Ukraine tensions flag risks for Beijing’s grain importers

A major shipment of Ukrainian corn entered China on December 6 last year, the first installment of what was supposed to be an annual 3 million tons of the grain from the eastern European country.

Much has changed since 2012 when China and Ukraine signed the loan-for-crops deal that brought the delivery to port. At the time, Export-Import Bank, one of Beijing’s policy lenders that smooth foreign trade, gave Kiev access to US$3 billion in loans in exchange for a steady supply of grain.

Today, a fragile new government clings to power in Kiev, and the Crimean peninsula, from which 10% of Ukraine’s grains are shipped, has been annexed by Russia, a great concern to the international community. This week, violence has flared in eastern parts of the country, major corn producing areas that border Russia. Beijing’s corn deal with Ukraine’s former government hangs in the balance.

Chinese grain importers dealt mainly with Ukrainian state-owned firms in the past. Now that the government has changed, the terms of those agreements may be up for early review.

“If you change the government, there is a very big question mark: Whether the contract or the agreement will still keep on, or if they will break the promise and say they need new investment,” Jane Peng, a Shanghai-based analyst at the Netherlands’ Rabobank, said last week. A war in the country has the potential to derail any deals as well, she noted.

The crisis in Ukraine comes as Beijing reorders its priorities for grain imports and domestic food production.

China has long touted a self-sufficiency policy for grain, requiring that domestic farmers produce 95% of the country’s staple crops. On the face of it, the policy remains intact. But a new, more practical generation of policymakers has also recognized the challenges that China will face in the future in feeding its massive population. Earlier this year, the State Council said that domestic producers must maintain 95% self sufficiency for edible grains but relaxed the requirements on crops that are used as feed for livestock, with corn the primary target.

Chinese aren’t crazy about corn on the cob, but their pigs are. As the world’s biggest consumer of pork, the grain consumed by the animals is also of strategic importance to the long chain of industries that puts China’s favorite meat on the table.

Over the next few years, China will look to stabilize its total grain production at below the volume cultivated in 2013, showing that the government plans to become increasingly flexible over the amount of grain that it imports. The new policy stance will likely lead to a great increase in corn imports over the next decade and China’s state-owned importers are gearing up for that change.

Late last month, the General Administration of Quality Supervision, Inspection and Quarantine signed a deal that will allow Brazil to begin exporting corn to China. The deal looked like a bid to move away from reliance on the US, which contributed more than 90% of the corn that China imported last year. Shipments from Ukraine were part of China’s push into new grain markets other than the US. For farmers in Ukraine’s agrarian heartland, the political chaos has come at an inconvenient moment.

During the next 15 years, Chinese feed grain imports could rise by as much as 210%, according to a report by Rabobank’s Peng. Corn makes up the bulk of the feed, with wheat and soybean also filling a substantial role. Between 2015 and 2020, China’s corn imports are set to jump by about 33% to an annual incoming load of 8 million tons. Ukrainian farmers no doubt hope to fill some of those orders.

Some potential for even greater growth in corn imports exists – if China decides to loosen its policy further. Like many other agricultural purchases, corn is part of an import quota regime. For imports within the 7.2 million-ton quota, tariffs stand at 1%, but outside of that quota the tariff can be as high as 180%. In the past, under pressure to maintain efficiency, keep costs low and feed the population, China has ditched quota regimes. Imports of soybeans soared between 2004 and 2010 after the government scraped many restrictions.

China’s corn inventory is high this year and demand is low, not the kind of conditions that will push Beijing to remove the quota regime, Peng said. But as demand for pork increases, so will the demand for corn. If China experiences a domestic corn shortage, the government may reconsider the quota regime. In turn, changes to the system could cause “imports to treble overnight,” the Rabobank report says. That’s because the international price of corn is 20% lower than in China due to the higher cost of production on the mainland.

Ukraine and Brazil have high potential for catering to a hungry China. The countries contribute 3.3% and 1.4% to China’s corn imports, respectively, but have the greatest prospects for increasing shipments as demand grows in China, the Rabobank report says.

China’s state-owned importers have preferred doing business with their peers in government-controlled firms around the world. The rocky political situation in Ukraine might lead them to reconsider signing more deals with state enterprises in the country for fear of losing the contracts in a rapid shift in leadership. Private corn exporters could even become the winners in the political transition.

“[China] would be happy to deal with them,” Peng said. “That will be a totally different story, dealing with the privately owned companies instead of the state-owned ones.”

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