China to end corn subsidy, sell off huge stockpile

Feed stuffs that were going to China will need to find another buyer while the country uses its stocks

News that China is eliminating its corn price support and stockpiling program is either bearish or bullish, depending on the time frame.

“In the short term, it is going to be disruptive, there is going to be uncertainty,” Bryan Lomar, the U.S. Grains Council’s director in China, said in an audio file on the council’s website.

“But over the long term, we think a market oriented feed industry in China is best for everybody.”

The news broke last week when an official with China’s National Development and Reform Commission announced that the government would stop buying grain from farmers at inflated prices Oct. 1.

Lomar said the sudden policy shift came as no surprise.

“Many policy-makers have been arguing that this is an extremely expensive policy,” he said.

Lomar said it costs the Chinese government a lot of money to store the grain, keep it in condition and buy it at prices that are more than double the U.S. price.

Dim Sums, an anonymous internet blog about the Chinese rural economy, said economist Cheng Guoqiang estimated the annual carrying cost of China’s corn reserves at nearly US$10 billion, so there is plenty of incentive to reduce the stockpile.

Rich Nelson, chief strategist at Allendale Inc., estimates China has 220 to 250 million tonnes of corn stocks.

“This needs to be narrowed down to probably 100 (million tonnes) or so within just a few months,” he said.

His biggest concern is that China will become a net exporter of corn rather than a major importer later this year or early next year.

“If they do, that’s certainly a major issue for us,” said Nelson.

“They could sell these stocks internationally at a lower-than-needed price simply just to move the product.”

Other analysts are taking more of a wait-and-see approach.

“You really have to take any Chinese statement with a grain of salt,” said Mark Gold, managing partner of Top Third Ag Marketing.

“The Chinese are famous for saying one thing and doing something just the opposite.”

He thinks the announcement might be a ploy by the Chinese government to exacerbate the already bearish attitude in the marketplace so it can buy up cheap grain.

However, it would be bearish news for the grain sector if China actually lives up to its commitment.

“It certainly wouldn’t be helpful. The Chinese have been an incredible importer of grain for the last several years,” said Gold.

China’s large stockpile of corn would be sold in the domestic market, limiting imports of corn and substitutes such as sorghum, distillers grain and barley.

“If we lose the demand from China, it has ripple effects all around the world,” he said.

“I mean, they are the largest buyers in the world.”

Nelson isn’t concerned about the impact of falling Chinese imports on feed grain prices.

China hardly buys any U.S. corn anymore, preferring to buy the commodity from Ukraine. U.S. exports for the first five months of 2015-16 were only 67,200 tonnes.

And while the country has been the top buyer of U.S. sorghum and distillers grain, it has recently taken steps to restrict imports of those two minor feed grains.

China has made it difficult to get import permits for sorghum and in January launched an antidumping and countervailing duty investigation into U.S. distillers grain.

Nelson said those steps have limited trade in the minor feed grains, and he doesn’t expect any corn imports for two years.

The news out of China came around the same time that the U.S. Department of Agriculture estimated farmers will plant 93.6 million acres of corn, which is 5.6 million acres more than last spring.

“We’re looking at a potentially huge crop here in the U.S.,” said Gold.

“That tells me certainly in the short run there is at least 50 cent (per bushel) of risk in this market and maybe more between now and July 1.”

The bearish corn situation will make it more difficult for wheat and soybeans to rally.

However, it will be a moot point if a La Nina develops and, as some are predicting, delivers the hottest and driest July in the history of Iowa. That would more than offset the bearish acreage and China news, said Gold.

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