China plans to start allowing its corn prices to be set by the market, the latest step in reforming its huge agricultural industry that could further thresh weak global corn prices.
A major consumer in the world corn market announced the change Tuesday, which will remove a policy in place since 2007 that set a minimum price for corn grown by domestic growers.
The move is expected to make Chinese corn cheaper, leaving buyers including farmers who use it to feed their animals not needing to buy imported corn. That threatens to add pressure on global corn prices, commodity analysts said.
In addition, the move could hurt foreign sellers of barley, sorghum, distiller’s dried grains and cassava, which Chinese farmers have been buying as cheaper alternatives to corn to feed animals, said Tobin Gorey, agri-strategy director at Commonwealth Bank of Australia.
Since 2013, China has emerged as a major importer of such alternative feed ingredients.
Commodity analysts expect China will start to sell down its corn reserves, which equate to at least 50% of the world’s corn stockpiles, adding further pressure to prices.
China isn’t a huge importer of corn, but “in an amply supplied market with record-high global stocks… a few million tons could nonetheless be sufficient to put further pressure on the world market price,” said Commerzbank in a note. “What is more, despite three consecutive years of falling corn prices, the acreage is expected to be expanded in the U.S.”
The minimum prices mechanism, which required the government to buy corn when prices fell below a set level, was introduced by the government to improve the livelihoods of domestic corn farmers.
This means corn in China is currently selling for as much as 600 yuan (US$92.41) a metric ton above the global price, according to the State Administration of Grain. Chicago Board of Trade benchmark corn ended Monday at $3.70 ½ a bushel, or US$145.86 a metric ton.
The result, according to the U.S. Department of Agriculture, was that the world’s stockpiles have increased around 60% since 2012, which further undermined prices.
USDA estimates that China holds 111.5 million metric tons of corn, which is more conservative that the 250 million metric tons of corn that China says it holds.
“They were hoping to stockpile some of it because back then people were so bullish on Chinese imports. It was at a time when the government was eager to have a buffer but I think it [the stockpiles] went way above their expectation,” said Aurelia Britsch, Head of Commodities Research at BMI Research in Singapore.
The government has promised to introduce direct subsidies to the corn growers to help support their farms but no further details have been released.
The minimum-price policy included other crops such as cotton, soybeans, rice and wheat.
However, China has started to reform its agricultural sector in the hopes of improving efficiency and trying to prevent oversupply of products that are subsidized. In 2014, it liberalized prices for cotton and soybeans, yet it continues to deal with the aftermath of the policy as it tries to sell down 11 million metric tons of cotton it also accumulated.
One factor putting pressure on China to sell is that corn deteriorates, so it can’t hold supplies for years in hopes that the price will rise.
“Around 70 million metric tons or around one-third [of the corn] has been stored for three years or three years plus. It is questionable whether this corn is still able to meet the sourcing standards of feed mills. When corn is stored for such a long time the quality will deteriorate,” said Lief Chiang of Food & Agribusiness Research analyst at Rabobank in Shanghai.
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