What’s next for China’s corn demand amid Covid lockdowns, rising fertilizer costs?

Dalian corn futures have rallied over the past week and are again getting close to making new record highs.

Prices hit a high of 2,932 yuan/ton (462 USD/ton) on March 7 before pulling back slightly. With the bullish macro backdrop for commodities, it seems likely that futures will remain firm.

Cash prices edged slightly higher over the past week. Most of the strength was in northeastern China due to the ongoing Covid outbreak and lockdown in Jilin province which has limited transportation and hindered logistics.

Prices in production areas such as the city of Harbin are at 2,570 (434 USD/ton) yuan per ton. Areas with heavier demand such as Shandong province are at 2,830 yuan/ton (446 USD/ton), and prices at southern ports are at 2,900 yuan/ton (457 USD/ton).

The outbreak in Jilin started at the beginning of March and showed no signs of slowing down with another 2,465 cases reported today.

Despite that areas including Shanghai are experimenting with more flexible approaches to lockdowns, the severity of the outbreak in Jilin, combined with the fact that it is a less developed rural province, likely mean stricter Covid measures will last for the foreseeable future.

At present, the corn crop in China faces challenges due to higher fertilizer prices and efforts to switch land to soybean production.

As mentioned in our recent urea analysis, prices for urea have been rising. Fertilizer supplies in corn growing regions are tight and disruptions to those supplies could potentially hurt yields.

The government has also been making efforts to switch land towards soybean production.

In the past, this had some success, but usually traded off with corn production. One problem was that subsidies for soybean production were typically announced after farmers had already made their planting decisions.

This year, the Heilongjiang provincial government announced soybean planting subsidies two months earlier than normal, granting 248 yuan/mu or 3,720 yuan/hectare ($585 USD/ha) to farmers.

At this point in the season, it is too early to assess the size of acreage that might be switched.

For many farmers, it is not solely an economic calculation.

Many small farmers find corn simply easier and less risky to grow. Farm sizes are smaller in China, so bringing in new equipment just for soybean productions can be an unwanted hassle if a farmer might only be looking to plant 5 or 10 hectares.

Import demand also bears pressure as the growth of global prices has dramatically outpaced the rise in domestic corn prices.

It is possible that state-owned companies may still import with thin margins if there is a political desire to increase stockpiles.

Even taking that into account, the current USDA estimate of 26 million tons of Chinese corn imports in 21/22 seems too high given the current state of import margins.

As the second quarter approaches, feed demand could weaken further as the hog industry is forced to shed overcapacity.

The current ratio of hog prices to corn prices is 4.15 versus 1 which indicates massive losses for hog farmers.

According to the government’s price monitoring system, a ratio below 6:1 triggers an alert and a ratio below 5:1 elevates the alert to the highest-level. Eventually, hog farmers will need to reduce herd sizes which will weigh on corn demand.