(DTN) "Stop buying corn in the market!" was a verbal order the four largest state-owned grain companies received recently from China's central government.

Some corn-processing companies in Jilin province had already received similar instructions in January. More than 70 corn-processing companies in Heilongjiang province also received the same instruction, according to the local traders. Jilin and Heilongjiang are the major corn-producing provinces.

Nationwide inflation had stimulated the escalation in corn prices. Farmers are not in a hurry to sell corn because they expect high prices to be even higher just before harvest of this year's crop. Grain processors and distributors expect the same thing, which is why they want to buy more corn now, especially as international corn prices are climbing.

The Chinese grain reserve system had purchased 36 million tons of corn last year for a temporary reserve, while the total figure sold to the market was 27 million tons. Though the Chinese government does not release an official stock number, those in the market believe that 2010 ending stocks will be very tight.

Despite the tight-stocks situation, "importing corn is not possible right now because of the high import price," said Professor Wu Laping from China Agricultural University. "According to the current FOB price, plus ocean freight, U.S. corn will cost RMB 2700 per ton ($10.44 per bushel???, while domestic corn from northeast China only costs RMB 2300 per ton ($8.89 per bushel). This large price difference has forced grain companies to buy more domestic corn and stop importing from the U.S."

China imported 1.5 million tons of corn last year, most of it from the U.S. Imports stopped around September 2010, after China's new corn harvest.

Higher corn prices and the lack of supply made some corn processing plants suspend their production recently. Chinese corn processors consume more than 48 million tons of corn annually, while animal feed consumption is around 98 million tons; other consumption, such as food processing, accounts for 15 million tons. "However, corn consumption is increasing around 5 percent each year," said Wu. One reason is rising meat consumption in response to increases in income. "We can produce around 160 million tons of corn per year. If the output decreases because of weather, we will need to use stocks or import more."

"Current corn stocks may still be available until the end of May, and then the market supply may become very tight," added Wu. "If import prices are competitive, China may start to import more corn after May. It is not easy to estimate the total import volume, because 60 percent of the import quota is controlled by the state-owned companies, but, I am estimating 5 million tons." The market sees the country having a shortage of 10 million tons of corn, but high prices will restrain some of the demand.

China's corn import quota is 7.2 million tons. USDA pegs China's imports at 1 million metric tons for the 2010 crop year. Sales on the books already total about one-third of that amount.

If China does import 5 mmt, and the U.S. supplies just 60 percent of that -- a modest share, given likely reductions in Argentina's crop and the effects of the crack-down on export taxes announced March 3 -- it would imply a reduction in 2010 U.S. corn ending stocks to 569 million bushels.

"That is a stocks-to-use ratio of just 4.2," said DTN analyst John Sanow. "That would put even more emphasis on the need for high yields and would make an already bullish scenario even more bullish."

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