China Farm Prices in Free-Fall

With demand weak and another big harvest underway, Chinese prices for major farm commodities are falling. It looks like China's attempt to hold the line against falling world prices over the past two years is gradually collapsing.

Corn prices are leading the decline. In September, Chinese authorities announced that the floor price for corn in northeastern provinces would be 2000 yuan/metric ton, down about 10% from last year. Since then, corn prices in China have fallen about 20% and are now far below the 2000-yuan floor price.

The Ministry of Agriculture price report for October 21 says prices were generally in the 1600-1780 yuan/metric ton-range. Pries are below the 2000-yuan floor in the northeast provinces--Liaoning, Jilin, and Heilongjiang--where the program will begin operation in November. (The floor price, or "temporary reserve" program only applies to the northeastern provinces, but most farmers sell to an intermediary at a discount who then sells the grain on to the granary.)

China corn prices, 2015 (Yuan per metric ton)
Province	Sept 1	Oct. 21	Change
Shandong	2000-2180	1620-1730	19%-21%
Hebei	2060-2110	1680-1780	16%-18%
Henan	1920-1970	1560-1620	18%-19%
Anhui	1930-1940	1530-1550	20%-21%
Shaanxi	2020-2040	1520-1640	20%-25%
Shanxi	2080-2100	1600-1640	22%-23%
Liaoning	2220-2260	1770-1780	20%-21%
Jilin	2160-2200	1770-1840	16%-18%
Heilongjiang	2060-2160	1600-1740	19%-22%

According to Securities Daily, the wheat price has also been falling. The decline began in September. It was interrupted by the announcement that the minimum price for next year's crop will be held at 2360 yuan/metric ton, the same level as this year but far above corn prices. The decline in flour production after the October 1 holiday caused the decline in wheat prices to resume this month. Some traders unloaded inventories as they saw prices falling.

Rice prices are supported by the minimum price, but there are reportedly small declines in rice prices as well. The rice-purchase season is just getting underway.

The decline in price in some areas has put pressure on grain traders. According to Securities Daily, media reports say the grain market has an atmosphere of panic in some localities. 

Hog prices are declining as lower corn prices reduce feed costs and give this beleaguered sector some breathing space. The decline in hog prices began in the major corn-producing provinces of northern China and prices are declining in southern provinces as well. Soft demand and plentiful supplies are driving hog prices downward. The onset of cold weather and disease outbreaks is prompting some farmers to pre-emptively sell hogs before they are hit by disease. 

The surge in pork prices during the summer months has reversed. According to National Development and Reform Commission data, the national average hog price peaked in late August and fell 5 percent by October 14. The price of slaughtered carcasses fell 7 percent. The National Bureau of Statistics reports retail pork prices fell 1%-2% from early September to early October. 

With corn prices falling fast, though, profitability has improved for hog producers in China. The ratio of hog price to corn price improved from its low point of 5.04 in March to 7.94 on October 14.

The decline in hog inventories, however, appears to have stabilized. The hog inventory reported by the Ministry of Agriculture increased by 0.6% in September 2015, the third (small) monthly increase in a row. Sow numbers continue to decrease, however, but the decrease was only 0.2% in September, much slower than the 2% decrease in January 2015. The Ministry says that hog inventories are down 11.8% from a year ago and sow inventories are down 15%. The Ministry of Commerce reported a big jump in slaughtered hogs in September although it was 9% less than a year earlier. 

The National Bureau of Statistics reported that pork production for the first three quarters of 2015 was down 3.6% from a year earlier. That was a slower decline than they reported for the first two quarters of 2015 (-5.1%) which implies a recovery in the third quarter. 

So far, there have been few signs of dissatisfaction in the countryside. Securities Daily worries that the decline in grain prices will undermine progress in achieving the communist party's goal of an "all-round well-off society." The Securities Daily writers then call for reform of the farm subsidy system which they estimate to cost 1 trillion yuan annually (over $160 billion).