ANALYSIS-China fights agflation, grapples with tight supply
Trade the News
Friday November 19, 2010 07:30:10 AM GMT
* China's liquidity tightening seen a short-term measure
* Higher global farm output needed to tame prices
* China seen buying more corn, soybeans and cotton
* Seeks new sources of grain supply as consumption jumps
By Naveen Thukral and Niu Shuping
SINGAPORE/BEIJING, Nov 17 (Reuters) - China's demand for farm commodities will rage unabated in the next few months as rising consumption in the world's second largest economy will defy its new moves to soak up liquidity and dampen food prices.
Global prices of grains, cotton and oilseeds have slid from record or multi-year highs in the past week as policy makers in China, the world's biggest importer of soybean and cotton, take steps to rein in consumer prices running at a 25-month high.
But as consumption outstrips domestic supplies, China is likely to ship in even larger volumes of soybeans and cotton in the months ahead, and is widely expected to buy more corn from the international market, analysts said.
"Irrespective of what the Chinese authorities do to curb rising food prices, the core issue needs to be addressed and that is that production needs to exceed demand in order to rebuild global stocks to put a downward pressure on prices," said Luke Mathews, commodity strategist at Commonwealth Bank of Australia.
"Until that happens any activity by any government around the world is not going to be a sustainable measure."
Consumer price inflation in China spiralled to a 25-month high in October, with prices rising 4.4 percent from a year earlier. Food, which makes up about a third of China's consumer price index, led the way, climbing 10.1 percent.
This has spurred authorities to take several steps to tame inflation and deter speculation. After a meeting on Wednesday, China's State Council, or cabinet, announced plans such as intervening to control prices when necessary and releasing state reserves to hold down prices. It also singled out grain, oil, sugar and cotton as markets it sought to cool. [ID:nBJA002345]
Chicago Board of Trade front-month corn <Cc1> jumped to its highest in more than two years this month, while soybeans <Sc1> scaled a 26-month top, buoyed by a squeeze in world supplies and strong demand, although prices have dropped since last week on talk of China's measures to check inflation. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a graphic on open interest and prices on China's Dalian
soybean and soyoil futures, see:
http://link.reuters.com/sug85q
For a graphic on China's corn and cotton prices, see:
http://link.reuters.com/wug85q
For a graphic on Chinese inflation, see:
http://link.reuters.com/bak84q
For Q+A on how serious China's inflation is: [ID:nTOE6AE04B] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
IMPORTS TO CLIMB, LIFT PRICES
In the Chinese market, Dalian corn futures last week climbed to an all-time high of 2,440 yuan a tonne and Zhengzhou cotton surged to historic highs of 33,720 yuan a tonne last week.
China -- whose soybean imports jumped 26 percent to record highs in the first 10 months of this year, surpassing the total for all of 2009 -- could be in the market to take more than 5 million tonnes of corn in 2011, say some analysts, potentially making it the world's fifth largest importer.
The country is already the world's top importer of cotton.
Rising demand has also dampened the government's ability to control prices by releasing stockpiles of cotton, corn and sugar into the market this year. China keeps the size of its reserves secret.
Analysts and traders say China's state corn stocks could have dropped below 10 million tonnes, or less than a month's supply, following the release of some 45 million tonnes since the beginning of 2009.
Similarly, reserves of cotton could be as low as 300,000 tonnes, less than 5 percent of annual production, and sugar could stand at 200,000 tonnes, around 2 weeks of supply.
"We believe the government's stocks are very low, which has weakened the government's power to control the price rises," said Wang Chen, a senior researcher with Wanda Futures in Beijing.
"Giving the rising labour costs and more farmers moving to cities for jobs, all these would boost demand for agricultural products."
Growing feed demand, mainly from China, should lift U.S. grain futures far above current prices within three to five months, U.S. analyst AgResource said on Wednesday, underscoring the country's voracious appetite. [ID:nLDE6AF2D7]
And the country is scouting for new potential sources.
Argentina's farm minister said last week his country was in talks with China to export corn to the Asian country, which does not currently buy Argentine corn, thanks to trade issues and Beijing's curbs on genetically modified varieties.
"There is a report that China is in talks to buy Argentina corn. This indicates tight domestic supply and demand for supplies from the overseas market," said He Lin, an analyst with Nanhua Futures in Heilongjiang.
"China is seeking other supplies overseas (besides the United States." (Editing by Clarence Fernandez)
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