China’s reform on corn starts an earthquake of agriculture?

The cancellation of Corn Temporary Purchase and Storage Policy may be just a start of a quake on China’s corn and its deep-processing industries and agricultural structure. And all of them is the trend under the supply-side reform, a crucial step for China’s economy, according to CCM.

                   Source: Baidu
 

The "Three Highs" force the quit of corn temporary purchase and storage

After eight years’ implementation of the corn temporary purchase and storage policy, a severe and challenging problem----"Three Highs" (high output, high inventory, high import volume) occurs.

The high inventory refers to inventories of  corn reaching as high as 250 million tonnes, which requires more than 10 billion dollars for protection and storage. Meanwhile, the constantly falling international price of corn causes a great pressure for de-stocking. In early May, the average international price of corn was about USD191/t (RMB 1250/t), while the domestic purchase price was USD287/t (RMB 1850/t), according to CCM’s research.

So if the new policy—“market-oriented purchase + subsidy"—comes into force, how the government offers subsidy to corn farmers is a problem difficult to solve. Yet, CCM considers it a necessary step towards a healthy corn industry in the long run, even the agricultural structure.

 
The most effective weapon—price

The new policy shows the Chinese government’s determination to make full use of price—the most effective weapon for resource allocation.  It‘s also a strong signal indicating that the government will follow the market discipline and make policies according to the relation between supply and demand.

If carried out, the new policy will give rise to big changes on corn deep-processing industries and agricultural structure, according to CCM.


The quake of corn deep-processing industries

Corn-feed industry

There is no doubt that things will be totally different in corn deep-processing industries if the price of corn is determined by market.

The corn-feed industry will rebound with a larger demand for meat, eggs and milk due to the implementation of two-child policy and the progress of urbanization.

For example, currently, the breeding industry is experiencing a bleak time. The high price of corn in these years has put a big pressure on corn-feed industry because the feed spend occupies around 70 percent of total cost. However, if the corn price falls, it will be a piece of exciting news for corn-feed enterprises, according to CCM’s research.

 
Starch sugar industry

The falling price of corn will not be supportive to starch sugars' prices and accelerate the integration of starch sugar industry, and prices of the latter will probably decline to the lowest point in recent years. For instance, in 2015, the markets price of F55 HFCS (= high fructose corn syrup) was down by 4% YoY to USD 495/t in China, the lowest in the past five years, according to CCM’s research.

“Currently, China’s starch sugar industry is facing overcapacity. In 2015, the total capacity of China’s starch sugar was approximately 19.80 million t/a while the overall production was about 12million t/a. Obviously, the  utilization of capacity—60%—is not so optimistic,” stated by CCM’s researcher.

Therefore, some small and medium-size starch sugar enterprises may go bankrupt while big companies can benefit from lower cost, predicted by CCM.

 
Ethanol fuel

It may also advance the use of ethanol fuel in China. And the Chinese government may offer subsidies and favored policies to some related enterprises. This idea is also an alternative way to help reduce the high inventory of corn. Therefore, the development of ethanol fuel may be promoted by the falling price of corn, according to CCM.

 

The reshape of agricultural structure

Besides the deep-processing industries, the crop planting structure will be reshaped in the next few years. Currently, the farmers in Northeast China (Liaoning, Jilin, Heilongjiang provinces) prefer planting corn due to the high purchase price set by the state. But with the new policy to be carried out, they may be hesitated because of the unstable condition. CCM predicts that some policies related to soybean, rice and wheat might be changed as well to dispel the worry of farmers who want to plant another crop. For example, the government can set a lowest target price for soybean and improve its yield rate.


 

About CCM:

CCM is the leading market intelligence provider for China’s agriculture, chemicals, food & ingredients and life science markets. Founded in 2001, CCM offers a range of data and content solutions, from price and trade data to industry newsletters and customized market research reports. Our clients include Monsanto, DuPont, Shell, Bayer, and Syngenta. CCM is a brand of Kcomber Inc.

 

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