The government’s decision to liberalize the corn market by eliminating its price support faces ‘substantial challenges’
After months of speculation, China has announced it is eliminating its price support on corn and will allow market forces to dictate what farmers are paid for the crop.
Given China’s size, the success or failure of this reform could have major implications for the world grain market.
The announcement was contained in the 2016 Number One Document, an agricultural policy released Jan. 28. However, no details were provided about how and when the liberalization plan would unfold.
Tom Sleight, president of the U.S. Grains Council, has insight into the situation, considering that it has operated an office in Beijing for more than 30 years.
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China purchased just over 20 million tonnes of wheat, corn, barley and sorghum last year, that is well below the 60 million tonnes purchased in 2021-22.
He expects China to slowly decrease the bloated price it pays Chinese farmers for their grain to reduce massive government stockpiles of corn.
“I think it has been dropped by about 15 or 20 percent now. Maybe there will be another move in another year or so,” said Sleight.
“It’s going to be a slow process.”
That’s because Chinese corn growers would face significant financial hardship if the government eliminated price support in one fell swoop.
The U.S. Department of Agriculture said China faces “substantial challenges” in liberalizing corn prices while keeping wheat and rice price supports in place.
“After China reformed subsidy policies for cotton and soybeans in 2014, many farmers abandoned these crops and switched to corn,” it said in a Feb. 5 report on the Chinese situation.
“If China liberalizes corn prices but not wheat or rice, it could face similar challenges.”
The USDA said it will also be difficult to abandon price support given that the average cost of production for corn in China was $8 per bushel in 2014, according to a report from the Chinese government.
Chinese domestic corn prices are still around $8 per bushel, or more than double the U.S. price, which is why the government in Beijing is having difficulty selling its overpriced stockpiles of the commodity. Hog farmers find it cheaper to import sorghum and other competing ingredients.
Sleight has heard estimates that the Chinese government owns 50 to 200 million tonnes of corn.
The USDA expects Chinese corn inventories to be 113 million tonnes by the end of the 2015-16 crop year.
“We don’t put a lot of faith in those numbers because we know they’re just guessing,” said Sleight.
“Everyone knows that China’s stocks on corn is a state secret, so it’s just all speculation.”
However, he believes it will take at least a year or two before the stockpile dwindles to the point that North American farmers start seeing more transparent market signals coming out of China.
There is a distinct possibility some of the government reserves will spoil in that time.
“Corn can certainly go bad if you don’t keep it in proper condition, and they tend to store their grain for quite a long period of time, two or three years,” he said.
Sleight expects China’s feed grain imports to contract slightly this year as the government sells some of its over-priced reserves. However, it will still be a major buyer of corn, sorghum, barley, cassava and distillers grain. It was the world’s largest buyer of feed grain last year.
Any curtailment in China’s purchases has the potential to move markets, depending on what grain it cuts back on the most.
“Anything that China does is going to have an impact on global prices for grain, there is not question about it,” he said.
Arlan Suderman, chief commodity economist with INTL FCStone, believes sorghum exports from the U.S. and Australia would shut down if China eliminated its artificially high price for corn.
“It would leave us with a lot of low-priced grain sorghum here in the United States that would probably push its way into the feed and ethanol industries and displace corn,” he said.
“If we stopped exporting sorghum, I would anticipate that would have downward pressure on corn prices.”
Sleight expects that China won’t cut sorghum imports.
“We do see that they will probably throttle them back just a touch this year, but buying patterns so far indicate there will still be strong sorghum sales to China,” he said.
The U.S. has exported four million tonnes of sorghum to China in 2015-16. That is up from 3.4 million tonnes from the same time last year.
Corn exports are meager by comparison: down to 912 tonnes from 82,500 a year ago. China buys its corn mostly from Ukraine and Argentina.
Sleight is confident the oversupply situation in China is temporary and that the country will become a big importer of U.S. corn in the long term.
China’s agriculture ministry unveiled a plan in November calling for a nine percent contraction in China’s corn acreage by 2020. The contraction would occur in the scythe region that arcs across northern China, where yields are poor.
In the meantime, the USDA is expecting another big crop in 2015-16. It is forecasting 225 million tonnes of Chinese corn production, up from 216 million tonnes the previous year.
sean.pratt@producer.com
