China Takes More Steps to Cut Stockpile

BEIJING (DTN) -- China may change its corn price policy once again, lowering it to $6.25 per bushel after the new-crop harvest wraps up. That is down from the 2015-16 purchase price of $7.98 per bushel.

"We are expecting that the state reserve will lower its floor price for corn again this year to 1600 renminbi per ton (US$ 6.25), to decrease its historically high stockpile of corn reserves," said Wenge Fu, vice president of New Hope Group, one of the largest feed companies in China.

He thinks the state reserve will have more than 200 million metric tons of corn stocks at the end of April, which is about equal to the China's annual consumption. China's reserves started at 150 mmt before 2015-16 purchases, Fu said. By the end of 2015, the government bought more than 30 mmt, and the program runs until the end of April.

"We are expecting that the purchase volume will be at least another 20 mmt," he said. "This will make the stockpile total more than 200 mmt."

Over the past eight years, China's floor price policy increased the amount it paid to farmers for their corn, which encouraged more production and caused the country's stockpile to swell. The high prices have made it more expensive for feed companies like Fu's to purchase local corn.

First, it pushed up the price for corn not purchased from the government reserve, considered the market price. The March 2016 corn contract on the Dalian Commodities Exchange is trading around $7.65, much higher than in the U.S.

Second, feed companies are limited on how much they can import. The government quota is 720 mmt, but only 40% of that is allocated to private companies.

Feed companies started importing more corn substitutes -- primarily sorghum, barley and dried distillers grains -- to avoid paying the high domestic prices. China imported 30 mmt of these corn substitutes in 2015, which do not have a quota.

"However, the high stockpile is still a problem for the government to solve," Fu said. "Unless they lower the price, there is no other way to consume the 200 mmt of corn reserve."

The Chinese government has taken steps to cool the pace of sorghum, barley and DDG imports through increased inspections and a new anti-dumping investigation of U.S. DDG subsidies. China's Ministry of Commerce launched the investigation because China imported more than 6.7 mmt of U.S. DDG in 2015, but domestic production is less than 3 mmt. Most of it is the byproduct of alcohol production, not ethanol production.

After the government's current buying campaign ends in April, FU thinks the market price of corn could decline to about $7.03 per bushel. "This will make the import of substitutes less profitable."

While China's stockpile is large, Fu estimates that 75 mmt is from the 2012 and 2013 crop years and isn't good for food or feed consumption. Another 15 mmt of 2014's harvest has deteriorated, leaving 90 mmt of low-quality corn.

The only way to rid the stockpile of this corn is to sell it to industry processors at a lower price, he said.

Xiwen Chen, the deputy director of the Central Rural Work Leading Group (CRWLG), said in Beijing last week that China must lower the corn price to stop imports of corn substitutes. CRWLG is the top rural affairs decision-making agency of central government.

A lower floor price will lead to less corn production in 2016, and estimates suggest that farmers will cut corn production by 3.3 million acres, putting total planted acreage at 88.9 ma. Total output would be expected to decrease to 212 mmt, or 8.35 billion bushels.

China's lowering of the floor price will cause lower imports of corn substitutes, in the short run, Fu said. But after the state chews through its stockpile, it will create the potential for corn imports to rebound.

(KM/AG)

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