Weak Corn Prices

According to Futures Daily, Chinese corn prices have been falling due to pressure from the new harvest, weak demand and worries about the fallout from the European debt crisis. The futures price fell below 2200 yuan per metric ton (about $14.75  $8.75/bu) and is threatening to break through 2100.

This year's record-breaking harvest, estimated at 184.5 million metric tons, has been coming on the market, putting seasonal downward pressure on prices. In northern China good weather encouraged farmers to sell, and the price fell 200-300 yuan/mt to 2160-2380 yuan. In the northeast the corn price is in the 2000-2050 yuan range. As prices start to fall, farmers become more eager to sell. Farmers tend to sell a lot of corn at the end of the year to raise money for the coming holidays.

The market is worried about the effects of the European debt crisis, and whether the crisis will spread outside Europe to the United States.

Demand has been weakened by the government's recent actions to rein in the industrial corn-processing sector. A new VAT regulation was issued for the fuel ethanol industry--instead of exempting fuel ethanol companies from VAT they must pay it first and then get a refund. Stricter environmental controls were announced for starch, sweetener and ethyl alcohol processors, raising their operating costs.

Livestock demand is not particularly robust either. The peak season for pork consumption in southern provinces has not arrived yet. The one bright spot is the poultry industry where prices and profits are still high and producers are stocking up on birds in anticipation of the January 1-Chinese New Year holiday season.

A big  uncertainty is the level of state corn reserves. The article says it is "an indisputable fact" that reserves are low. Restocking of government reserves could add to demand and support prices, but the article says state-owned grain companies are buying "only 500,000 metric tons" compared with 29 million metric tons in 2010.