Wednesday, February 4, 2009

Policy Reverses Corn Flow

Normally, the lowest prices for Chinese corn are in the northeastern provinces. This region has huge supplies and it is far from the big markets in coastal areas. As you go south, the corn price tends to go higher. Corn typically flows out of the northeast to southern regions where there is excess demand.

This year, the government announced a support price for purchasing 30 mmt of corn in the northeast, about half of the harvest in that region. The price structure is now distorted, with northeastern prices higher than in provinces to the south.

A farmer in Zhengding County of Hebei Province complains, "This year the corn price is low, and I can't sell at a price that will bring a profit." The price in Hebei averaged about 1.6 yuan/kg last October, and it fell to 1.33 yuan/kg in January, as new corn came on the market. Farmers' profits have been cut by half. In some areas of the province, the price is just 1.2 yuan/kg.

By comparison, the price in the northeast is about 1.5 yuan. Grain Bureau monitoring data reported the Hebei price on Jan. 5 at 1.24-1.36 yuan, compared with 1.44-1.52 yuan in Liaoning and 1.42-1.50 yuan in Jilin.

The hardest-hit areas of Hebei, like the Baoding region, have the lowest corn prices, which are attracting traders from the Northeast and Southern provinces to buy cheap corn. One grain trader who came from Jilin said he can make money by purchasing grain and shipping it back to high-price Jilin. This is a reversal of the usual flow of corn.

In effect, the government is buying up 30 mmt of northeastern grain to store in warehouses, and corn from Hebei is coming north to meet commercial needs.

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