Monday, April 18, 2011

Corn Processing: More Regulation Rumors

Last week, the China grain net web site reported rumors that the government is planning measures to slow down industrial processing of corn. This is part of the government's attempt to slow inflation.

Earlier this year officials ordered manufacturers of starch and alcohol products in the northeastern provinces of Jilin and Heilongjiang to stop buying corn and checked up on their inventories. The rumors say that the government is planning to spread restrictions to corn processors in all corn-producing regions. There is also a rumor that the value added tax (VAT) for corn products will be "adjusted." It's not clear what this means...there are other rumors that VATs will be eliminated on some products (to lower their final price), but it also could refer to canceling the VAT refund for exported corn products. [update Apr. 19--a Bloomberg news story says the VAT on processed corn products will be raised.]

The government's concern is that demand for corn is outpacing supply, potentially putting upward pressure on prices. The National Development and Reform Commission (NDRC) has been trying to slow down the growth of industrial processing of corn since 2006 when it stopped new corn ethanol projects. Then in September 2007 NDRC issued a document calling for industrial processing to consume no more than 26% of China's corn. According to some estimates the share has nevertheless risen to 28% this year.

Another article posted on the China Grain site in March cited the large number of small companies processing corn that have high energy use, low efficiency, and high pollution emissions. As a precedent, the article cites the temporary shut-down of corn processors in northern China to reduce pollution during the Olympics in 2008. An April 2010 notice called for a reduction of 1 mmt in capacity by 2011. The article said that 658,000 mt had been eliminated by September 2010. The article predicted that the government will soon take more steps to eliminate small plants--the 12th five-year plan calls for such a consolidation.

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