Friday, January 21, 2011

State Corn Purchases--Get Out of the Way!

The Chinese government has begun to purchase corn to replenish its reserves. Normally, if the government were to go into the market to purchase it would have to compete with other purchasers and probably drive prices higher. To avoid this, the government has ordered corn processors to stop purchasing. Sinograin and its related "deep processing" factories stopped purchasing January 15. According to news from the market, all the major corn processors in Jilin Province have stopped buying corn one after another, making room for government purchases to proceed.

The stockstar futures news says, "although reserve corn purchases have started, processors have left the market so there isn’t a lot of competition."

That means all the corn being purchased now goes into state warehouses. Little grain is in commercial distribution channels, tightening the supply in the market. The article says fewer farmers are selling corn ahead of the spring festival.

Another measure being considered is to cancel the subsidy for Chinese ethanol producers. The subsidy is about 1880 yuan per metric ton of ethanol, roughly the cost of a ton of corn in northeastern China (it takes 3.3 tons of corn to make a ton of ethanol). Without the subsidy ethanol production would be unprofitable and production would be cut back. The article estimates that ethanol uses about 5 million metric tons of corn, so it wouldn't have a huge impact but would ease some of the pressure on corn supply.

The article says the government's control measures have stabilized corn prices. If there are big fluctuations, more measures will be implemented.

There are more rumors about potential corn imports from the United States. Some speculate that Hu Jintao will sign an agreement for corn imports during his visit to the United States. Whether those rumors are true or not, the article asserts that imports are not likely to have much impact on the Chinese market. The price of imported corn arriving at southern ports is about 2250 yuan/mt, about 100 yuan more than domestic corn. Adding the tariff and VAT pushes the cost even higher to 2560 yuna/mt. At these prices it's hard to see a lot of corn imports.

Chinese authorities are aware that the corn supply situation in the United States is tight and more Chinese imports could push prices even higher. That's probably the reason authorities have ordered private processors to stop purchasing to make room for reserve replenishment to avoid a scenario of high domestic prices stimulating imports and even higher world prices.

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