China yanks down corn reserves, pulls up U.S. corn

China is rapidly depleting its corn reserves, but it is costing the government a small fortune.

The government sold 48.8 million tonnes of corn at auctions held between May and September of 2017, according to a recent blog on the Dim Sums web site, which used information gathered from a Chinese web site www.grainmarket.com.cn.

Those auctions raised $10.4 billion but the subsidized corn was purchased from farmers for $17.2 billion. After interest and storage costs of $4.7 billion the net loss was $11.5 billion on that corn.

To put those losses in perspective, Canadian farmers generated total net income of $9.8 billion in 2017.

And China’s losses keep piling up. Another 25.7 million tonnes of government corn has been sold so far in April and the first half of May of 2018 for $5.9 billion. The grain was purchased for $8.9 billion and incurred interest and storage costs of $3.4 billion for a net loss of $6.4 billion.

“Officials are eager to sell corn since interest and storage costs go up and grain deteriorates the longer it is held,” stated the Dim Sums blog.

The grain industry is eagerly awaiting the depletion of China’s corn stocks because it is weighing down global grain prices.

The U.S. Department of Agriculture is forecasting China will have 60.5 million tonnes of corn ending stocks at the end of 2018-19. That is down from the recent high of 110.7 million tonnes three years ago.

Nobody knows where the country’s comfort level is but supplies hovered around 36 million tonnes in the early 2000s before China began building up its stockpile.

The reduction in government stocks will be greatly accelerated if China goes ahead with plans to introduce a 10 percent ethanol mandate by 2020.

Jeff Kaprelian, director of brokerage services with The Hueber Report, said China made the decision to abandon self-sufficiency in corn and that will eventually result in higher grain prices across the board.

“China will need a significant amount of corn down the line,” he said.

Kaprelian anticipates Chinese demand, when it materializes, will result in a 15 percent increase in total U.S. corn exports, which will prop up corn as well as other grain and oilseed prices.

China has announced a five-year program designed to shift land from corn to alternative crops. There is a particular focus on getting producers to grow more soybeans in order to reduce the reliance on imports.

Dim Sums reports that two provinces issued emergency circulars this spring ordering farmers to plant soybeans, referring to it as “an important political task.” The government is offering a $344 per acre subsidy to grow soybeans.

But the market isn’t co-operating. Soybean prices in Heilongjiang province are down nine percent from a year ago, while corn prices are up 12 to 18 percent.

“These price movements seem likely to prompt farmers to switch from soybeans to corn, thus bringing the supply side structural adjustment program to a screeching halt in its third year,” said Dim Sums.

That would delay the depletion of Chinese corn stocks and the beginning of a robust export program to that country.

Kaprelian said China bought eight cargoes of U.S. corn earlier this year but sales have dried up for a variety of reasons.

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