As Chinese corn buyers start looking for alternatives to expensive US corn and uncertain Ukrainian crop, the Chinese government has this week approved Brazilian corn for import. We analyze what the impact could be in the scenario Brazil replaces the US in China’s corn import mix.

Brazilian corn approved in China

This week China’s general customs administration (GACC) approved over 100 Brazilian agricultural traders, cooperatives, and facilities to participate in exporting Brazilian corn to China, a trade which has previously been very uncommon. Ports with approval for export include Santos, Paranagua and Itagui. Included in the deal, cargoes must be inspected for 18 quarantine pests before departure for China. Going forward, more approvals may be granted for Brazilian farmers and shippers, paving the way for an even greater volume of shipments. The news comes as one of China’s primary corn suppliers, Ukraine, continues at war with Russia and grain exports have been very limited. In 2021, China imported 8 MMT of corn from Ukraine, making up 28.3% of the country’s imports, with the US taking the majority share at 70.5% totaling 20 MMT.

Chinese corn imports have declined by 35.8% YoY to just 16.8 MMT over the Jan-Oct period as shipments from Ukraine were halted at the end of February, but also due to falling demand in the country. Some of this can be attributed to an unfavorable exchange rate as US corn for most of the year has largely been the only option for Chinese buyers. So far this year, US corn has accounted for 91.5% of Chinese corn imports since the war started. According to the USDA, there is a $42 premium to import US corn over Brazilian into China, making Brazilian corn more economical. A weak yuan also raises the possibility China will look to use its current stocks, which are priced in yuan, before replenishing them at a more favorable exchange rate on the seaborne market in the future driving higher import demand.

Brazilian corn harvest

According to the USDA, Brazil’s corn crop is expected to yield 126 MMT, rising by 8.6% YoY, for the 2022-23 marketing year. On the export side, USDA expects a 5.6% increase YoY in Brazil’s corn exports at 47 MMT, and the highest on record. Brazilian farmers have more than recovered from last year’s weak corn harvest as yields have improved quite significantly. The sharp rise in volumes expected in 2023, estimated by the USDA, is likely more than enough to fulfill China’s demand given the country’s corn imports this year.

Growing woes in China

Like coal, China has sought to reduce its reliance on the seaborne grain market by increasing domestic production. While somewhat successful, the current corn crop is expected to decline in the coming marketing year. Estimates have been revised down by 4 MMT in the next marketing year, according to the USDA’s latest China Grain and Feed update; Citing excessive rains in the north-eastern regions of the country, which stronger yields are not expected to fully offset. Chinese farmers also receive a subsidy 9 times larger to grow soybeans over corn, providing a greater scope for less corn planting and more corn imports. On the demand side, weakened appetite from China’s restaurant industry, which has been affected by Covid-19 lockdowns has also hampered grain demand to an extent. With lockdowns still occurring this further adds to hesitancy when considering importing expensive US corn. Finally, low hog prices and firmer feed prices earlier in the year incentivized hog farmers to reduce their herds, reducing feed demand.

Demand impact positive but still lower YoY

Overall, in the scenario China replaces US corn with that of Brazil, the bulk carrier demand impact will be positive for the Panamaxes, though overall demand is still estimated to decline YoY. While the distance to China from the US Gulf is longer (assuming going via CGH) than the voyage from Paranagua for example, the congestion and load waiting times in ECSA translate into vessels being tied up for longer. This is largely due to the lower volumes out of the US resulting in less port queues, but also the number of berths available in the USG compared to the Brazilian grain ports. This year, average load waiting times for a Panamax loading corn in Brazil totaled 10 days compared to just 6 in the US.

This effect could be further exacerbated by increased arrivals into Brazil during the start of the country’s corn exporting season in Q3 which overlaps with the even larger soybean season. According to AXS vessel tracking, the Panamaxes have accounted for 98.7% of all Chinese corn imports this year. As a result, we plot the demand impact of Brazil substituting US corn heading to China solely as a Panamax trade looking to next year. Based off USDA estimates for next year, which are lowered to 18 MMT from 22 MMT, and substituting the US share of Chinese corn imports to Brazil, expected Panamax demand improves by 30.9% compared to what it would be if China continued to import from the US. Another scenario is that both Brazil and the US play the majority role in China’s corn import mix, as Ukrainian volumes are still very limited despite the extension of the Black Sea grain deal. In this case, we would expect Panamax demand from this trade to rise nearer to that of this year. Overall, while relatively subdued, the impact of China substituting US corn with Brazilian crop does have some upside to what otherwise might be a sharper decline in bulker demand from Chinese corn imports.