Concentrated Production in China to Blame for Price Spikes Says Rabobank Report

The report recommends investments in logistics infrastructure are critical as trade flows shift.

March 5 2012 --- 2011 saw China’s biggest corn crop on record but not where demand (animal production) is most concentrated, creating bottlenecks along lengthening supply routes, spiking pricing spreads and ultimately driving a shift in where animals might best be raised.

Rabobank have analyzed this trend and released a report looking into the key factors driving this issue, and how they might be circumvented in the future.

A massive increase in soy crush capacity is creating clusters of excessive soymeal supply along certain pockets on the coast, causing a deterioration in crush margins as well as a shift in soymeal supply routes.

With geographical mismatches between supply and demand, grain traders and crushers will find it increasingly necessary to focus on investment in distribution and storage, while feed millers and animal producers will need to manage an extended supply chain at an increased risk for bottlenecks.

The report suggests that Investments in logistics infrastructure are critical as trade flows shift, creating challenges for state policy, but opportunities for traders—as much as state-owned enterprises (SOE) allow. Much of the integration by grain traders, crushers and feed companies that has already occurred has not been among multinational players but among domestic firms. These multinationals are at the greatest risk of being excluded from the growing market.

China’s incremental production volumes for the corn sector and crush capacity in the soybean sector have increased substantially within a very short time period.

2011 saw China’s biggest corn crop on record but not where demand (animal production) is most concentrated, creating bottlenecks along lengthening supply routes, spiking pricing spreads and ultimately driving a shift where animals might best be raised.

A massive increase in soy crush capacity is creating clusters of excessive soymeal supply along certain pockets on the coast, causing deterioration in crush margins as well as a shift in soymeal supply routes.

Investments in logistics infrastructure are critical as trade flows shift, creating challenges for state policy, but opportunities for traders – as much as state-owned enterprises (SOE) allow. The influence of SOE’s in storage and distribution will grow as this sector becomes more and more important.

Volume increases have caused strain at the seams of the economic growth narrative as market dislocations have become emerging themes. In some cases, expanding volumes are reinforcing the need for ‘deeper’ logistics capacity along established distribution channels. For others, these channels themselves are being completely reversed.

With geographical mismatches between supply and demand, grain traders and crushers will find it increasingly necessary to focus on investment in distribution and storage, while feed millers and animal producers will need to manage an extended supply chain at an increased risk for bottlenecks.

Source: Rabobank