Subsidized Corn for Chinese Ethanol

The Chinese government has hoovered up corn at a record pace again this year to keep prices artificially high. Having already spent billions to buy up and store the corn, the government is preparing more subsidies to sell it off.

As of February 10, 2016, officials had purchased 82.6 million metric tons (mmt) of this year's corn crop for the "temporary reserve." That's 37 percent of the entire corn crop and roughly matches last year's government purchases. The purchases will continue through next month, so the total could surpass 90 mmt. At a price of 2000 yuan per ton, that would be a 180-billion yuan (nearly $28 billion) corn shopping spree since last November.

Some analysts in China estimate the corn stockpile has grown to nearly a year's supply, and officials are now making preparations to offload the  reserves. China's grain bureau has reportedly drawn up a preliminary list of processing enterprises it intends to target for special sales of corn reserves in coming months, presumably at discount prices.

One of China's four fuel ethanol manufacturers will get subsidized corn. A document issued by the Bangbu City government in Anhui Province announced a subsidy of 280 yuan/metric ton ($43/mt) for up to 180,000 metric tons of corn purchased by COFCO Biochem (Anhui) during January-March 2016.  The subsidy of up to 40 million yuan (over $6 million) is earmarked specifically for this company. The subsidy reflects a new initiative to force local governments to bear the costs of grain policies. More such subsidy schemes by local governments could be hatched in the coming months. Fuel ethanol is one of the few viable uses for the rotten corn held in reserves.

So...China's commerce ministry has just launched an "investigation" that will accuse American fuel ethanol producers of "dumping" their by-product--distillers dried grains with solubles (DDGS)--at unfairly subsidized prices. Yet at the same time a Chinese ethanol producer is receiving an explicit subsidy that cuts the cost of its own corn raw material by about 15%. The intent of the Chinese subsidy is to use more corn to make fuel ethanol, which means increasing the supply of the DDGS by-product in China and driving the price even lower.