China's $27Bil Corn Dump

Chinese authorities sold 150 million tons of corn reserves during 2017-18 at prices 30%-40% less than they paid for it. The bill comes to an estimated $27 billion for loan write-downs and 3-to-5 years of storage and interest costs. Some commentators think the Chinese market's ability to absorb the massive injection of corn is an indication that the country now has a structural deficit in corn S&D.

China's corn reserves spiked to a crisis level after the government bought up a cumulative 310 mmt of corn and managed to sell off just 70 mmt from 2012/13 to 2015/16 using a "temporary reserve" program to put a floor under prices in northeastern provinces. After making some adjustments, Chinese analysts estimated reserves reached 210 mmt in 2016. After that year's harvest authorities allowed a 30-percent decline in corn prices to a more realistic level, but they purchased an additional 30 mmt to prevent prices from falling too far too fast.

During 2017 and 2018 Chinese officials put priority on auctioning off their mountain of corn reserves. They suspended a longstanding rule that commodity reserve sales had to recover the cost of acquisition and extended the auctions earlier and later in the year than usual, beginning in April and continuing through the end of October 2018. This year's auctions are expected to stop in November as new crop corn is coming on the market.

• According to China Grain Net, 100.14 million metric tons of reserve corn were traded in 28 weeks of auctions from April to October 2018 (45% of the 219.9 mmt offered for sale). Auctions during 2017 traded 57 mmt. The 2-year total was 157.5 mmt, China Grain Net reported.
• Grain and Oils News reported that net sales via the 2018 auctions totaled 93 mmt and estimated that the remaining stock of temporary reserve corn was 89 mmt.
• The Dim Sums blog calculated that 48.8 mmt was traded in 2017 and 96.3 mmt was traded during 2018--a 2-year total of 145.1 mmt--based on a compilation of 2017 and 2018 auction results reported by National Grain Trade Center.

The corn was sold at prices well below the prices paid for the corn when it was purchased during 2013-15. This implies that funds from the auctions will not fully pay off loans from the Agricultural Development Bank of China that financed the purchases, in turn implying a massive write-off of these loans. Dim Sums compared the auction prices with the "temporary reserve" procurement prices corresponding to the year and province for each lot of corn auctioned. On average, the reserve corn was auctioned at a price that was 39% below the purchase price during 2017 and 29% below the purchase price in 2018. For example, corn auctioned during 2018 brought an average price of $225 per metric ton, but it had been purchased at an average of $316/mt 3-to-5 years earlier (values were converted to US dollars using an exchange rate of 6.7 RMB/$, roughly the average for the last two years).

Summary of China's corn auctioned from "temporary reserve", 2017-18
Item	May-Sept 2017	April-Oct 2018
	Million metric tons
Grain sold at auction	48.8	96.3
	Dollars/metric ton
Average sale price	203	225
Average purchase price	330	316

The total loss from selling at prices below acquisition price was $14.9 billion: $6.2 billion for the corn auctioned in 2017 and $8.7 billion for the corn auctioned during 2018. The cost of interest and storage is estimated to be $12.7 billion: $4.3 billion for 2017 auctions and $8.2 billion for 2018 auctions.  The total cost of the corn auctioned was $27.6 billion: $10.7 billion for the 2017 auctions and $16.9 billion for the 2018 auctions.

Estimated financial losses from China's auctions of corn from "temporary reserve", 2017-18
	Billion dollars
Revenue from auction sales	9.9	21.7
− Purchase cost	-16.1	-30.4
=Loss of value	-6.2	-8.7
Cost of interest and storage	-4.5	-8.2
Total cost of grain auctioned	-10.7	-16.9
Assumes exchange rate of 6.7 RMB/US$;. Interest rate 5%; storage cost of 86 yuan/ton/year--values obtained from a presentation at China's 2018 Agricultural Outlook Conference. Purchase cost estimated from temporary reserve prices for corresponding year and province.

The auctions have been using a first-in-first-out approach. During 2017, 27.9 mmt of corn produced in 2013 and 19.9 mmt from 2014 was auctioned. During 2018, 44.8 mmt from 2014 and 51 mmt from 2015 was auctioned.

China auctions of corn from reserves, 2017-18
	Auctioned in：
Produced	2017	2018	Total
	Million metric tons
2012	1.0		1.0
2013	27.9	0.6	28.5
2014	19.9	44.8	64.7
2015		51.0	51.0
Total	48.8	96.3	145.1

We can compare the totals with reports of how much was procured during corresponding years to estimate how much corn is left. Let's assume no corn from 2012 or 2013 remains since they have stopped auctioning it. Grain officials reported that 83.3 mmt was procured in 2014 which exceeds the cumulative 64.7 mmt of 2014 corn traded by 18.6-mmt. Grain officials say they procured 125 mmt of corn during 2015/16, which exceeds the 51 mmt auctions of 2015 corn by 74 mmt. These two numbers sum to about 93 mmt. This is a little more than the 89 mmt remaining stock estimated by Grain and Oils News who anticipated that the temporary reserve stockpile could be completely exhausted by mid-2019. There should be an additional 30 mmt purchased during 2016/17 as well.

Grain and Oil News expounded on the "surprising" and "shocking" flip in the Chinese corn market from massive excess supply to deficit in three years: during 2015/16 authorities removed 125 mmt of corn from the market to support prices and in 2017/18 they auctioned 100 mmt to prevent prices from rising. Both Grain and Oil News and China Grain Net note that the corn market shows signs of surprising tightness this year despite the massive release of reserves.

Not all of the auctioned corn has actually entered the market. The reserves are mostly stored in northeastern provinces, and there have no reports of massive volumes of corn clogging ports and rail lines for shipment to other regions. The South China Grain Exchange commented last month that the auctions represented a change in ownership, yet there does appear to be a significant volume of corn injected into the Chinese market.  China Grain Net said processors in northeastern provinces have been using mainly corn from temporary reserve auctions and are now starting to buy corn from the 2018 crop.

A number of Chinese commentators have noted that prices have been climbing. The National Bureau of Statistics 2018Q3 producer price indexes show corn prices up 2.5% year-on-year while wheat prices were down 2.7%, rice prices were down 3.9%, and soybean prices were down 4.1%. Corn prices are 1450-1650 yuan/mt in Jilin Province and 1450-1610 yuan/mt in Heilongjiang, but in the Huang-Huai region further south prices have been rising 50 yuan per week. In Shandong Province, corn prices have been rising and are now in the range of 1900-2040 yuan/mt. Commentators attribute the tight corn market to uncertainty about the size of this year's Chinese crop and trade tensions that have shut down most imports of U.S. grain.

As always, the numbers are obscure, but there does appear to be a remarkable and puzzling flip in China's corn market from excess supply to excess demand in a short 3-year interval. Commenting on this flip, Grain and Oils News says that self-reliance is even more important during this period of re-emerging inflation and trade tensions with the United States. Based on indications that China now has a deficit in its corn supply being filled by sales from reserves, the Grain and Oils News writers insist that maintaining domestic supply-demand balance, steadily increasing corn prices, and stimulating more corn production are important issues for this new era.