Thursday, January 4, 2018

China Wants to Shed Rice Stockpiles

Chinese authorities are considering another reduction in support prices for rice in 2018 to move toward market pricing, dissipate their huge stockpile, and stem a surge of imports, market analysts say.

With a record crop of 208.56 million metric tons (about 146 mmt after milling) in 2017, China's rice supply is more than adequate. As of December 25, 62.5 mmt (presumably rough rice; 43.75 mmt after milling) of the fall rice crop had been purchased (34.7 mmt medium grain and 27.8 mmt long grain), 2.3 mmt more than a year earlier. Procurement of the summer-harvested early indica rice crop totaled 9.16 mmt (6.4 mmt milled basis), up 570,000 mt from the year before.

An August rice market analysis estimated that the government's rice stockpile could be a record-high 100 million metric tons (apparently on a rough basis; 70 mmt milled basis), or about 80 percent of a year's consumption. The analyst's estimates were based on authorities' annual procurement of about 30 mmt of rice (21 mmt milled basis) through the support program since 2013 less sales of reserves.

Despite plentiful domestic supplies, rice imports also continue to rise. According to a Ministry of Agriculture report of customs statistics, China imported 3.6 mmt of (milled) rice in the first 11 months of 2017. That was up 15% from a year earlier.

A December report from China's central broadcasting network said that good quality rice is fetching good prices, but the price support program is propping up prices for generic rice.

A November report from China Grain Network said that quality of the 2017 rice crop varied by region. Rice has sprouting and other serious quality problems in parts of China were there was heavy rain at harvest time--mainly in Henan, Hubei, and Anhui Provinces. In southern regions like Jiangxi and Hunan Provinces quality of the crop is good. In most other areas, the quality was more or less the same as the previous year.

According to the China Grain Network report, the surge of rice imports is prompted by the spread between Chinese and international rice prices. In late November, the price for Thai 5% broken was $410/mt fob, and 3880-3980 yuan/mt on arrival in China. Pakistan 5% broken was $385/mt fob, and 3900-3920 yuan/mt on arrival in China's Guangdong Province.

On December 26, prices for domestic late-season long grain milled rice ranged from 3800 yuan/mt in Hunan (China's largest rice-producing province) to 4000 yuan/mt in Shanghai and 4040 yuan/mt in Chengdu, Sichuan Province. Early season long-grain rice was 3910 yuan/mt in Shanghai, comparable to the price of imports. Medium grain japonica rice was more expensive: 4800 yuan/mt in Guangzhou, 4900 yuan/mt in Fujian, 4300 yuan/mt in Shanghai, and 4200 yuan/mt at the train depot in Heilongjiang (the largest production region for japonica rice).

China also managed to double its exports of rice to over 1.1 mmt in the first 11 months of 2017. China Grain Network explains that the exports reflect a strategy of accelerating the disposal of excess rice stockpiles and describes the exports as "structural adjustment." In other words, China is dumping surplus rice on the world market. According to China Grain Net, the average unit value of exports through October was $482/metric ton (45 percent lower than last year). The average export price equals 3133 yuan/mt at the current exchange rate--about 20 percent less than prevailing domestic prices in China. Major markets are South Korea, Philippines, Mongolia, and African countries such as Guinea-Bissau, Côte d'Ivoire, and Mozambique. The China Grain Net analysis expects exports of rice to accelerate as de-stocking and reform of the rice market picks up.

The China Grain Network says market participants anticipate declining rice prices in 2018 as the government is expected to cut minimum prices again. They expect the minimum price for japonica rice to be cut by 200-400 yuan/mt, the middle/late indica price to be cut by 200 yuan/mt, and they think the minimum price for early rice could be eliminated altogether. The announcement could come in February, the month when minimum rice prices for the coming season are typically announced.

The State Council's December 12 announcement that imports of broken rice will be permitted at a tariff of 10 percent beginning July 1, 2017 has not been explained, but it is consistent with rhetoric about a new emphasis on quality products in agricultural policy. Authorities may remove the price support for the low-quality early indica rice crop and allow imports of broken rice at a 10 percent tariff to liberalize the low end of the market. Both are relatively low-quality types of rice used for making liquor and other industrial processing.

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