China's Emerging Corn Deficit Marked by Price Rise

Rising prices in China's corn market signal the transition from glut to seller's market, according to some analysts in China. The market has been filling its corn deficit by drawing down a stockpile over the past four years, but the stockpile is expected by many to be depleted in 2020.

Over 15.9 million metric tons of corn was sold at four weekly auctions of "temporary reserve" corn held between May 28 and June 18, 2020--nearly all of the corn offered. Premium prices were paid, with the average price rising from 1765 yuan per metric ton in the first auction to 1884 yuan in the June 18 auction. The auctions are the main source of corn now that farmers have sold nearly all of their surplus corn from last fall's crop.

The auctions are replicating similar frenzied conditions that prevailed during corn auctions 11 years ago when fiscal stimulus to prod China out of the 2008-09 recession leaked into some commodity markets. Authorities have upped deposit requirements for auction participants for upcoming auctions, an echo of restrictions on participation imposed in the 2009 auctions to cool off suspected speculation.

Corn prices at southern port of Huangpu in Guangdong Province has been on the rise from 1970 yuan per metric ton in early March to 2240 yuan per metric ton on June 22, a 14-percent increase. Prices have been rising in all regions.

Source: gdgrain.com

An analysis by Grain and Oils News proclaims 2020 as an historic transition for China's corn market from a buyer's market to a seller's market. This year is hailed as the "finale" for the temporary reserve price support program that accumulated a huge glut of corn that has been dumped back into the market since the program was ended in April 2016. The estimated 56 million metric tons remaining in the temporary reserve ahead of the May 28 auction is expected to be depleted by this year's sales. Subtracting the sales from the first four auctions, the temporary reserve should now be down to about 40 mmt.

Grain and Oils News reckons that China's use of corn now exceeds its production by a significant margin. The deficit has been filled by sales of reserves, but the market will now become tighter as the reserves are depleted. The analysis observes that domestic Chinese prices exceed the price of corn imported from the United States by about 500 yuan/mt for July-November.

A similar analysis posted on the BRICS market analysis site estimates that China's consumption of corn is 285-300 mmt for 2019/20 while 260 mmt was produced, a deficit of 25-40 mmt. However, the release of reserves and imports of corn and substitutes can easily fill that gap and allow private traders and processors to increase their inventories. BRICS presumes that all 56 mmt of temporary reserves and 13 mmt of other reserves will be sold in 2020. BRICS expects 10-20 mmt of corn, sorghum, barley and DDGS to be imported. With corn prices rising close to wheat prices, BRICS also sees more substitution of wheat for corn in feed in wheat-growing regions. BRICS attributes the rise in corn prices to disruptions of logistics and cautious sales by farmers due to covid-19 this year.

The Ministry of Agriculture and Rural Affairs CASDE balance sheet estimates production of corn in 2020 at 266.5 mmt and corn use totaling 285.5 mmt. CASDE expects 5 mmt of corn imports, leaving a deficit of 14 mmt for 2020/21, presumably to be filled by corn from inventories. CASDE estimates that domestic corn prices will be 1900-2000 yuan/mt and estimates the landed cost of imported corn at 1750-1850 yuan/mt after taxes. CASDE expects imports of corn and substitutes to rise in the second half of the year.

Analysts agree that demand from starch and alcohol processors is tepid, as profits and capacity utilization are low. Analysts see recovery of the swine sector boosting feed demand based on the Ministry of Agriculture and Rural Affairs' report of rising sow numbers. According to industrial feed output statistics for January-May 2020, feed output was up 3.1 percent from a year earlier. The report appears to be evasive in reporting swine feed statistics. Swine feed production in May 2020 was down 14.5 percent from a year earlier, but it had plummeted by 41.3 percent in October 2019 when swine numbers appear to have bottomed out.

BRICS mentioned fall army worms as a possible factor affecting China's corn supply in 2020, but CASDE cited good soil moisture in projecting a record yield of 6.4 mmt per hectare with no mention of army worms. An agriculture industry development report issued by the Chinese Academy of Agricultural Sciences (CAAS) on June 4 estimated that fall army worm infestations could destroy less than 2.5 percent of the corn crop--equal to about 6.5 mmt. The CAAS report estimated that swine production capacity would recover to at least 80 percent of normal by the end of 2020. CAAS estimated that the deficit in corn supply could be filled by reserves and by imports of corn and substitute grains.

Surplus Wheat Will Add to China's Stockpile

China is completing one of the biggest wheat harvests ever this month. China doesn't need all that wheat, and the government is expected to purchase a significant chunk of the crop to prop up the price and keep its farmers happy.

Official news media reports that the summer grain harvest is 90 percent complete. "Summer grain" consists mainly of wheat that was planted last fall, stayed in the ground through the winter and is ready for harvest in early summer. Agriculture Minister Han Changfu estimates that yield is up this year and the proportion of "quality" wheat is up 2.8 percentage points, despite drought in some areas, warm winter temperatures, and worries about covid impacts on field management. Han says various levels of government spent 160 million yuan ($22.9 million) to prevent wheat scab, rust, and pest damage to the crop.

