China Grain Reserves Bulge With Weak Market

Chinese officials stockpiled more grain during 2019 to shore up sagging prices as a slow market undermined plans to jettison the stockpiles. With warehouses already bulging, it will be challenging for China to buy more American grain this year to meet its "Phase One" purchase commitment.

Chinese state news media boasted that price support policies for wheat and rice raised Chinese farmers' income by 10 billion yuan (about $1.4 billion) in 2019. The news item claimed that programs to purchase wheat and rice at minimum prices have put money in farmers' pockets by preventing farm gate prices from falling below minimum levels set by the government.

Rice and wheat stocks are at record levels and corn stocks are still "abundant" (despite a massive 3-year de-stocking program), according to a January 15 Ministry of Agriculture and Rural Affairs press conference.

Grain prices are down, despite stockpiling efforts. The Ag Ministry said grain prices in December 2019 (peak season for sales of fall-harvested grain) were down from last year. Farm prices for indica rice were down 6.3 percent from a year earlier, japonica rice prices were down 7.7 percent, and corn prices in production regions were down 2.8 percent from a year earlier. Wholesale prices for common wheat were down 4.4 percent and quality wheat prices were down 6.5 percent.

This month the National Grain and Commodity Reserves Administration also reported declines in farm gate prices for wheat (-3.1 percent), corn (-2.3 percent), japonica rice (-3.6 percent), and indica rice (-.7 percent in the two biggest producing provinces), but they were smaller than those reported by the Ag Ministry. Soybean prices were up, despite an 18-percent increase in output. (Domestic soybeans are used predominantly for high-protein food products and may be benefiting as substitutes for expensive meat.)

China farm procurement prices January 2019-2020
Commodity	Location	Jan 14 2019	Jan 13 2020	Change
		Yuan/metric ton		Percent
Wheat	National	2395	2320	-3.1
Indica rice	National	2525	2516	-0.4
	Jiangxi	2495	2478	-0.7
	Hunan	2615	2598	-0.7
	Hubei	2491	2513	0.9
	Guangdong	3521	3240	-8.0
Japonica rice	National	2699	2601	-3.6
	Heilongjiang	2646	2599	-1.8
	Anhui	2604	2593	-0.4
Corn	National	1801	1760	-2.3
	Heilongjiang	1649	1638	-0.7
	Jilin	1722	1711	-0.6
	Shandong	1950	1931	-1.0
	Henan	1857	1843	-0.8
Soybeans	National	3428	3566	4.0
	Heilongjiang	3425	3552	3.7
	Henan	3620	4440	22.7
Source: China Administration of Food and Commodity Reserves.

With last year's grain shopping spree, de-stocking of government grain reserves slowed during 2019. The weak market appears to have undermined efforts to "optimize" stockpiles and make price support programs more market-oriented that were ordered by the "Document No. 1" issued by communist officials at the beginning of 2019. Support price programs were activated later than usual this year to give more time for private sector entities to purchase grain, but the degree of market intervention was nevertheless heavy. Price-support purchases of wheat accounted for 31 percent of all wheat procured in the six major wheat-growing provinces. A disastrous japonica rice crop and retreat of private buyers from the market in Heilongjiang prompted the provincial government to issue emergency notices to boost purchases from farmers in December, but overflowing storage bins, the short time before the holiday season, and snowfall disruptions limited the implementation of the action plan.

During 2019, officials purchased 22.27 million metric tons (mmt) of wheat and 15.2 mmt of rice at minimum prices. The combined 37.5-mmt purchases of wheat and rice were 41-percent larger than in 2018. The bigger government purchases reflect big harvests in 2019, weak demand, and downward pressure on prices in 2019. The grain goes into government warehouses where it is held until it can be sold when prices are more favorable, but few sales are made and grain has been accumulating for years.

Only 2.6 mmt of wheat held in reserves was auctioned off in 2019. That implies the stocks of wheat held in reserves increased by 19.7 mmt during 2019. One online report estimates that "policy-type" wheat reserves reached a record high of 93 mmt at the end of 2019 after dipping briefly during 2018. The stockpile of wheat reserves accumulated from market intervention is estimated to have doubled since 2015.

Auctions sold 12.6 mmt of old rice reserves during 2019, 4.05 mmt more than was sold in 2018. About half of the sales were japonica rice (6.255 mmt). Middle-late indica rice (4.88 mmt) and early indica rice (1.47 mmt) sales were nearly double those of the previous year. Nevertheless, the 12.6-mmt auction sales of old rice were less than the 15.2-mmt of purchases of new rice to prop up this year's prices, implying a 2.6-mmt net increase in policy-type rice reserves during 2019.

The formal price support for corn was suspended in 2016 when the stockpile swelled to 250 mmt or more. The 3-year disgorgement of corn stockpiles was slowed by the weak 2019 market as corn output rebounded by 3.6 mmt and demand was reduced by African swine fever and tepid starch production. Sales of corn stockpiles totaled 56 mmt in 2017 and 101 mmt in 2018, before decelerating to 22 mmt in 2019, according to data from Sinograin, the state-owned company that manages government reserves.

The slow-down in de-stocking appears to be the main impact of African swine fever on the corn market. The government is willing to keep holding the corn to prevent an even steeper fall in prices. The Ministry of Agriculture and Rural Affairs' top market analyst estimates that China's consumption of corn exceeds its production by 25 mmt, but in his judgment current corn supplies are adequate due to availability of stocks.