The week started off with China increasing its bank reserve requirement by 50 basis points April 17. Traders had been anticipating this move, and perhaps more still is to come.
The Peoples Bank of China increased reserve requirements for the nation's largest banks from 20 percent to 20.5 percent, a record. The change will tie up about $350 billion (Chinese) in funds banks otherwise would have to be able to lend. China is tightening screws on nonstate-run corporate loans for corn purchases, imports and domestic. Government agencies reportedly have issued a laundry list of compliance measures for bank lending relative to corn procurement. The changes intend to make overseas procurement impossible by entities other than state-run firms.
The People's Bank of China set seven requirements: Banks only can lend to central and local reserve enterprises; loans that have been issued or approved for nonstate-run firms will be retracted; lenders have been advised to speed up corn sales -- this would appear to be for those lending for the purchase of domestic stocks by local processing facilities; the deep-processing sector (industrial usage) is the focus of the regulatory change; violations of building codes, regulatory approvals and other state mandates require corn processing facilities recently completed or those still in the process of construction to immediately halt construction; China will order a "timely" adjustment of the corn processing VAT policy; and banks have until the end of June to comply with the latest regulatory changes.
The main emphasis of the requirements is to limit corn procurement by nonstate-run enterprises, as they do not buy grain for the reserves, which ultimately makes it way to the domestic market via auction sales. China previously had estimated that corn usage for the industrial sector would reach 50 million metric tons in 2011, while feed corn consumption is forecast at 100 million metric tons.
The Chinese government estimates this year's corn production to be around 172 million metric tons. If that number was realistic and feed wheat was doing its job as a viable substitute for corn, extending loans to corn buyers for industrial production shouldn't be a problem.
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Beijing may have a more difficult time reining in inflation. The news April 19 showed China was pulling the 13 percent VAT tax break on its processing industry. The new decision will exist until the end of June. Growth in China's nonfeed use of corn registered 2 percent from 2008 to '09. But nonfeed use increased a whopping 14 percent in 2010 and, until now, had been forecast to grow at a rate of 15 percent per annum through 2015.
As of April 20, only 7 percent of the nation's corn acres had been planted. Weather is cold so what is planted in Iowa, Nebraska and Illinois will just lay in the soil and do nothing. Soil temperatures across most of the Corn Belt from the center northward are well below the 50 degrees necessary for germination. Similar problems are plaguing the western Canadian prairies. According the Canadian Wheat Board, producer plantings are expected to run ten days to three weeks behind normal.
The U.S. has to produce a large crop of corn. Especially if food wheat, hard red winter wheat, continues with problems of being too warm and dry. Trend line yields and a sharp increase in acres is needed.
