Chinese authorities--having run out of space to store their corn glut--will pay 61 starch and alcohol processing plants to hold government reserves purchased from the 2014 crop. The new subsidy is a small piece of the Chinese Government's complex juggling act in a highly distorted domestic corn market.
On July 24, 2014 the Ministry of Finance, National Development and Reform Commission, Grain Bureau, Agricultural Development Bank jointly issued a notice announcing subsidies for 61 northeastern corn-processing enterprises to hold corn purchased for the state's temporary reserve. The notice listed processing companies eligible for the subsidy in the three provinces where the largest volume of surplus corn has been purchased: Inner Mongolia, Heilongjiang and Jilin. The notice did not provide any details about the amount of the subsidy or how it will be paid.
Chinese authorities reportedly purchased 70 million metric tons of corn from the 2013-harvested crop for the "temporary reserve" (this doesn't include normal reserves held by the government). This corn was purchased by the government to prevent prices from falling and to ensure farmers would not be stuck with unsold corn. The 70-mmt temporary reserve purchases equaled nearly one-third of the 2013 corn crop. The temporary reserve program operated only in four northeastern provinces: the three provinces covered by the new storage subsidy plus Liaoning. Chinese news media report that some corn from other provinces was shipped to the northeastern region to take advantage of the high "temporary reserve" price plus another subsidy to ship corn from the northeast to southern provinces.
The new corn-storage subsidy pays industrial processors to store the government's corn because government granaries in the northeastern provinces have run out of space. Other reports say Sinograin--the government's reserve management company--has already been renting private grain depots to store reserves. The new subsidy expands storage capacity with another big crop expected about two months from now.
The subsidy also throws a bone to corn processors who have been losing money over the last two years. The recipients of the new subsidy are manufacturers of starch, alcohol, ethanol, corn oil, sweeteners and other chemicals using corn as raw material. (It does not include feed mills or grain storage and trading enterprises.)
The problems in China's corn processing sector reflect an earlier short-sighted effort by Chinese authorities to stoke corn demand when corn prices were depressed a decade ago. Authorities subsidized dozens of corn processing projects during the depressed corn market of 2000-04, but the National Development and Reform Commission released a document a few years later calling for limits on the industry. Now corn prices in China are three times their level in 2000 and most processors are losing money.
The July 24 notice listed 61 processors eligible for corn-storage subsidies. Their total corn-processing capacity was reported at 28.5 million metric tons (mmt): nearly 40 percent of the corn output in these three provinces--and doesn't include feed mills. These plants are probably operating at less than half their capacity due to negative margins. Prices of starch, sweetener, and alcohol products have been falling due to weak Chinese demand and falling global prices. Chinese authorities kept corn prices at an elevated level, a recipe for big financial losses in the processing industry.
COFCO--a giant state-owned agribusiness--is/was the leader in boosting corn processing. It's also the largest processor on the list of subsidy-eligible plants with 5.4 mmt of capacity in six plants on the list. This includes two fuel ethanol plants in Jilin City (1.8 mmt corn-processing capacity) and Zhaodong, Heilongjiang (600,000 mt capacity), both built in 2001. COFCO's Yushu plant built in 2006 can reportedly manufacture 410,000 mt of corn starch, 97,000 mt of corn fiber feed, 16,000 mt of corn oil, and 18,000 mt of corn germ meal from 600,000 mt of corn annually. Northeastern corn prices were about RMB 800 per mt in 2001 and are now about RMB 2400-2500 per mt.
China's new corn-storage subsidy echoes 1970s-era U.S. grain policy mistakes. The 1977 U.S. Farm Bill authorized a "Farmer Owned Reserve" program that paid farmers to store grain on their farms to serve as a buffer stock to stabilize the grain market. This culminated in budget-busting surpluses and the 1983 PIK program that paid farmers with surplus grain if they agreed not to plant crops. Government efforts to stabilize markets always end up creating a proliferation of arcane programs and unanticipated chaos.