China Government Corn Purchases Record-High

A Futures Daily corn market analysis says the Chinese government's purchases of corn in the northeast region reached 70 million metric tons as of February 25, surpassing last year's total and a record high. The government purchases account for 65 percent of all corn purchases since the 2014 harvest.

China has a "temporary reserve" program that makes the government buyer of last resort when market prices fall below a minimum price set each year. The program only operates in the northeastern provinces, and most of the corn supply in that region is in the hands of the government.

The Chinese government approved the MIR162 variety in December. According to China's inspection and quarantine authority, 1.43 mmt of U.S. corn and related products were rejected during 2014 due to detection of MIR162. According to Futures Daily, corn imports are profitable now. It's unclear whether tariff rate quotas have been released to potential importers.

Futures Daily says several years of big harvests and weak demand have led to the accumulation of huge inventories of corn that probably are around 100 million metric tons. Some corn from 2012 and 2013 is being transferred from reserves in the northeast to other provinces. One reason is to clear out space for corn from the 2014 crop. Another reason is to improve the regional balance of inventories.

In 2014, there were spot shortages of corn that caused the price to jump 300-to-400 yuan in the space of a couple weeks. Last  year, with much of the northeastern corn flowing into government reserves, a higher proportion of corn from provinces like Shandong, Henan, and Hebei was sold to southern provinces, leaving short supplies there in the spring and summer of 2014. Futures Daily says this is unlikely to happen this year.

One reason for the weak demand for corn is the substitution of cheaper imports of sorghum, barley, distillers dried grains, and dried cassava which don't require a quota issued by the government to import. The Futures Daily reporter estimates combined imports of these substitutes at 25 mmt in 2014.

Domestic wheat has also been substituted for corn. In 2013, many areas had heavy rain at the time of the wheat harvest which caused sprouting of wheat, making it unusable for milling into flour. A significant volume was used for feed. Futures Daily also says that wheat output has increased over the last several years in southern provinces of Anhui, Hubei, and Hunan (presumably replacing rapeseed), causing the price to fall and making it attractive as a substitute for corn.

This year there was also rain at the time of the corn harvest, causing widespread contamination of Chinese corn with vomitoxin and aflatoxin. In Henan Province, farmers have a lot of corn on hand since traders are hesitant to buy and store large volumes.

As was the case in 2014, China's corn market will be driven by government sales of reserves during the spring and summer after the corn-purchasing season ends.