American Drought Already Hitting Chinese Consumers Hard

What is now being labeled as the worst drought in the United States in 25 years has led to serious concerns about the world food supplies and inflation. The high temperatures specifically in the corn producing regions continued over the month of June and early July and have meant further downgrade of export estimates from the US for this crop year.

The USDA’s July World Agricultural Supply and Demand Estimates (WASDE) report predicts corn yield for the year 2012-13 to be down 20 bushels to 146 bushels per acre due to the extreme heat conditions in the central and eastern Corn Belt. Of the projected 47.6 million tons reduction in global supplies, US will account for 46.2 million tons.

More than 70% of the corn producing regions are in conditions of drought. The persistent and extreme dryness in the corn regions has meant that only 31% of the corn crop was reported in good to excellent condition in the USDA weather report this week, which was 35 percentage points below the same time last year.

The pressure from growing demand for corn from the Far East specially from China has continued in spite of the accelerating prices. The December corn on CBOT closed at $778.5 on July 18 as Chinese importers remained the center of attention.

The growth of commercial farms in China has meant that feed grain has become more important in the economy. According to Food and Agricultural Policy Research Institute (FAPRI) data, China’s per capita consumption of corn has grown at an average of 4% over the period 2000-12. The Chinese drought has meant that the imports for China are predicted to go up by 3 million metric tons in 2012-13 over the previous crop year.

In anticipation of tightening supplies and the escalating prices that follow, the USDA has revised import estimates 2.0 million tons downwards each for China and EU-27, 0.5 million each for Japan and South Korea and 0.3 million tons for Mexico.

However, China’s grain reserve corporation, Sinograin, had continued to accumulate US corn over the period April-June. The purchases specifically went up in mid-May when priced dipped slightly.

Capital Economics has assuaged fears about the drought by suggesting that US is not the only supplier and forecasts about the impact of weather could be exaggerated.

Slight diversification was seen on this front when Chinese companies sought out Ukrainian corn for a portion of the 8 million metric tons of imports expected this year. COFCO, the top trading house in China and New Hope Group, the biggest animal feed producer have shown interest in importing from Ukraine. Ukraine is to sign a corn quarantine agreement with China to facilitate
this. In the meanwhile, USDA continues to paint the scenario of a difficult corn year ahead of us. Many forecasters feel that the drought will continue all through Q3 and beginning of Q4 of 2012.