It is wet in southwestern Ontario and in a perverse sort of way that is a good thing. The reason being if it wasn’t wet in southwestern Ontario I might be out tearing up my corn crop, which I planted three weeks ago. The Mother’s Day frost burned about 90% of the corn in Ontario and in my case burned everything to the ground. So it has started raining and all I can do is wait and watch. Provincial agricultural officials tell me the corn will be okay. However, my agricultural economist mind tells me we’ll see. The specter of replanting corn in late May especially after that wonderful start doesn’t do much for my psyche.
So maybe we better focus on the very good news this week in the corn market. China is officially importing American corn. The USDA announced last week the sale of 369,000 metric tonnes will go to China with another 174,000 metric tonnes going to unknown destinations. In the pre-ethanol gold rush days this would have been seen as winning the lottery within the corn market. Needless to say, it doesn’t have the same impact now but it still is a shot in the arm for US corn demand.
The market last Thursday reacted with a bit of a yawn as nearby futures shaved about a nickel off futures prices. This was after the corn market had gained about $.20 over the last couple of weeks. We knew something was going on because commercial spreads were weakening and China was a rumor. It has now being confirmed and it is very good news for North American corn farmers.
The great corn hope has always been China. We are very used to hearing grain analysts talk about China’s insatiable appetite for North American and South American soybeans. For instance what would we do with the soybean price if it were not for our Chinese friends buying soybeans? I think you know what I mean; it would be a bit of a bloodbath. Every day in China and parts of East Asia people sit down for a bit of soybeans. It is a staple almost like North Americans sit down for toast and cereal. Of course the great hope in the corn market was to get the Chinese to do the same thing with corn.
The conventional wisdom went like this, as Chinese incomes rise they will demand more meat in their diet which means they will need more corn for those animals. I think I said that 1000 times in the year 2000. In fact when the price of corn was $2.15 in Ontario, what else could I say to give guys hope? With the Chinese having 443 million hogs versus 66 million in United States, you’ve got to believe they’d like to eat corn. Not only do they eat corn, but also increasingly they are feeding those hogs dried distillers grain.
According to the US grains Council in 2008 the Chinese bought 8000 tons of distiller’s grain from the United States. In 2009 they bought 524,000 tons and in January and February of 2010 they bought 240,000 metric tonnes of DDG’s. So that should give us some clues on how hog production is becoming more dynamic and that our Chinese friends like the taste of the grain fed livestock.
It all has the aroma of something big going on regarding the demand side of the corn equation. When we talk about grain fundamentals, it is the demand side that is always important to increase. Supply will ebb and flow but it will mainly flow into abundance. When we can increase demand of any agricultural commodity in a structural way by getting new demand going in a place like China, it does well for our long-term future. China importing corn and increasing their import of DDGs is a very good thing. Let’s take it for what it has and hope it becomes consistent over a long-term basis.
Of course the question will be asked what difference does it make now? We’ve got large surpluses of wheat, soybeans and to some extent corn. Simply put it does make a difference because those surpluses are fickle and Mother Nature at some point will take care of them. A good example might be all this “dead looking” corn in Ontario fields. Ditto for some of the poor looking fields in the northern US. At the end of the day we know a supply issue is going to come along but it is good that demand despite our uneven prices is still buoyant and dynamic.
Some will say the Chinese imports are temporary to satisfy demand in southeast China when they have production problems in northeast China. Certainly there may be some truth to that in 2010. However, when it comes to China nobody really knows the truth. I have stood on its southern shores and wondered what makes it tick. The simple truth is it’s one of the fastest-growing economies in the world with double-digit growth rates and a young population, which is getting richer. So now in 2010 they want our corn. I wager it is a small step toward a much bigger corn importing future.