Is China Showing Its Hand in the NTB Game?

Since this past November, China has shut out around 1 million metric tons of U.S. corn citing the use of unapproved genetic modification. This is huge. Some industry estimates are ascribing a drop of as much as 85% in US corn exports to these rejections, which is effectively: the US’ largest crop getting shut out of its largest market. Last week, the National Grain and Feed Association originally estimated that these rejections would cost American producers $427 million, although this estimate has since come down to a more conservative $223 million.

How do these losses occur? The corn has to be sold somewhere else, which incurs additional transportation costs, but also, the new buyers inevitably negotiate discounts (Reuters). These combined effects has depressed corn prices by around 11 cents per bushel, which will end up costing producers a massive $1.14 billion (if Beijing doesn’t complete the approval process by the end of the market year). This has some pretty serious implications, and not only for US bottom lines. Cargill, Inc., one of the biggest agricultural companies in the US (and the world) has seen 28% decline in its quarterly earnings (according to the WSJ) and cites Beijing’s rejections as the principal driver of the decline.

Cargill’s situation also highlights the issue of who should bear the brunt of the rejection costs: grain traders or the seed companies? It’s an interesting dynamic. Traders have historically been huge proponents of genetic modification because of its enormous positive effect on yields; it benefits both parties to grow and sell as large a crop as possible. However, now trader groups such as the North American Export Grain Association is urging seed companies to not only absorb the losses from Chinese rejections, but also to refrain from selling seeds that incorporate GM processes or traits not yet approved by China. Seed companies like Sygenta have rejected the notion of shouldering responsibility, and continue to release products that China hasn’t approved yet (Sygenta introduced a new seed at the beginning of the year).

China typically approves some types of genetic modifications to crops, although the process generally takes longer than other large countries. It also affords a bit more power to its port authorities than is typically seen; for example, Chinese port officials can reject an entire cargo if even one tiny kernel of corn is found to contain unapproved genetic modification processes. Over the course of the past few years, Chinese imports of corn have exploded: 47,000 tons in 2008 to 5 million over the past year. The rejection of American corn began occurring this past November, with China citing Syngenta’s Agrisure Viptera as the culprit.

And now it gets really interesting. This GM strain has been awaiting approval from China’s agriculture Ministry for several years now, and they only just recently began rejecting the shipments. What’s different now? It’s no secret that some Chinese officials have voiced a concern about overdependence on US corn (which supplies ~90% of its imports). China’s own bumper crop in the last year may be to blame. Shoring up domestic profits from an excellent harvest would definitely appear on the Agriculture Ministry’s political agenda, and what better way to do it than further delaying GMO approval and rejecting further imports? Well played Agricultural Ministry, well played.OLYMPUS DIGITAL CAMERA

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