Nov 23 2022
The demand for Brazilian corn has never been greater as China prepares to enter the market and disrupt the global trade books for the feed grain, raising buyers' concerns on the impact it could have on prices and supplies.
Not too long ago, China's corn import demand was merely a rounding error on the global corn trade books as the nation fed its livestock industry with domestically farmed corn. China started its rebuild of a hog farming sector decimated by the African Swine Fever pandemic in an environment of an increasingly affluent population hungry for more animal protein. Suddenly, looking inwards for feed corn is no longer possible as the growth for corn demand has outpaced the increase in domestic corn production.
China first looked to the US to provide for its growing corn appetite and subsequently to Ukraine to fill more demand growth, with the two countries being able to meet the Chinese government's stringent phytosanitary and GMO requirements.
This corn procurement strategy worked – until it did not.
When Russia invaded Ukraine Feb. 24, panic struck the global grain market owing to a supply-side obscurity after flows from a key corn exporter was put on an indefinite halt. It was the case until UN and Turkey brokered a deal for a safe passage for grains out of Ukrainian ports, but volumes were slow.
Prolonged war in Ukraine crossing over the harvest season of China's new crop from August essentially stripped China off more than 8 million mt of corn. Escalating political tensions between Beijing and Washington have also disincentivized Chinese state-owned buyers from extending supply exposure to increasingly pricier US corn supported by domestic ethanol program and fervent export demand.
"China cannot afford another trade war with US and this serves as a method to diversify their sources of corn instead of relying heavily on the US," a Singapore-based grains trader said.
As the war in Ukraine continue to drag on, there was a clear need to improve corn supply diversification for the world's second-largest economy with a 1.4 billion population. Speculations of China considering its stance on importing Brazilian corn got louder until China finally invoked an agreement first tabled eight years ago.
"There is no greater appetite for Brazilian corn from China than now," another trader said.
China announced in May that they have concluded key negotiations in a protocol with Brazil to allow imports of Brazilian corn but the timeline remained blurry even to those who trade daily. China waived quarantine requirements on Brazilian corn in July and accelerated phytosanitary approvals for export to commence in 2023, but relaxation of farm controls for corn buoyed confidence in Brazilian authorities to hopefully ship the first bulk cargo by the end of 2022.
Alas, a change in government in Brazil after a tightly contested election in October gave Chinese authorities the final push to see this deal. Shortly after Lula da Silva was elected to succeed the incumbent Jair Bolsonaro as president, China's General Administration of Customs released an updated list of traders, facilities and terminals approved to export corn to China.
The reality of exports to China happening has never been clearer until now, and the final door left to be unlocked is the approval on the GMO requirements. As it stands, there are unapproved GMO strains in the hybrid corn seeds used in farming in Brazil waiting to be given the green light by Chinese authorities before they could leave Brazilian shores.
The prospect of China vying for Brazilian corn is sufficient reason for existing destination markets prepare for a stiff competition going forward. Even as the Black Sea Grain Initiative received a 120-day extension Nov. 17, supply diversification will remain paramount in the Chinese policymakers' interests.
Would China seek to replace the supply void left by Ukraine or would they also replace more US corn with Brazilian supply? The jury is still out.
The data tells the story. Spain, Egypt, Iran, Japan and South Korea took up close to 60% of Brazil's corn exports in the 2021 calendar year, and more than 50% between January and September. In a demand-driven scenario, China's involvement in the trade flow will provide massive tailwinds to prices, which would be welcomed by Brazilian farmers. However, US corn could come into the picture to provide a ceiling to prices and participate in more flows to the biggest importers.
Brazil is expecting another record corn crop in 2022-23 and this should provide some comfort to key buyers regarding supply, at least for the time being—until we see another major scarcity event in the form of a record La Niña phenomenon in South America or a record Chinese corn crop production failure.
Right now, participants are sitting still, waiting for the trade cards to shuffle. Until the first corn vessel begins its voyage from Brazil to China, it is business as usual for buyers and sellers.