Could Corn Be a Big Winner in a Phase 1 Deal with China?

China is said to be shopping for ethanol in the U.S., which could fill an appetite for meeting China's mandate, while the need to export more corn-based products from the U.S. ( MGN )

China looks to be shopping for U.S. ethanol. People familiar with the matter say there is interest from China to buy U.S. ethanol, which could end up being a major victory for a struggling corn ethanol industry. 

“I think if we're not going to get it on the domestic side in terms of mandatory blending, then exports are the main horse you have ride here,” Alan Brugler of Brugler Marketing.“We've got China making sounds like they're going to buy a lot of ethanol. That's certainly an easy way to get $ 1 billion or $2 billion on the tab. And they have an E-10. mandate in China. They're not making enough ethanol to fill that.”

“China has been publicly talking about the fact that they want to build up their ethanol industry,” said Chip Nellinger, of Blue Reef Agri-Marketing. “They're starting to ramp that up. They don't have enough corn to do it. So, it's good news.”

“If they're going to stick to the mandate, the E10 blend, they need a lot more ethanol than they have the capacity to produce at the present time,” Brugler said.  “That's a political target. They could always defer that implementation date or go with a 5% or something, but if they're going to stick with what they what they have in the plan, they need more ethanol and we're a convenient source to get it.”

DDGs could be part of the export mix to China, along with a lot of protein, according to Nellinger.

“From the feed side, it could be good for corn,” he added. “It's a big number, if they follow through and by $40 billion in buys, I think corn is going to benefit greatly from that.”

Analysts say the U.S. needs that added demand from China, as ethanol could be in for more of a slump in the U.S. EPA announcing this week it’s leaving the RFS at 15 billion gallons for 2020, and no news of addressing the small refinery waivers.

 “Obviously it’s a disappointment,” said Nellinger. “I don't know that it's a major market mover. I think that some disappointment on the demand side was already built into prices where we're at on corn, but it's certainly not a good development.”

The market continues to wait for more signs the agreement with China is the real deal.

Soures say China was also shopping for U.S. wheat this week. Meanwhile, the country lifted the ban on U.S. poultry, signaling an opportunity to send more poultry as a protein source to China.

“The poultry is not going to totally replacement for pork, simply because of consumer preference in China, but they've been ramping up their own poultry production - particularly ducks -  within China, so they can they can get some high-quality chicken from us and help to fill in that hole,” said Brugler. “They’re trying to convince some of the consumers to not chase the high price pork and to go for the poultry.”

While China looks to be laying the groundwork for big agricultural buys, is the marketing acting that way?

“I think it's starting to, which is good news,” said Nellinger. “I think the other good part is that the funds are short a large amount of corn and soybeans, and now that uncertainty with the trade deal seems to be kind of getting in the rearview mirror now. We don't have the details, but we're certainly acting like this time it's different.”

“Markets are starting to believe it,” added Brugler. “It’s just a little bit of a ‘once burned, twice shy’ situation.”

 

Comments