Sunday, March 13, 2016

Request for China Corn Starch Export Subsidy

A Chinese corn processing industry executive submitted a recommendation to the National Peoples Congress urging the government to de-stock corn reserves and to subsidize exports of his industry's products.

The request was made on March 10 by Tong Yi, the general manager of COFCO's Jilin management center and a "grass roots" representative to the Congress. Mr. Tong reckoned that China's policy reserves of corn surpassed 250 million metric tons (mmt) at the end of February, with an estimated annual cost of 50 billion yuan ($7.7 billion) for interest and storage. He noted that 70 mmt of corn is at or beyond its 3-year maximum storage period and faces serious risk of degradation.

Mr. Tong said the 88 mmt of corn reported "temporary reserve" purchases from the 2015 harvest by February 29 represented 90% of the northeast region's production. He complained that corn processors in the northeastern region lost their competitive advantage of cheap raw materials as prices in the northeast became de-linked from prices in other regions. According to Tong, processors in Hebei Province are paying 1650 yuan/mt for corn, but the price in the northeast is 1950 yuan/mt.

Mr. Tong estimated that the northeastern region of China has 40 mmt of industrial corn processing capacity, but less than 50% is being utilized. He said the national capacity utilization rate is 70%. Northeastern processors either pay more for corn or can't get any at all.

Tong didn't explain how the processors managed to maintain even near-50% capacity utilization with 90% of the region's corn supposedly locked up in warehouses. He did note that some corn from other regions had been shipped in to the northeast to take advantage of the high prices there.

Tong said the temporary reserve policy has had positive results by protecting farmers' returns and maintaining food security. He called for the government to begin releasing corn reserves as soon as possible, presumably before the end of the temporary reserve purchasing period which runs through April 30.

Mr. Tong asked for a revival of a policy that refunds value-added tax (VAT) payments for exports of corn products, with no expiration date so that processors can make export plans with reasonable expectations. Tong said the subsidy would encourage companies to export and help use up record-high corn inventories.

In 2015, China's State Council gave a 13% VAT refund for exports of products made from corn and several other agricultural products that was effective from January 1 to December 31, 2015.  The 2015 rebate covered corn starch, by-products from starch production, monosodium glutamate, non-denatured alcohol, by-products of wheat-milling, and pine nuts. The 13% export subsidy apparently didn't give much help to China's starch exports much,  but there was a clear boost in exports of monosodium glutamate and corn starch by-products while the VAT rebate was in effect during 2015 (see chart).

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