China's first significant imports of corn from the United States have been arriving. Is this the beginning of a new era of China as a corn importer, or is it a temporary phenomenon?
No one knows for sure, but an article by Cheng Guoqiang, an advisor to the State Council, sheds some light on the situation and what policymakers are thinking.
The article, published in a communist party publication on May 28, describes corn price increases as "abonormal price fluctuations." Cheng asserts that rising corn prices do not reflect a short supply of corn. China has plenty of corn in reserve, so he says. These "abnormal price fluctuations arise from a complicated mechanism."
Unfortunately, outsiders looking at official statistics will mistakenly conclude that rising prices reflect rising demand. The corn production estimate for last fall published in China's Statistical Abstract is 163.97 mmt, down just 1.2% from the previous year. However, Cheng makes no reference to the official number, instead citing other estimates that production was down about 10% nationally, and down 20%-25% in major production areas of the northeast.
A 10% decrease would be more than 16 mmt. If we suppose that the price-elasticity of demand for corn in China is -0.5, a 10% decrease in supply implies a 20% increase in price--not far off from the actual increase over the past year.
Cheng asserts that no one anticipated a poor corn harvest, but market advisory services were sending around reports and photos from crop tours showing fields in the northeast and ears of corn decimated by drought. This doesn't inspire much confidence in China's agricultural advisors and their so-called "early warning systems."
When evaluating China's corn market, it is important to keep in mind that the market had such a big surplus in the previous year that the government had to buy up 35 mmt of corn--over 20% of the harvest--to support prices. Cheng cites this price support policy as one of the factors putting upward pressure on corn prices.
Cheng brings out the speculation bogeyman. Farmers anticipated higher prices, and with less cash-flow pressure due to improved rural financial services, they were not under pressure to sell. Thus, they held their grain off the market. Purchasers, also anticipating rising prices, tried to stock up on corn.
Another factor cited by Cheng is poor logistics. He says that a certain number of rail cars are reserved for emergencies, which constrained the capacity to transport corn out of the northeast. This doesn't square with what actually happened. At times there was so much corn flowing south (helped by a transportation subsidy) that there was an unusualy inversion of prices between the south and north.
Cheng worries that rising corn prices could set off a chain of price increases in pork and other commodities that would feed inflationary expectations.
Cheng also warns that rising domestic corn prices create "import pressure."
Cheng warns, "We need to pay close attention to the possibility of large-scale import of corn" that could reduce corn prices and discourage farmers from planting corn next spring.
The article concludes with a series of recommendations about avoiding "over regulation of the market," moving more corn around the country through government channels, keeping reserves under centralized control. Cheng recommends that the government should "...strengthen import control, be on guard against impacts of foreign corn on the domestic market."
If China has a normal corn harvest this fall and prices start to drop, corn imports will prove to be a temporary phenomenon.