into more down the road, it won't be without reservation. Chinese leaders will likely work to keep domestic prices high, Ward says.

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