China's corn market reform has succeeded beyond expectations but a full year's supply of corn in reserves still looms over the market, according to the Ministry of Agriculture's lead corn market analyst.
In an interview with China Times, Mr. Xi Gensheng of the Ag Ministry's Research Center for Rural Economy judged the cancellation of the country's corn floor price policy last year as a clear success by eliminating distortions in the market. Xi noted that the corn price in China has fallen faster than expected--to an average of 1400 yuan per metric ton in production regions, down from last year's floor price of 2000 yuan. The normal geographic pattern of prices in China--lowest in the northeastern provinces, highest in the south--has been restored. The price decline erased a big gap between Chinese and international prices that had persisted for three years. Xi said the sale price for corn is now 1600 yuan--lower than the 1709 yuan/metric ton estimated cost of imported corn.
Mr. Xi pronounces the decline in corn planting last year as a breakthrough in "supply side reform." Noting that the Ministry of Agriculture has a bigger estimate than the Statistics Bureau for last year's decline in area planted in corn, Xi exclaims, "Whether [the decline in corn area] is 20 million mu or 30 million mu, both exceed the target of 10 million mu."
Below the optimistic headline, Mr. Xi noted that there is still a mismatch between corn supply and demand in China. Xi estimated that the temporary reserve of corn still holds 230 million metric tons, which he describes as about equal to a year's production of corn and a record high.
Last year 42 million metric tons of corn reserves were sold--through auctions (21.8 mmt) and a one-time "rotation" of grain (20 mmt). Xi expects multiple measures and channels to be used to dispose of the remaining corn stockpile: by improving the auction system to sell more corn, favorable tax treatment for processors, giving tax rebates for exported corn products, subsidies to processors, transportation subsidies, supporting hog industry expansion to use up the corn, and considering an expansion of fuel ethanol capacity.
While lower prices that reflect market conditions are a guiding principle of supply side reform, Xi notes that Chinese leaders are warily watching the impact on rural income to ensure social stability.
Xi Gensheng estimates that the reduction in corn prices has cut profits for corn farmers. He observed that gross income for corn growers fell 205.64 yuan per mu in 2015 when the floor price for corn was reduced 10%, and he estimates that this year's price decline could reduce gross income by a further 300 yuan.
This year the government has issued corn producer subsidy funds totaling 39 billion yuan to three northeastern provinces. Xi estimates that the payments to corn producers amount to 130 yuan per mu, much less than the decline in their income from lower corn prices. Mr. Xi said that disputes are common over who is entitled to the corn subsidy: the lessors who rent out the land or the large farmers who grow the corn. Producers outside the northeast do not get these subsidy payments. He also notes that the lack of coordination between the corn producer subsidy and soybean target price subsidy may impede corn area adjustment in Heilongjiang, the largest soybean-producing province.
(A separate article reported that rice vs. corn profitability was a consideration in reducing this year's minimum price for rice. It was feared that a huge surge in surplus medium grain rice production in the northeast region could result if the rice price was kept stable while the corn price is plummeting.)
Xi worries that large-scale farmers are under cost-pressure due to farmland rental costs. In Heilongjiang, he estimates corn farmers are losing 200 yuan per mu. In Shandong Province, corn farmers are losing 10-50 yuan per mu and some large farmers receiving lower prices are losing 200 yuan per mu. Large-scale farmers who don't get subsidies are giving up their rented land, Xi said.
If costs of land rent set by long-term contracts pose a "systemic risk", Xi speculates that the government may step in to "rescue the market."