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China facing grain bottlenecks

China continues to be a major user of U.S. corn and soybeans. But all the while, the nation's leaders are building up ag production capacity at home. Though it's helping meet the nation's growing food and feedgrain needs, the rapid expansion is in some ways creating just as many problems as it's helping solve.

A new report from Rabobank shows the major shift underway in China -- in both the grain and livestock sectors -- is creating logistical problems that are actually resulting in surpluses where the grain's not needed and shortages where it is. This isn't just straining the current domestic supply/demand situation, but also complicating plans for future ag infrastructure development.

"2011 saw China's biggest corn crop on record but not where demand (animal production is most concentrated, creating bottlenecks along lengthening supply routes, spiking pricing spreads and ultimately driving a shift in where animals might best be raised," according to Rabobank's report. "With geographical mismatches between supply and demand, grain traders and crushers will find it increasingly necessary to focus on investment in distribution and storage, while feed millers and animal producers will need to manage an extended supply chain at an increased risk for bottlenecks."

As a result of the hasty ag infrastructure development, China's processors and distributors are facing a new challenge: To prevent a supply shortage or bottleneck, they're keeping more grain or meal on hand, something they haven't had to do before. It's proving to be a difficult new market dynamic.

"Consumers (or distributors) of soybean will have to carry in larger inventories and gain exposure to international pricing dynamics -- a new area of risk management for some," according to Rabobank's report. "Those without this expertise are bound to feel discomfited by this change in events."

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