SINGAPORE (Reuters) - Beijing will have to seek alternative sources of grain to feed animals as top exporter the United States runs tighter on corn supply than it has for decades, while at home a severe drought threatens China's wheat belt.
The most likely options for China would be to import more distillers' dried grain or Australian feed wheat. Supply of both is plentiful, in contrast to corn and wheat, which are both witnessing prices near multi-year highs after a series of supply shocks and rising demand.
Spiraling prices for grains are contributing to China's food inflation, which it would want to avoid stoking with more imports from already tight markets.
"The fundamentals are so tight on corn globally and that is without factoring in any Chinese imports of corn," said Adam Davis, a senior commodity analyst at Merricks Capital, a Melbourne-based funds manager that invests in agriculture.
"U.S. corn supplies are so tight that they won't have much surplus left for China this year and Argentina is also not doing too well because of the drought."
China, already the world's largest importer of ethanol byproduct distillers' dried grains or DDGs, has the potential to take a lot more imports as more feed mills use them to replace corn.
U.S. DDG exports to China skyrocketed to more than 2.9 million tonnes in the first 11 months of 2010, up from almost nothing three years ago, displacing as much as an estimated 1.5 million tonnes of corn imports.
"The prices of wheat have also been rising due to the drought," said Shen Enxian, a senior analyst with China International Futures. "Increasing the usage of distillers' dried grains can be an option."
Still, the appetite for DDGs may be temporarily slowed by an anti-dumping probe China launched late in December, as imports surged. The commerce ministry expected to make an initial conclusion in March on the probe, a prospect that has driven some buyers to try and cancel shipments due around that time.
The nation can also shun expensive U.S. corn if it opts to use rain-damaged wheat from Australia, which can replace corn to some extent in making feed for animals.
Australian feed wheat supply is unusually large this year after rains and floods damaged crops. Around half of Australia's 2011 crop of 22 million to 26 million tonnes is likely to be downgraded to feed grade, much more than the 4 million tonnes of feed wheat a year it typically produces for domestic consumption.
Chinese buyers were among the first to buy it -- purchasing about 150,000 tonnes of Australian feed wheat last month. International traders based in Australia have snapped up to 2 million tonnes of the grains from farmers in expectations that demand from animal feed makers would surge as global supplies shrink.
The U.S. government slashed its forecast for corn stockpiles by 9 percent on February 9, projecting the tightest supply since the Great Depression as a record amount of the crop is used to make ethanol.
Corn prices in Chicago jumped to their highest since July 2008 after the U.S. report showed stocks would dwindle to 675 million bushels by the August 31 end of the marketing year, a move that could force end-users to scale back use of the grain.
The world's second largest corn exporter Argentina is also facing problems, as its corn crop has been hit by the La Nina weather pattern. The Buenos Aires Grains Exchange sees corn output down 17 percent at 19.5 million tonnes from 23.5 million in the 2009/10 season.
Global grain supplies have been tightening for months as droughts and floods coupled with unrelenting demand for feed, food and fuel caused wheat and corn prices to more than double from last summer's lows.
"It is a very bullish picture emerging for corn and add to that the concerns that we are seeing in China, not just on wheat, the U.S. Grains Council has said China may need more corn," said Abah Ofon, an agricultural commodities analyst at Standard Chartered Bank.
China turned corn importer last year, buying 1.57 million tonnes, its largest in 15 years, almost all from the United States. The U.S. Grains Council estimates China may need to import as much as 9 million tonnes, this year, but rising prices have already prompted it to cancel some import plans.
GRAINS OUTPUT & DROUGHT
Worries over rising food inflation have forced Chinese authorities to make plans to boost grains output and take fiscal measures, such as raising interest rates this week, for the second time in just over six weeks, to tame rising prices.
China will further boost its grain output this year with more assistance to farmers such as providing various subsidies and hiking minimum purchase prices for rice, state radio said in a report on its website.
The Chinese government has been releasing corn from state reserves over the past two years after drought pulverized its harvest in 2009, causing a big deficit in supplies.
A severe drought in key wheat growing areas is also threatening to curb output of winter wheat in China, the world's biggest consumer and producer of the grain, which could pile on the woe for its policymakers.
U.N. agency the Food and Agriculture Organization has sounded the alarm on the issue, calling it a serious problem.
Drought threatens more than 6.67 million hectares of wheat in eight major wheat producing provinces, which contribute more than 80 percent of China's total wheat output.
Snow across drought-hit parts of north and central China has brought some welcome, if limited, relief.
Snow was recorded in the capital Beijing, and parts of Henan, Anhui and Jiangsu provinces, some of which have suffered from months without rain, Sun Jun, a senior forecaster for China's meteorological service, told state radio.
Additional reporting by Zheng Xiaolu in BEIJING; Editing by Clarence Fernandez