Robust China Imports Upside Risks To Grain Prices

BMI View: Grains imports from China will accelerate in 2013/14, as international prices remain relatively low, while domestic prices are unlikely to retreat from their highs, buoyed by robust demand and increasing procurement prices for state reserves. This poses upside risks to grain prices in the short term, especially to wheat. Ultimately, due to the weakness recorded since H213, we forecast both wheat and corn prices to average significantly lower in 2014.

Wheat: Durable Import Spree

China's wheat imports reached a spectacular record high of 1.3mn tonnes in October, up 273% y-o-y due to increasingly attractive import prices and because bad weather damaged the wheat crop this season. The government may be forced to release grain from stockpiles and ask state-owned companies to import more wheat in order to ease domestic prices, which will keep wheat imports historically elevated in the coming months. Wheat prices in China continue to hover at record levels, at CNY2,550/tonne in Henan, up 9.9% y-o-y and more than double the CBOT wheat prices. More specifically, demand for high-quality wheat will be particularly acute, given the damage to the domestic crop. Total imports for 2014 could come in close to full wheat low-tariff import quota levels set at 9.6mn tonnes, compared with 3.0mn tonnes imported in 2012/13 and to the 2002/03-2011/12 yearly average of 1.8mn tonnes.

More Imports Coming
Wheat - China Henan Wheat/CBOT Wheat Price Ratio (RHS) & China Wheat Imports ('000 tonnes)

BMI View: Grains imports from China will accelerate in 2013/14, as international prices remain relatively low, while domestic prices are unlikely to retreat from their highs, buoyed by robust demand and increasing procurement prices for state reserves. This poses upside risks to grain prices in the short term, especially to wheat. Ultimately, due to the weakness recorded since H213, we forecast both wheat and corn prices to average significantly lower in 2014.

Wheat: Durable Import Spree

China's wheat imports reached a spectacular record high of 1.3mn tonnes in October, up 273% y-o-y due to increasingly attractive import prices and because bad weather damaged the wheat crop this season. The government may be forced to release grain from stockpiles and ask state-owned companies to import more wheat in order to ease domestic prices, which will keep wheat imports historically elevated in the coming months. Wheat prices in China continue to hover at record levels, at CNY2,550/tonne in Henan, up 9.9% y-o-y and more than double the CBOT wheat prices. More specifically, demand for high-quality wheat will be particularly acute, given the damage to the domestic crop. Total imports for 2014 could come in close to full wheat low-tariff import quota levels set at 9.6mn tonnes, compared with 3.0mn tonnes imported in 2012/13 and to the 2002/03-2011/12 yearly average of 1.8mn tonnes.

More Imports Coming
Wheat - China Henan Wheat/CBOT Wheat Price Ratio (RHS) & China Wheat Imports ('000 tonnes)

We believe strong demand from China will help front-month CBOT wheat prices to remain above support, coming at USc640/level in the short term. Net speculative long positions (net specs) are back close to the lowest levels recorded in recent years, which will also support prices. On the technical front, the daily relative strength index has recently bounced back from oversold territory and has still much room to grow before reaching overbought sentiment. Over the medium term (6-9 months), we believe wheat prices will show more weakness and do not rule out a break below support around USc640-650/bushel in H114, as the market moves closer to the 2014/15 season for the largest producers. We forecast prices to average USc650/bushel in 2014 and USc600/bushel in 2015.

Little Further Downside
Front-Month CBOT Wheat, USc/bushel (LHS) & Wheat Net Specs (RHS)

Corn: Import Revival In Sight

Despite strong domestic demand and the fact that CBOT corn prices are very competitive relative to Chinese corn prices, the country's corn imports have been very low in the past six months, amounting 198,600 tonnes between May and October, down 93% y-o-y. This is because private importers have long reached the maximum allowable 2.9mn tonnes for FY2013 under the low-tariff import quotas, following a period of strong imports in January-April.

Strong Rebound In 2014 Pending
China - Dalian Corn Price & After-Tax Corn Import Price (CNY/tonne) & Imports ('000 tonnes)

We expect China's corn imports to pick up strongly at the beginning of 2014, as international prices are expected to remain at relatively low levels, while low-tariff import quotas will be renewed in January. Until then, imports are likely to remain lacklustre. As a result of all this, China has turned to sorghum imports as an alternative to corn for feed use. Total imports for the 2013/14 season could reach 7.0mn tonnes, compared with 2.7mn tonnes imported in 2012/13 and the 2002/03-2011/12 yearly average of 770,000 tonnes.

Strong Support
Front-Month CBOT Corn Prices, USc/bushel (Weekly Chart) & RSI (Below)

After corn prices have fallen by almost 40% y-o-y, we believe the bulk of these price declines are behind us, and see them merely grinding sideways-to-lower from current levels. Although we see upside risks to prices stemming from China's strong imports from January, we continue to believe most of the risks are skewed to the downside. More specifically, the US ethanol mandate could be lowered or eliminated altogether, which would considerably decrease US corn consumption and increase global market surpluses ( see 'Biofuels Faced With Shrinking Demand', 28 November). We expect prices to average significantly lower over 2014, as the global market will be very well supplied in 2013/14 following a drop in production in 2012/13. We see prices averaging USc425/bushel in 2014 and 2015, compared with USc600/bushel in 2013.

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