Granaries Full in Northeastern China

Granaries are completely full in China's largest grain-producing province, and worries are mounting over procurement of this coming Fall's new crop, according to a report from Business Reference News.

The reporter visited granaries in eastern Heilongjiang Province and found corn and rice piled seven meters high to the ceiling in warehouses. Temporary bins lined the courtyards. One grain storage facility manager claimed that his 3 million tons of capacity was filled, including 40 warehouses and 900 rudimentary temporary bins. According to the report, the entire city's storage is full, and the situation is similar across the province.

This image from Google earth shows a facility in Heilongjiang with 40 

temporary steel bins (shiny things on the left). 

A provincial Grain Bureau official said nearly 80 million metric tons of grain was procured from the 2015 crop in Heilongjiang, 7.5 million tons more than the previous year. Of that total, 63.9 million metric tons was "policy grain": rice purchased at minimum prices and corn purchased for the "temporary reserve." Policy grain procurement was up 12.5 million tons from the previous year.

Discrepancy: the National Bureau of Statistics said Heilongjiang produced 63 million metric tons of grain in 2015. That is 17 million tons less than provincial grain bureau says was procured. Either Heilongjiang produces more grain than the statisticians say, or the procurement statistics are inflated (maybe both...a future post on the target price program will discuss allegations that grain production in northeastern provinces is underestimated.)

Grain depot managers say the pressure on grain storage and procurement for the 2016 crop is unprecedented. Grain has been coming into the warehouses but not going out. High temperatures pose a dual threat: the grain can mold and it can become combustible.

This Google earth image shows a facility in a Heilongjiang township

that has six temporary bins with thatched roofs and spaces for about

two dozen others (it's unknown when this image was taken).

The government cut the support price for corn by about 10 percent last year and has announced that there will be no support price for the 2016 corn crop due to be harvested this fall. Corn producers took a "wait and see" attitude regarding corn policy this year. Heilongjiang is likely to have another big corn crop in 2016, despite the announced abandonment of the support price and the Ministry of Agriculture's acreage adjustment plan. Under these conditions the price may fall sharply and there may be difficulties selling the crop.

June to August is the key period for auctioning off reserves before the new harvest comes online. However, Heilongjiang is distant from final markets and the quality its corn is worse than in other provinces like Jilin and Shandong, so demand is weak. On July 28, 1.7 million metric tons of Heilongjiang corn was offered for auction, but only 178,000 metric tons sold.

Granaries say they have no room to store more grain. It would be wasteful to build even more warehouses, they say. Nevertheless, officials are encouraging private investors to built more granaries. There is also lobbying to build more industrial processing capacity to use up the corn, including fuel ethanol (Heilongjiang already has one fuel ethanol plant constructed during the last corn glut).

Grain traders, farmers, and officials are said to be worried about the upcoming corn marketing season. Local traders say they may have difficulty getting cash to finance grain purchases without bank funds earmarked for the government price support program last year. Without the program traders will have to get bank loans on their own. Bankers probably won't be too interested in financing purchases of a commodity that's going down in price.

Some officials argue for letting the corn price fall to parity with the price of imported corn. They say this would choke off imports and allow China to "snatch" foreign markets. The price has already fallen. The average sale price in the July 28 auction was 1503 yuan per metric ton, 25 percent less than last year's temporary reserve price. The corn sold July 28 had been produced in 2013/14 when the price was 2220 yuan, so this month's sale price is 33 percent less than the purchase price.

Corn prices at northeastern China ports are currently 1830-1850 yuan/mt (about $275/mt), but probably need to fall to under 1450 yuan/mt to be competitive on the export market. The farm-gate price would need to fall to about 1300 yuan/mt which might be too low for Chinese officials to stomach.

For the skeptical among us, we will point out that a number of articles last year claimed that granaries were full. Yet they managed to procure and store a record volume of corn (125 million metric tons) from November 2015 to April 2016. Could this be cut-and-paste journalism, or are the articles pushing an agenda? Not clear.