Chinese corn prices hit a new six-year low, as the government announced it will pull its price support system for the grain.
The government will end its corn stockpiling programme at the end of the current season, and allow prices to be set by market rates, the country’s State Administration of Grain said.
“We hope the new reform will let the market play more of a role in the formation of prices,” said Liu Xiaonan, a deputy director with the National Development and Reform Commission (NDRC), said.
The nine-year-old government stockpiling system, designed to support farmers, has led to Chinese corn prices as much as 50% above global prices, and resulted in the accumulation of huge inventories.
Chinese domestic prices fall
The move has been widely anticipated, with a number of government statements suggesting such measures were imminent.
But Chinese corn prices still fell on the news that the measures will be implemented by the start of next season, in October.
May corn futures on the Dalian exchange closed down 0.8% pm the news, at 1,700 yuan a tonne, a new six-year low for a spot contract.
New crop corn January 2016 futures finished down 1.2%, at 1,437 a tonne, the lowest close for the contract.
Limited direct effect
Commerzbank noted that “China is only a corn importer to a limited extent”.
Tight customs restrictions mean China has been importing relatively small amounts of corn, despite the disparity between domestic and international prices.
Chinese corn imports have been no higher than 5.5m tonnes in the past five years.
“In an amply supplied market with record-high global stocks, however, a few million tons could nonetheless be sufficient to put further pressure on the world market price.”
Demand for substitutes
More important will be the likely effect on demand for corn substitutes.
With corn prices high, feed mills have been increasingly turning to substitutes, particularly sorghum, barley, and dried distiller’s grains.
Chinese sorghum demand has soared from just 631,000 tonnes in 2012-13, to a peak of 10.16m tones in 2014-15.
Instead of the stockpiling system, the government will instead subsidise corn growers, which have a cost of production well above that in the world’s key corn exporters.
Any fall in domestic corn prices will reduce the value of the huge government-held stockpiles, which make up more than half of the world’s total corn inventories.
Law of unintended consequences
Last month the US Department of Agriculture’s Beijing bureau warned that reform of corn policy might have unintended consequences.
“There are substantial challenges to liberalising prices for only a few crops at a time while keeping high price supports for others,” the bureau said.
Indeed, a contributing factor to the current corn glut was the abandonment of subsidies for cotton and soybeans in 2014, which caused farmers to favour to corn production.
“If China liberalises corn prices but not wheat or rice, it could face similar challenges,” the bureau warned.
