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Commodities

China set to add to the global corn glut

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A harvester unloads corn to a cargo truck in Gaocheng, Hebei Province.   © Reuters

TOKYO -- The global corn market is bracing for a potentially large spillover from China as the country will restart exports after nearly a decade of stockpiling the grain in pursuit of food self-sufficiency.

Market insiders have long worried about the kind of impact China might have once it decides to tip its bursting stockpiles onto the global market. If Chinese exports expand significantly, they will likely further drag down an already depressed market.

China is the second largest maize producer after the U.S., accounting for 20% of the worldwide harvest. But in limiting its exports, it has kept from impacting the global market. Meanwhile, exports from the U.S., Brazil and other large producers have had significant impact.

Beijing has protected Chinese farmers by buying corn and wheat at a premium. In China, a ton of corn costs about $30 more than the international average. The policy has resulted in huge reserves, estimated at between 200 million tons and 240 million tons.

It is believed Beijing will scrap this policy in October and begin encouraging farmers to switch to other crops.

The nation's corn production this year is expected to be beyond bumper -- an estimated 200 million tons. "The storage capacity is already near the maximum, so an extra crop would soon have no place to be stored," said Naoyuki Omoto, head of Green County, a Tokyo-based grain consultancy.

For now, an estimated 2 million tons are expected to be exported by two companies, including the Cofco group, China's leading food company. The amount is small, considering the massive stockpiles, but market insiders are already worrying that China will eventually export oodles of kernels.

China used to be a significant corn exporter. It shipped in excess of 10 million tons annually between 1992 and 1994, and then again in 2002 and 2003. Should the country boost exports to similar levels, it would inevitably impact the global market.

Bumper U.S. corn crops for the past few years have already pulled down prices by about 60% from their peak in 2012.

Going forward, the market is focused on how Beijing might try to lower prices of domestic crops that remain higher than international levels, a factor that, if unchanged, would certainly discourage buyers.

In addition, China may also introduce measures to boost the competitiveness of its corn. Its exports -- especially if they come from years-old stockpiles -- may be of inferior quality, according to Hideki Hattori, general manager at Food Management Support, an Itochu group company.

"You can expect, for example, the government may potentially grant some kind of subsidies to encourage exports," Hattori said.

That scenario could prove tricky for Beijing, however, as it may lead to an international outcry that China is dumping corn on the global market.

In fact, the U.S. in September filed a complaint with the World Trade Organization alleging Beijing has unfairly driven up domestic prices of corn and other grains, making it difficult for American farmers to export crops to the country. Should China subsidize exports, it would likely fuel the U.S. ire.

Countries that stand to bear the early brunt of Chinese exports include Japan and South Korea, due to their geographical proximity to China.

In Japan, corn accounts for half of all cattle feed, and there is a debate as to whether buyers in the country might prefer Chinese maize, most of which is genetically unmodified.

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