September 22, 2011

China's move to sell corn reserves will curb corn prices from rising in the short term, but prices will be hard to keep down in the long run, experts said.

Domestic corn prices have been rising since September. In Shangdong and Henan provinces, the corn price has increased RMB300-400 (US$47-63)/tonne compared with the same period of last year.

Meanwhile, the corn futures price on the Dalian Commodity Exchange (DCE) has gone up in correction to stand at RMB2,386 (US$374)/tonne on September 20.

China has run a grain reserves policy to maintain food security for years. Usually there is a time limit for the commodity reserved. Taking corn as an example, every two or three years the old corn stocks have to be replaced to ensure the quality.

Since the financial crisis in 2008, China has also run the stockpiling programme to protect the interests of farmers in case the commodity prices fluctuate severely.

Currently, to prevent corn prices from rising too fast, the government has decided to release a batch of corn onto the market.

In Henan, Shandong, and Shanxi provinces, the newly-grown corn was expected to go to market within a week to reinforce market supply and will form synergy with the government reserve release to check further price hikes.

However, it is hard to bring down long-term corn price uptrend due to robust market demands since this year. According to surveys conducted by dozens of institutions and commodity exchanges, the corn yield this year will reach a record high. Yet the increase of corn output is lower than the growth rate of the domestic demands.

The released corn reserves could only curb prices in the short term. Besides, the run-down state reserves would need to be replenished later, so it was hard to depress the corn price in the long run, analysts said.

Rising corn planting costs is another reason for corn prices to go higher. Currently, planting costs have reached RMB2,100 (US$329)/tonne on average. Most corn farmers said they would wait until next year to sell their corn when the corn is expected to command high prices. Based on these factors, corn prices are hard to bring down long term and will eventually go up in correction.