China introduced a "temporary reserve" program to support the price of corn in 2008. The program operates only in four northeastern provinces. A floor price is set for each province and China's grain reserve corporation buys corn if the market price falls below the floor. About 35 million metric tons of corn were purchased during the first year of the program. Purchases of the 2009-2011 harvests were relatively small since strong demand pushed prices higher.
Stockpiling corn at a depot in Hegang, Heilongjiang Province.
Following the 2012 corn harvest a perfect storm of conditions put downward pressure on corn prices in the northeast. Overall, the quantity harvested was large (but in some districts of Jilin Province yields were down 30 percent due to pest problems and typhoon lodging). Wet weather in the northeastern provinces after the harvest raised the moisture content of the corn and caused mold problems. The lackluster economy slowed demand for starch and other industrial products made from corn, and a build-up of hog inventories drove hog prices down, reducing demand for feed. The dead pigs in the Shanghai River exacerbated the weak feed demand problem and the H7N9 avian influenza outbreak led to a kill-off of chickens, further weakening corn prices.
From November 15 to mid-April 2013, 20 million metric tons of the 2012 corn harvest was purchased for the temporary reserve to support prices. That's the largest amount since 2008-09 and roughly 20 percent of the corn marketed so far during 2012/13. About half of purchases were made in Heilongjiang Province. The quality of corn in the northeast was not good and mold problems are common. The corn price in the northeast is still falling despite the reserve purchases.
In North China, the 2012 corn harvest and the quality were good. A lot of corn was sold out of that region soon after the harvest. However, prices in northeast and north China are linked. Industrial processors are the largest buyers who usually drive the market, and they have been in loss-making mode since the second half of 2011. They are not buying much corn now, and many smaller processors have shut down.
In Hegang Prefecture, Heilongjiang Province, 120,000 metric tons of corn remain unsold. As the weather warms up, wet corn is more likely to get moldy and farmers worry that they won't be able to sell it. At No. 8 grain depot, trucks are lined up to sell corn. Normally, all the corn is sold by March but this year the depot is working around the clock in May to stockpile farmers' unsold grain. Technicians have been sent to villages to test grain before it's sold and recommend storage and drying techniques to prevent mold from growing.
Since the end of 2012, the Hegang branch of the Agricultural Development Bank of China has lent 4.3 billion yuan ($690 million) to 26 grain companies to ensure they had sufficient funds to buy 1.2 million metric tons of corn. Companies are buying moldy corn and taking losses on it as their "social responsibility." According to the head of one company, moldy corn can be used to make ethanol, but the price of ethanol has fallen 900 yuan per metric ton. They lose 400 to 500 yuan on each ton of corn used for ethanol.
Several articles reported on reserve purchases in Inner Mongolia. In Ordos, farmers reportedly had 100,000 metric tons of corn still unsold in mid-April. One farmer had 100 metric tons piled in his courtyard, harvested from 120 mu (20 acres) of land. He said farmers are accustomed to waiting at home for traders to come to buy grain but this year no one comes. Grain traders are afraid to buy corn because they might get stuck with it. They have no room to store it and have cash flow problems. According to the manager of a grain warehouse, no one in the supply chain--farmers, traders, or corn depots--are benefiting from last year's big harvest. Farmers are ready to plant the new crop but lack cash to buy seed and fertilizer.
Ordos authorities have designated the Sinograin branch and 18 buying stations to buy corn for temporary reserve to address the problem of unsold grain.