Chinese corn prices may be stable to higher this year, largely because the state reserve is buying at a higher than anticipated price.
“Government policy is distorting corn price,” said Zhonghua Wang, a market analyst at Zhangshang Futures in Beijing. “Recent statistics show that the Chinese state reserve is buying more corn compared to last year. This will impact cash corn supply in the next month.”
By January 25, China’s state grain reserve, had purchased 39 million metric tons of corn, higher than the 36 mmt it purchased during the same timeframe last year.
“The government is buying around 1 mmt of corn every day,” Wang said. “If they keep this speed, the government will make the total purchase volume more than 70 mmt this year, higher than last year’s 69 mmt. That’s 32% of national production.”
The government’s floor price for corn, which is $9.18 per bushel in China’s northeast provinces, helped restrict end users’ access to the market. While northeastern China produces the most corn, feed companies are buying from southern and middle China and are leaving most of the northeastern supplies for the government to buy.
“Feed companies in south China normally build higher storage in the winter time, but we haven’t seen this happen so far,” Wang said. About 60% of China’s corn goes to the feed industry, while another 30% goes to the processing industry where it’s made into starch or ethanol.
The difference between domestic and international prices is taking a toll on China’s processors, and demand for corn is declining.
The Chinese government chose to continue the controversial floor price program to help boost prices paid to farmers for the 2014-15 crop year. Despite China’s growing stockpile, which was estimated to be as high as 60 mmt before the last corn harvest, it appears likely the purchasing program will continue for the 2015-16 crop year.
China’s National Statistics Bureau said total corn output for 2014-15 was 215.7 mmt, up 2.1% from the previous year. Yet consumption is only estimated at 189 mmt — 117 mmt for feed and 52 mmt for processing — leaving a surplus of 26 mmt.
All in all, China’s looking for a total carry-out of 86 mmt.
“Even though the carrying out is so high, the domestic price may still be stable or even stronger as the government is monopolizing the market,” Wang said. “The state reserve will control the price by auctioning the storage pile to the market.”
The auctions started on Jan. 7, 2015, and will continue every week. The first auction offered 5.02 mmt to the market, and only 1.56 mmt was purchased. Buyers paid between $9.38 per bushel and $9.85 per bushel.
Because of the floor price support, Chinese farmers will plant more corn this year, and the increased production will pressure the government for an even higher domestic corn price, Wang said.