Thursday, October 9, 2014

China Eager to End Price Support Policy

According to China Times, officials of China's National Development and Reform Commission and Ministry of Agriculture are eager to eliminate "temporary reserve" agricultural price support programs in favor of "target price" subsidies. According to officials, the experimental target price subsidies are likely to be extended to cotton producers outside of Xinjiang "Autonomous Region" and to corn as soon as 2015.

According to Futures Daily, China is having another big corn harvest (despite panicked reports of drought over the summer), and there is strong downward pressure on corn prices. In an area of Henan Province, corn with 25% moisture is reportedly selling for 1.1 yuan/kg, a little more than half the customary 2-yuan price. In Jining, Shandong Province, a grain depot manager says that corn yields are over 650 kg/mu this year (the national average reached 600 kg/mu in 2013 for the first time) and prices have fallen from 2.5 yuan/kg to 2.24 yuan/kg over the past two weeks. In China's northeastern region, the price for corn with 30-percent moisture is reportedly down to 1.44-1.48 yuan/kg.

According to Grain and Oils News, authorities have moved 40 mmt of corn out of northeast China since May 20, but a record stockpile of 70 mmt of "temporary reserve" corn still remains. The stockpile was accumulated by supporting prices during the past two years and will likely grow larger this year. Grain and Oils News anticipates that China's corn market will have an excess supply for the foreseeable future.

With corn prices falling, farmers are watching to see whether authorities will announce a "temporary reserve" price for corn this year. At a grain-purchasing conference held in Harbin, there were indications that officials will again purchase corn for the temporary reserve, but no announcement was made on what the price will be. In July 2013, officials announced an increase in the corn price despite clear indications of excess supply. Will officials announce another increase in the corn price this year?

The minimum price for wheat is usually announced by early October--before planting of winter wheat. The wheat market is also waiting to see whether a higher minimum price for wheat in 2015 will be announced this month. Authorities have also announced that their purchases of wheat surged by 20 mmt during 2014.

Officials are also anxious to eliminate the sugar "temporary reserve" program. Officials are said to be planning to announce an elimination of "temporary reserve" stockpiling policies in the 13th five-year plan now being formulated. It's unclear whether the "minimum price" programs for rice and wheat will also be eliminated. One analyst observes that a target price subsidy for corn is very likely to be introduced in 2015 because corn is not a food grain and therefore less sensitive than wheat or rice.

The decision to extend the target price subsidy to more commodities and regions depends on the results from this year's trial target price programs for cotton and soybeans. If the trials fail, officials will presumably have to look for another subsidy method.

The abandonment of price supports comes six years after the "temporary reserve" was introduced and ten years minimum prices for rice and wheat were introduced. Price support programs were first introduced during a period of excess supply and low prices. Since then, Chinese prices have been ratcheted upward until they are well above international prices. Now China faces a situation of excess domestic supplies and high prices. Officials have been purchasing grains, cotton, oilseeds and sugar to prevent prices from falling and now have record-high inventories of commodities. Yet, with prices above world prices, imports are pouring in, adding to the excess supply in the Chinese market. Hence the eagerness to do away with the programs.

The "target price" subsidy is said to be less market-distorting than temporary reserve stockpiling. Officials have forgotten that they said the same thing ten years ago about the minimum price purchasing scheme when they introduced it to replace the disastrous "protection price" policy of the 1990s.

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