China's Corn Price Conundrum

Chinese officials are mulling a cut in this year's floor price for corn with a decision likely in September. China's high corn price has caused growing chaos in its corn market as its corn production, government stockpile, and imports of corn and related commodities have simultaneously spiked. Now the market is waiting expectantly for a "corn policy turning point."

In July, China's imports of corn and its substitutes reached a record volume of 4.6 million metric tons for one month:
Corn: 1.11 million metric tons
Distillers Dried Grains: 1.1 mmt
Barley: 1.28 mmt
Sorghum: 1.11 mmt

However, China's demand for animal feed is tepid. The Ministry of Agriculture said China's feed output was down 1.7% in the first half of 2015. Statistics tracking output by 180 Chinese feed companies found that feed production plummeted over 14% in the first four months of 2015 compared with the previous year. China's National Bureau of Statistics said the national inventory of hogs--the biggest consumers of feed--was down 6.1% from last year at the end of June. That suggests the hog population has been decimated by about 25 million. According to the Ministry of Agriculture statistics, pig feed production for the first half of the year was down 7.1%.

With the feed industry in the doldrums, why are they importing ingredients? A Chinese analyst explained that the imports of corn and its substitutes represent feed mills taking advantage of low international prices to import cheap feed ingredients. The MOA analysis surmised that plunging soybean meal prices and imports of corn substitutes had slashed costs for feed companies, contributing to their positive profit results for the first quarter of 2015.

While imports are surging, the Chinese government is stuck with a mountain of domestic corn estimated at over 100 million metric tons that it bought at high prices over the last three years. Another harvest is about to take place, which could swell its excess reserves even more.

According to Grain and Oils News, an unnamed National Development and Reform Commission official said they are evaluating an adjustment in the corn "temporary reserve" program in which the government sets a floor under market prices. The floor has been 30% or more above international prices since global prices plunged in 2013. There was a rumor that the program would be eliminated, but rumors now indicate that it will be retained but the floor price will be cut.

The amount of the corn price cut is contentious. According to China Business News, some officials are calling for slashing the corn price by as much as 20% in order to boost consumption of domestic corn and curtail imports of sorghum and barley. But Ministry of Agriculture officials reportedly oppose such a steep cut on the grounds that it could cause dissension among farmers in the northeastern region where about 40% of corn is grown. (The northeast has also been hit hard by China's economic slowdown.)

China's futures market anticipates roughly a 15-percent decline in the corn price. Dalian futures prices for January 2016 delivery anticipate a price of about 2000 yuan per metric ton, well below current cash prices of 2350 yuan.

The details of the corn price decision have to be determined by the Development and Reform Commission and then submitted to the State Council for approval. The decision on the corn price is expected to be revealed in September.

The Chinese government limits corn imports by means of an annual corn import quota of 7.2 mmt (which has never been filled). But there are no quotas on imports of DDGS, barley, or sorghum, and tariffs are only 3%-to-5%. Thus, feed mills who could not import corn have turned to these substitutes. In September, China has announced that a new registration system for imports of feed grains will be launched. A procurement manager for a major Chinese feed company told Grain and Oils News that the system is  intended to limit imports.

A reduction in the domestic corn price of about 300 yuan per metric ton will reduce demand for imported sorghum and barley, according to Grain and Oils News.