Thursday, August 6, 2015

Corn Price-Cut Rumors

Rumors have been swirling about how China will address its corn policy logjam. Chinese authorities have been struggling to insulate the country from agricultural commodity price deflation over the past two years. By supporting prices, authorities have piled up over 100 million metric tons of corn according to some estimates, and another near-record harvest is on the way. Chinese corn prices are some 30 percent above the price of imports, and authorities have made little progress in whittling down the corn surplus. Financial pressure is mounting. Something has to be done, but it has been difficult to agree on what measures to take.

Grain and Oils News reported that "endless" rumors about impending corn policy changes have circulated one after another this year. Most rumors involve either eliminating the "temporary reserve" price support policy or cutting the support price after this fall's harvest. Other rumors included subsidies for transporting corn from the northeast to southern China and subsidies for processors.

Last month, the Ministry of Agriculture released a cryptic document 1480 which seemed to call for liberalization of corn prices. On July 30, the National Development and Reform Commission touted the stability of the rural economy in the first half of 2015, which also included language calling for "an improved corn temporary reserve program", a push toward marketization of grain purchase and sales, and a streamlined price formation mechanism that sends a signal of reform to the public.  Today the Ministry of Agriculture blamed high corn prices for recent increases in pork prices.

Industry insiders say that officials have decided what to do but they are still debating the details. The most likely course seems to be that the temporary reserve for corn will be continued, but the price will be cut 10% to 20% from last year's level. The degree of the cut is unknown, but a price slightly above the "market price" of about 1900 yuan per metric ton seems to be the most likely level.

The National Development and Reform's rural economy report also called for "adjusting imports and exports" through "strict control of grain imports." There was no elaboration on this, but it means that inspection and quarantine authorities will be sifting through cargoes looking for any weed seeds, fungus, or GMOs that could be an excuse for rejecting imported grain.

A futures analyst with COFCO advises observers to wait patiently for officials to announce the reform.

Whatever reform emerges, it is expected to reduce the price of corn. With that expectation, corn has become a hot potato. No one wants to be holding corn when its price goes down due to an arbitrary policy announcement. Grain and Oil News said that starch processors have become cautious in buying corn as raw material. Where they would normally buy two carloads of corn, now they are buying one. Auctions of corn from the government's temporary reserve are attracting little interest.

Of course, Sinograin, the government-owned grain reserve corporation will be hit hardest. Estimates are that it holds more than 100 million metric tons of corn in inventory which will suddenly be worth about 20-to-30 billion yuan (about 2-to-3 billion dollars) less after the prospective cut in corn prices--hence the fierce behind-the-scenes debate.

This loss will probably be covered by the Ministry of Finance. It's probably less than the cost of a single facility for the upcoming Winter Olympics, but losing money on grain lacks the cache and prestige of blowing it on ski jumps and ice rinks for curling.

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