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November 28, 2008

 

Market skeptical of China's extended grain-buying plan
 
 

China's plan to secure more grains to support prices could have repercussions and would not work on its own, said agricultural experts and traders.

 

In the corn and soy markets, the government's high prices have put off many trading firms that are unwilling to offer as much due to falling market prices and low demand.

 

"Without trading firms in the market, purchases by the government have little impact in shoring up prices," said an executive with a state-owned grain firm in Jilin, China's largest corn area.

 

The government's initial plan of 1.5 million tonnes of soy at higher prices has also led many crushers to shift to cheap imports, even in top soy producing province Heilongjiang.

 

The government is also sending a wrong signal to the farmers, said traders.

 

Due to the purchase plan, farmers are reluctant to sell to trading firms at less than the government prices, but it is impossible for the government to purchase all excess grain in the market, said a trader at a local crusher in Heilongjiang province.

 

The government needs a set of measures to spur demand, rather than simply increasing the purchase amount to support prices, said the Jilin executive.

 

Other executives at state-owned trading firms also suggested that the government should expand production of corn-based ethanol and restore its rebate on exports of corn and corn products to boost demand.

 

Beijing may also offer incentives to state-owned enterprises to buy local soy, several trading sources said.

 

Beijing plans to double its purchase amount of domestic corn to 10 million tonnes and soy to 3 million tonnes for state reserves after initial amounts failed to shore up prices, traders said.

 

The grain-purchasing plan comes as domestic farm commodity prices hover at low levels due to bumper harvests and the effects of the financial crisis, which has slowed demand.

 

Raising farmers' incomes was one of Beijing's top priorities in expanding domestic demand, but falling grain prices after record harvest indicate that many farms barely broke even after paying high fertiliser and fuel costs at the start of the season.

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