China Lurches Toward Corn Market Reform

China will end its "temporary reserve" price support program for corn, allow corn prices to be set by market forces, and give corn producers subsidy payments this year according to information dribbling out from Chinese officials this week. 

The move is expected to allow corn prices in China to drop to parity with international prices and choke off the country's two-year-old import boom for corn substitutes that include sorghum, barley, distillers grain, and cassava. This will add more downward pressure to a global bear market for grains.

The corn market liberalization was not unexpected, but the announcement was tentative and confusing, probably a reflection of the controversy over the plan that has raged behind the scenes. Last summer many market watchers speculated that a liberalization would be announced in September 2015. Instead, the temporary reserve was retained and the price was cut by 10%. The central no. 1 document issued in January 2016 singled out the corn market for reform, and a speech in March promised an announcement after the "two meetings" this month. 

Despite the months of anticipation, officials seem to have been unprepared to announce the new program. Much like last year's botched monetary policy, the new corn policy information dribbled out in a series of low profile announcements that confused observers. The corn market reform was first announced March 25 by a TV station in Inner Mongolia. Over the weekend there were rumors and microblog postings speculating about the veracity of the news. On March 28, an office director of the National Development and Reform Commission announced the corn market reform at a press briefing. This announcement was reported by several grain market news sites, but not by official news media. 

Officials were forced into action as they watched China's corn supply and demand grow further and further out of sync and financial commitments soared. High corn prices quietly sucked growing amounts of domestic corn into government reserves. The of corn volume stockpiled at the support price has grown progressively from 30 mmt in 2012/13 to 69 mmt in 2013/14, 83 mmt in 2014/15 and 103 mmt (so far) in 2015/15. The NDRC official announcing the corn market reform said consumption of corn was only 175 mmt last year while production was 224.58 mmt. Market analysts in China estimate that the corn inventory has reached 250 mmt--more than last year's output. Economist Cheng Guoqiang estimated the annual carrying cost of the corn reserves at 63 billion yuan (nearly $10 billion). 

No concrete details have been announced about the new corn policy. The NDRC said that any enterprise will be able to enter the market and purchase corn. Farmers will sell corn in an open market and the price will be determined by supply and demand. However, if there are signs that farmers are having a hard time selling their corn, some designated enterprises will receive subsidies to buy up corn. 

Farmers will receive subsidy payments based on the amount of corn they actually plant. The central government will allocate funds to provinces that have a comparative advantage in corn (probably the northeast), and the provinces will implement the subsidy programs.

The corn announcement is much like last year's abandonment of the temporary reserve for rapeseed which was announced with minimal publicity at harvest time. Prices plummeted as the harvest began. Provinces were ordered to give rapeseed subsidies but none appear to have materialized. Provinces have also been responsible for cotton subsidies during the last two years but only a few have announced them. 

The prospective corn subsidy will need to be designed and implemented in a matter of months--a major challenge considering that corn is China's leading crop. Farmers will have to plant their crops this spring having no idea what price or subsidy they will get. One of the obstacles preventing liberalization of the corn market is that no workable subsidy program is ready to be put in place. Officials have been cautiously experimenting with a target price subsidy for cotton and soybeans for two years, and hoped that the experiments would prove successful enough that similar subsidies could be used for corn, rice and wheat. Instead, provincial officials will have to rush to put in place untested subsidy methods. The new subsidy could be quite large. In a speech this week, Cheng Guoqiang speculated that the subsidy could be 200 yuan per mu--about double the subsidies received for wheat ad rice--based on a 400 yuan-per-ton subsidy.

The tentative nature of the announcement probably reflects behind-the-scenes clashes over the reform. The decline in corn price will almost certainly impact farmers' incomes and perhaps reduce their inclination to plant corn--the move is being described as a "supply side reform." Officials were probably forced to make a decision as they watched the corn market spin out of control. And with spring planting approaching, officials needed to give farmers some kind of signal on what to plant this year. 

This announcement does not mean a move to laissez faire economics in China. An official from the central communist party's rural work committee said the next step would be to make improvements in the grain reserve system. The government will retain and improve the minimum price programs for rice and wheat.