April 8, 2016
China corn anomaly ends
It is an anomaly that while China is awash in corn, prices are so high that it has to resort to importing alternative grains and, in fact, even corn that it has a surplus of, for use in the manufacture of animal feeds.
The state's corn stockpiling scheme apparently is the culprit. The scheme, which has been in force for the past nine years, involves the purchase of corn by the government at a high price to support the huge rural workforce, as well as to make the country more corn self-sufficient. But eventually the effect became sour as the scheme has resulted in the artificial rise of corn prices by 30% to 50% above those of the global markets.
Last year, the average price of corn in China was US$358/tonne while that of the imported corn was only $265/tonnes.
With the government buying corn at a high price, individual farmers and enterprises don't sell corn in the "real" market thinking it would sell at a low price. Thus, they sell their corn produce to the government at a high price.
With domestic corn priced higher than the international market, Chinese traders imported corn substitutes such as soybeans, sorghum barley and distillers dried grains with solubles (DDGS), weakening the corn market in China.
In marketing year (MY) 2014-15, China remained as the world's largest importer of soybeans, with imports hitting another record at 78.35 million metric tonnes, or 60% of total world exports or 58% of total US soybean exports.Soybean imports are expected to rise 6% in the year to September 2016 as demand for animal feed equally increases.
The US Department of Agriculture forecasts that China's corn stocks will account for more than a half of the global stocks by the end of marketing year 2015/16 ending September, having nearly doubled in just five years.
Today, the government has about 250 million tonnes of corn reserves, more than the country can consume in a year, and their quality is deteriorating. And yet, last year China imported 4.73 million tonnes of corn, an increase of 82% year-on-year, according to Research and Markets.
Time to wake up. The scheme has already served its purpose. China is, thus, set to end the corn stockpiling scheme to reduce the surpluses and allow markets to set prices or make domestic prices low enough to keep imports out.
According to the State Administration of Grain, the government will instead subsidise corn growers and encourage commercial firms to buy grain from farmers at market prices.
According to a Reuters news report, the new policy will take effect in October, the start of MY 2016-17.
Although the end to the corn stockpiling scheme is expected to impact demand for US and other corn imports, the reform should be welcomed by the global market as, in the words of US Grains Council President and CEO Tom Sleight, it is "a step in the right direction toward more market-oriented decisions related to the supply and demand for corn".