Crazy Corn

No one really knows exactly what is driving China's corn prices higher. A couple of articles appearing on financial news web sites seem to agree that the rate of increase in prices is faster than supply-demand conditions warrant and prices could come down in coming months.

"Corn Gone Crazy" appeared on dozens of financial sites this week and suggests that the government auctions of corn reserves are being used to drive up prices. Warehouses holding grain reserves are identified as possible speculators. Another article, "Corn Faces Seasonal Decline in June," also points to speculative forces putting froth in corn prices and suggests that the withdrawal of "hot money" from the market and seasonal effects could lead to a reversal of prices this month.

The articles agree that the supply and demand situation doesn't seem to warrant such rapid increases in prices. The "Crazy" article points out that the first official corn production statistic of 164 million metric tons announced in a market information bulletin this week indicates a much smaller decrease in production than 140-mmt estimates that are common among market analysts. The reporter says that local people in the drought-stricken northeast last fall told him production was down 20-30% in Jilin Province, one of the chief production areas. A processor in Shanghai told the reporter, "Production must have fallen 15-20% last year and it was down 30% in some areas."

Despite the fall in production, the reporter was told corn reserves are still huge. One grain industry analyst claims that after four years of large grain purchases, corn stocks are at least 120 mmt at the end of April [??? not sure how valid this number is]. Government reserves are said to be at least 40 mmt.

Moreover, demand does not seem to be that strong. Feed use accounts for 70% of corn demand, and meat production is still in the doldrums. Hog producers are experiencing losses despite three rounds of government pork purchases in the last two months.

The "Crazy" article focuses on speculation by companies that store grain, but the details are very hazy. People in northeastern China told the reporter that about 70-80% of the corn harvest has been going into grain warehouses in recent years (usually 70-80% goes into the market). Large numbers of small warehouses have been contracted by Sinograin (the State grain reserve management company) to hold grain for them. Processors complain that they are unable to purchase enough grain to keep their operations going because there has been so little grain entering the market. The big storage was to support grain prices, especially during 2008/09 when 36 mmt of provisional grain reserve purchases were carried out in the northeast. (Japonica rice is also stored up in large quantities and experiencing a similar rise in prices.)

The details are hazy, but the article seems to be accusing holders of corn reserves of gaming the grain auction system to drive up the price of corn. Industrial processors are excluded from the auctions. Feed mills still have weak demand for their products. The author implies that the corn sold at the government auctions is being bought for speculation (although the rules are set up to prevent this). The reporter was unable to get a confirmation of this explanation from Sinograin. Private grain traders in the northeast denied they were speculating on grain.

The "Seasonal Decline" article suggests that the crackdown on speculation announced last week could drive "hot money" out of the corn market. This article says that farmers are still holding a lot of corn with high moisture that they will have to sell soon [before it gets moldy]. The author also claims that historically China's corn futures prices peak in May, so there is reason to expect prices to fall as the summer lull in meat/feed demand sets in.