China's corn stockpiling hurts China Agri-Industries

By Niu Shuping, Coco Li

BEIJING, March 10 (Reuters) - China's stockpiling of corn has artificially bumped up raw material prices in the northeast, home to processors of China Agri-Industries Holdings Ltd (0606.HK), and hurt its profit, a senior executive said on Tuesday.

Beijing has agreed to buy 40 million tonnes of corn in northeast provinces at higher-than-market prices, and the purchases have boosted prices in the northeast above other regions, China Agri executive director Yue Guojun told reporters.

"We have proposed to the government to abolish such purchases next year. The government can increase direct subsidies to farmers instead," Yue told reporters on the sidelines of China's annual parliamentary meeting.

"Processors in the northeast are hit hard and our profit has fallen from previous years," Yue said. He declined to elaborate.

China Agri, the country's largest grain processor, uses about 5 million tonnes of corn a year to produce products ranging from starch, sweetener to ethanol.

China's corn industries process about 50 million tonnes of corn a year, accounting for about 30 percent of the country's corn harvest last year, which was estimated at 163 million tonnes, he said.

The government's purchases have triggered a resumption of operations by some small and polluting alcohol and starch mills elsewhere who have enjoyed cheaper corn prices, such as Shandong, he said. Shandong is home to China's largest starch producer.

Beijing has been buying crops, including cotton and oilseed, to shore up farmers' incomes, which are under pressure from a fall-off in demand after five years of bumper harvests.

Its oilseed purchases at prices higher than international prices have led to crushers shifting to importing soybeans and rapeseed.

ALONE IN THE MARKET

Yue said Beijing's stockpiling had left Sinograin, the state grain buying agency, alone in the market, as a majority of trade firms were unwilling to buy corn from farmers at a small price advantage to ship the corn to consumers in the south.

Lower production in paper and textile mills will lead to weaker demand for corn starch this year after annual average growth of 15 percent over the past 8 years, he said.

Outbreaks of bird flu in January have also cut the use of corn for feed production, reflected in lower prices of DDGs, or dried distillers grains with solubles, a co-product from its ethanol plants, said Yue.

Yue said Beijing would continue to offer subsidies to support the production of fuel ethanol -- the clean biofuel blended in gasoline -- but expansion of that industry had not been given the go-ahead by the authorities on concerns over feedstock supply.

"We have invested a lot on the research of cellulosic ethanol, which will be the focus of our future business."

China Agri has said to expect a 180 percent increase in its 2008 net profit, owing to the company's conservative hedging policy in its oilseed business. It reported a 174 percent jump in first half net profit last year mainly due to higher margins in oilseed processing. (Reporting by Niu Shuping, Editing by Jacqueline Wong))