China Grain Net estimates that the wheat crop will be about 2 percent larger than in the last 10 years, but not as big as in 2019. The weather has been favorable and there has been no big rain in the wheat-growing region during the harvest. They think improved production techniques by large-scale farms also contribute to a big harvest.

China's main wheat-growing provinces

When Chinese provinces began purchasing wheat at minimum prices
Year	Hubei	Anhui	Jiangsu	Henan	Shandong	Hebei
2016	June 1	May 31	June 3	June 6	June 30	June 30
2017	June 7	May 31	June 7	June 6	July 6	July 6
2018	none	June 6	June 12	June 13	none	none
2019	July 11	June 5	June 12	July 2	July 14	July 19
2020	June 9	June 10	June 12
Source: http://www.cngrain.com/Publish/1/671024.html

China Grain Net explains that China's minimum price program for wheat puts a floor under wheat prices. Reforms in recent years called for the private sector to play the primary role in purchasing wheat and determining prices, but the government will enter the market to purchase wheat when the market price falls below the minimum of 2240 yuan ($320) per metric ton for the 2020 crop announced last October. China Grain Net describes the minimum price as a "weathervane" for the market and wheat market players have a saying, "There's no telling how much the wheat price will rise, but it won't fall in the short-term."

On June 8, the average purchase price for wheat ranged from 2080 to 2690 yuan per metric ton and the national average was 2276 yuan, according to the commodity and grain reserve bureau. China Grain Net estimated the average price in production areas at 2320 yuan on June 12.  There was a surge in wheat demand in March and April due to covid-driven hoarding, but prices have dropped as the new crop came on the market and demand tailed off during the summer. China Grain Net estimates the fob price for U.S. wheat at 1625 yuan per metric ton and the landed price, including taxes, at 2634 yuan.

The marketing season for wheat runs from June through September, and the harvest and procurement of wheat proceeds from south to north in the six provinces that are eligible for the minimum price program. The program can be launched when the market price is below the minimum for a certain number of days. The southernmost provinces--Hubei, Anhui, and Jiangsu--have already launched their minimum price programs for 2020. In Henan, the largest wheat-growing province, conditions vary across regions, but China Grain Net expects Henan to launch its minimum price program by June 20. Shandong and Hebei Provinces historically have purchased less wheat at minimum prices, but Shandong announced that it has 71 warehouses ready to store wheat if the program is launched there.

China Grain Net estimates that 15 million metric tons of wheat will be purchased at minimum prices from the 2020 crop. By comparison, 22.27 mmt was purchased at minimum prices in 2019. That was 16 percent of wheat produced and 31 percent of all wheat procured last year.

On June 10, the government offered to sell over 3 million metric tons of old wheat from reserves, but only 46,100 metric tons sold. The previous auction had sold only 67,000 metric tons.

This year's purchases will add to a wheat stockpile that China Grain Net estimates to already be a mountainous 80 million metric tons.

China's Socialist Economy With Landlord Characteristics

Chinese leaders pacified the urban citizenry by turning them into an army of real estate tycoons and landlords--precisely the class of people who were shot en masse when the communist party seized control of the country 70 years ago. Thirty years on from June 4, 1989, wealth generated by expensive concrete cubes stacked into the sky on state-owned land and financed by state-owned banks has proven to be an effective balm for taming a restive population.

In April, the Peoples Bank of China released a financial survey of 30,000 urban households conducted in 2019. A summary of the results by 21st Century Business News showed that the average urban family in China had assets of 3.179 million yuan (about $454,000), debt of 512,000 yuan ($73,000), and a fat net worth of  2.89 million yuan ($381,000).

Source: Peoples Bank of China 2019 urban family financial survey.

The average asset value of $454,000 for urban Chinese families is not that far behind the U.S. average of $792,000 (for 2016) reported by the Federal Reserve Bank's Survey of Consumer Finances. However, averages do not reflect the finances of a typical family in either country since the concentration of wealth in the richest households skews the average in both countries. The median asset value was $233,000 for Chinese urban families--higher than the $189,000 median reported for U.S. households.

How did Chinese families get so rich? Mainly by investing in real estate. Housing accounted for 59 percent of asset value owned by urban Chinese families. In fact, housing is pretty much the only sure path to wealth for the average person in China. The Peoples Bank of China survey reported that 96 percent of families were home owners. According to the survey, the average family owned 1.5 houses. Thirty-one percent of families owned 2 houses and 10.5 percent owned 3 or more houses. Personal experience suggests that these extra houses are mostly rented out, so these statistics infer that about 40 percent of Chinese urban residents are landlords.

Source: Peoples Bank of China 2019 survey of urban family finances.

