Wednesday, October 14, 2015

Grain Piles up in China's Biggest Producing Province

The government grain reserve corporation in China's largest grain-producing province warned that its grain stockpile could grow by 50% after this year's crop is harvested. The grain stockpile is sucking up capital to finance purchases of a commodity that is largely substandard and falling in value. Stricter standards for purchasing threaten to leave farmers stuck with unsalable grain.

The Sinograin Corporation's Heilongjiang Province branch said it is already holding a stockpile of 81 million metric tons (mmt) of grain, and it could grow to 120 mmt after the 2015 crop is marketed. Sinograin anticipates procuring 35-40 mmt of this year's grain crop in Heilongjiang--13 mmt of rice and 22-27 mmt of corn.

The Heilongjiang branch of the government's Agricultural Development Bank of China says it has 140 billion yuan (about $22 billion) to finance purchases of grain for the stockpile if necessary. With a massive oversupply of grain last year, ADBC reported financing 77% of purchases from the province's 2014 grain crop. The bank accounts for a fifth of the entire loan balance by all banks in Heilongjiang, and it accounted for one-fourth of the increase in the province's loan balance in 2015.

The stockpile is the result of China's efforts to prevent grain prices from falling by buying grain at a floor price and storing it in a "temporary reserve" stockpile. In September, the government announced that the floor price would be reduced to 2000 yuan per metric ton for the 2015 crop in the northeastern provinces, down from 2200 yuan last year. The new minimum price is about $8/bushel, nearly double today's corn price at U.S. Gulf of Mexico ports of $4.26/bu. Hence, economic gravity is pulling Chinese prices downward.

An investigation in Heilongjiang Province by a Futures Daily reporter found myriad signs of excess supply. People he interviewed speculated that the 2000-yuan "floor" price would actually be the "ceiling" on corn prices in Heilongjiang, as market prices are likely to end up in the 1800-2000 yuan range. Most farmers and traders there told the reporter they thought this year's corn harvest would be good--though not as good as last year's. However, demand for grain is weak. Feed demand in Heilongjiang is down this year, led by a 14.5% decrease in feed for hogs. The starch price reportedly fell to 2200 yuan/mt in August, just slightly above the floor price for corn, which led to the idling of several major corn processors. The corn price in Shandong Province is 2016 yuan/mt, slightly higher than than the price in Heilongjiang which makes it unprofitable to ship corn there. With a good harvest and weak demand, a big portion of Heilongjiang's corn will again end up in the government's reserve.

Heilongjiang launched its 2015 minimum-price purchases of rice on October 10.

However, the Futures Daily investigation also found that tighter standards are expected to cut the volume of government's corn procurement this year. The requirement for maximum moldy corn is reduced from 5% last year to 2% this year. The government is also raising the requirements for private granaries allowed to procure grain on the government's behalf and demanding collateral for loans, meaures that will disqualify many. An early-maturing corn variety that has been grown in the far north of the province is likely to be refused this year because it is unpalatable and hard for livestock to digest.

An official in Nenjiang, Heilongjiang estimated that only 30% of that region's corn would be able to meet the higher standard for the government's reserve. The official said that the government's procurement this year could fall by half if other areas have a corn quality similar to that in Nenjiang.

These conditions pose a danger that many farmers could be stuck with grain no one will buy. The central government has directed local governments to buy up the substandard grain, but "financial capacity is a big hidden risk" Futures Daily said.

No comments: