EXCESS DOMESTIC DEMAND DRIVES CHINA'S GRAIN MARKET

C O N F I D E N T I A L SECTION 01 OF 02 SHENYANG 000251

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/26/2017
TAGS: CH EAGR ECON EIND EINT ELAB ENRG ETRD PGOV
PREL
SUBJECT: EXCESS DOMESTIC DEMAND DRIVES CHINA'S GRAIN MARKET
STRATEGY

REF: A. SHENYANG 248


B. SHANGHAI 784

C. BEIJING 7554

DEPT PLEASE PASS TO DEPARTMENT OF AGRICULTURE

Classified By: CONSUL GENERAL STEPHEN B. WICKMAN.
REASONS: 1.4(B),1.4(D)


1. (C) Summary. China will not allow any exports of corn or
soybeans during 2008 and will radically curtail wheat
exports, according to Wang Haisheng, Director of state-owned
Jilin Grain Group and General Manager of Jilin Grain Group
Export and Import Company. Wang,s company, which accounts
for sixty percent of China's annual export capacity, also
looks to dramatically increase its imports of corn and
soybeans, especially from the United States. The
increasingly tight grain market has led Jilin Grain to change
the staffing pattern at its recently opened office in
Chicago, which will now hire more experienced American
traders to replace planned transfers from the home office in
Changchun. End Summary

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No Food to Burn
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2. (C) Wang Haisheng, Director of state-owned Jilin Grain
Group and General Manager of Jilin Grain Group Export and
Import Company, told Econoff on December 25 that the
increasing use of oil-bearing plants, particularly corn and
soybeans, to produce bio-fuels has had a major impact on
China's food supply, creating shortages and driving prices
higher. Government efforts to eliminate the diversion of
grain from the food and feed markets into the fuel market
have been largely unsuccessful, according to Wang. He said
that domestic supply and demand had previously been
relatively balanced, but the impact of the bio-fuel boom,
both domestically and in the international market, has caused
demand to surge well past supply.


3. (C) As the country becomes more affluent, changes to the
food supply system are only exacerbating the effects of the
bio-fuel boom.. For example, Wang said, animal feed and
deep-processed corn products account for an ever-increasing
share of the overall market. These less efficient uses
result in increased per capita consumption thus adding to
price pressure.

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No More Tax Rebates
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4. (C) When asked about China's recently announced
elimination of the 13-percent export-tax rebates for a range
of agricultural products, including wheat, corn and soy, Wang
said the measures were chiefly aimed at private firms in
order to encourage them to stay out of the export market.
State-owned firms, which account for the vast majority of the
market, are simply being told not to export. Noting that the
elimination of rebates couldn't very well be criticized by
other trading nations, Wang said the measure will make it
easier to explain China's absence from the market this year.


5. (C) Because domestic demand is so high, Wang said that
Jilin Group and its counterparts in other grain-producing
regions have been directed to sell from state reserves.
Sales from the reserves would add an extra 2 million tons of
corn to the nation's supply from mid-December to mid-January,
according to Wang, and all food producers in China are being
directed to take steps to get food prices under control.
Wang,s company, in particular, plans to step up its activity
in global markets, but he said there likely would be more
government steps announced to curb rampant food-price
inflation (reftels).

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If You Thought Supplies Were Tight Last Year
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6. (C) Market analysts have predicted that China will reduce
corn exports to 2.5 million metric tons for the 2007-08
(October to October) trading year. China approved 4.5
million tons of export quotas at the beginning of the 2006-07
trading year but halted sales at 3.8 million tons due to
rising domestic prices. Wang's information, if proven
correct, indicates that the reduction in corn exports will be
total. The removal of an additional 2.5 million tons from

SHENYANG 00000251 002 OF 002


global supply would have a major impact on stocks that,
according to industry reports, are already at thirty-year
lows. The increasingly tight grain market has led Jilin
Grain to change the staffing pattern at its recently opened
office in Chicago. The company will hire more experienced
American traders who, it is hoped, will be more effective
than the staff they had originally planned to transfer from
Changchun.
WICKMAN