In another reflection of the importance of real estate, average family assets were off the charts in China's two biggest and richest cities--Beijing and Shanghai--both with sky-high real estate values. Beijing families had average assets of $1.27 million, and Shanghai families had $1.15 million--about 150 percent above the national average. Two other pricey provinces adjacent to Shanghai--Jiangsu ($724,000) and Zhejiang ($687,000)--were 50-60 percent above the national average. Families in the bottom two regions, Jilin ($202,000) and Xinjiang ($182,000), had assets about 15 percent of the average in Beijing. Interestingly, assets owned by families in Tianjin--an urbanized/industrialized port city adjacent to Beijing--were less than half the value owned by their Beijing neighbors.

In comparison, the average home ownership for U.S. families reported by the Fed's survey was a much lower 64 percent. A Boston Federal Reserve study of the Fed's survey reported that housing accounted for 30 percent of U.S. family assets, and financial assets made up 40 percent. Fourteen percent of U.S. families owned two or more homes, far less than the 41 percent of urban Chinese families owning multiple homes.

The Peoples Bank survey found that 56.6 percent of urban Chinese families have debts. In parallel with the dominance of housing on the asset side of the balance sheet, home mortgages accounted for 75.9 percent of the debt. A higher proportion of U.S. families have debt (77 percent), but mortgages also account for 75 percent of U.S. family debt.

Today's elderly benefited from the gifting of state-owned apartments that kicked off the housing boom in the 1990s when they were in their prime. Today's young folks have to come up with massive down payments and take on hefty loans to get into the game.

The top 20 percent of urban Chinese families (ranked by debt) have 61 percent of the debt. Young families headed by people aged 26-35 years old are the most likely to have debt (73 percent), while those over 65 are the least likely to have debt (25 percent). The amount of debt by age group was not reported. 21st Century Business News commented that middle-aged and young families are under heavy debt pressure, while older households were most inclined to invest in risky assets like asset management products and trusts. The paper commented that some families with few assets are at risk of insolvency. Most mortgages are borrowed from banks, but family businesses and those with few assets often borrowed from informal lenders.

Source: Peoples Bank of China 2019 survey of urban family finances. 

The wealth distribution is skewed in both China and the United States. The top 10 percent of urban Chinese households control 47.5 percent of family assets, and they are dollar millionaires with average assets of over $2 million per household. The middle 20 percent of urban households control 10 percent of assets, an average of about $235,000 per family. The lowest 20 percent of urban households owned less than 3 percent of assets, but their average asset value was $59,000.

U.S. data show that the share of assets  held by the top 10% of U.S. households rose from 55 percent in 1989 to 64 percent in 2019, but that's not surprising for a capitalist country. While the family wealth distribution in urban China--47 percent owned by 10 percent--is less unequal than in the United States, it's almost the same as it was in the United States in 1989. What's the point of having a socialist economy if wealth accumulation by the rich is not that different from inequality in one of the world's paragons of capitalism?

Moreover, the degree of inequality in China is greater than the survey indicates because it excludes rural people and rural-urban migrants, and it captures less than 30 percent of China's assets.

If the home ownership rate is 96 percent and families own 1.5 houses on average, who exactly is living in all those houses? They are rented out largely to migrants from the countryside and other cities. Nearly all migrants live in rented rooms or dormitories provided by employers. An older survey with a broader sample found a lower 85-percent home ownership rate for urban Chinese families. The distribution of wealth in China would be even more skewed if the rural and migrant population were included in the statistics.

The biggest share of China's real estate wealth was generated by expropriating rural land. Villages were often paid compensation based on the value of grain crops the land could produce. Then the land was reclassified as urban land, and high rise buildings worth millions were constructed and sold off.

This survey covers only a sliver of China's national assets. Another survey by the Chinese Academy of Social Sciences found that family assets were only 30 percent of China's total asset value. Banks had 30 percent, nonfinancial enterprises had 28 percent, and government had 12 percent of assets. Families have minimal stakes in the other 70 percent of China's assets since they own few stocks or bonds. These are de facto owned by the tycoons and communist party functionaries who run them.

Financial assets accounted for only 20.4 percent of urban Chinese family assets--about half the share held in financial assets by U.S. families. The survey said that 58 percent of financial assets were owned by just 10 percent of families. Factories, equipment, shops, and other business assets accounted for about 13 percent of Chinese family assets. In addition to having a larger share of their wealth in financial assets, U.S. families also had a larger share of business assets (23 percent) in their portfolio--10 percentage points more than urban Chinese families.

Assets in China--some owned by families, most owned by...

Nor do Chinese families have any ownership of the land underneath their dwellings--all land is owned by the state. The dollar-value of dwellings should also be adjusted for the tiny size of the units, nuisances of plumbing and elevators that don't work, dirty or crumbling exteriors, and hours-long commutes.

It was not mentioned in the survey, but one of the most popular ways of utilizing this great wealth is to sell one of the houses to raise cash to educate the family's child overseas. The education typically takes place in North America, Australia, the UK, or New Zealand, with plans for the offspring to take up permanent residences in one of the English-speaking bastions of capitalism, and hopes of family visas for parents down the line.