Tighter Temporary Corn Storage Purchases, Prices Unlikely to Keep Rising This Year
As one of the country's important grain crops, corn prices have fallen sharply and continuously since the start of this year, with corn futures dropping all the way from a high of 2400 yuan/ton at the beginning of the year to a low of 1788 yuan/ton, as short sellers kept adding positions and the open interest in corn futures contracts repeatedly hit new highs. Recently, as various parts of the country have successively entered the autumn grain purchasing stage, and with new grain coming onto the market in large concentrated volumes, the market has seen periodic fluctuations in grain prices, especially in corn spot and futures prices.
On November 10, reports said that in order to stimulate domestic corn sales, the Chinese government is considering issuing subsidies to feed processing enterprises, while the government also plans to sell its huge state corn reserves at preferential prices. The National Development and Reform Commission also suggested lowering the corn purchase price for the 2016/2017 season. Industry insiders said the NDRC was still meeting in Beijing in recent days to discuss the specific details of the next measures, but concerns about a further cut in the purchase price dragged down corn futures on the Dalian Commodity Exchange.
Contrary to previous years, this year's cut in the temporary corn storage price has made this customary grain price fluctuation particularly complicated. In this regard, Lin Guofa, manager of the research department at Agricultural Products Group Purchase Network, said that subsidizing deep processing is not as good as subsidizing feed enterprises, which lowers production costs in the breeding industry and thereby reduces meat imports.
Mold rate above 2% draws attention
Since China implemented its corn purchase and storage policy, although it has to some extent stabilized market corn prices and protected farmers' incomes, the year-by-year increase in the purchase price has kept the corn/soybean ratio persistently high, which has also caused corn planting returns to be far higher than those of soybeans, leading China's corn to form a massive inventory. However, this situation suddenly changed in 2015.
In 2015, the state corn purchase price in Northeast China was sharply lowered from last year's 2240 yuan/ton to 2000 yuan/ton, ending the previous trend of annual increases in the purchase price. After the state announced the temporary storage price for Northeast corn, corn purchase prices in Henan, Shandong, Jiangsu, Anhui and other places fell rapidly, dropping more than 20% year on year, a decline that had never occurred since 2000.
“The sharp fall in corn prices this year is directly related to the cut in the temporary storage purchase price. Now that prices have fallen, finding a new price equilibrium point is what the market is most focused on. In the past two years, under a market pattern of supply exceeding demand, during the Northeast temporary storage purchase period, the price equilibrium point was the temporary storage purchase price, and the entire Northeast market priced off it.” Wang Baoquan, manager of the information research and development center at China Corn Network, said in an interview with reporters.
However, as corn market transaction prices have continued to decline this year, in order to ensure national food security and farmers' incomes, the state continued to implement the temporary storage corn purchase policy this year. On November 1, temporary storage corn purchasing officially began. At present, 23 state-owned grain purchasing depots in Daqing are simultaneously “opening their scales,” throwing open their doors to purchase newly harvested corn.
“We've been running around dealing with this for the past two days. We just finished loading the truck yesterday and rushed here overnight, just wanting to sell for a good price. Now the state grain depot purchasing is open and transparent throughout the whole process, and we feel more and more secure. It took half a day to complete the invoicing, sampling, testing, weighing, unloading, tare weighing, settlement and other procedures, and the 200 tons of corn that passed inspection also smoothly entered the temporary storage depot. After these few days, our anxious hearts can finally be put at ease.” Sun Shuming, a farmer from Hongqi Township, Lindian County, Daqing, said in an interview with reporters.
In addition, according to reporters' understanding, the current divergence in the futures market over corn prices lies in the fact that this year's temporary storage purchases strictly control warehousing quality to within 2% mold, and corn with more than 2% mold is to be purchased by local governments. How much local governments can purchase and at what price is still unknown. If the purchase volume is limited, then later market liquidity will be strong and upward price pressure will be great. If the purchase volume is large, then market price support will be strong.
In this regard, Wang Baoquan believes that this year's purchase and storage policy explicitly states that mold in corn purchased for temporary storage must not exceed 2%, and corn with more than 2% mold is to be purchased by local governments. However, local government purchasing has not yet officially started. This autumn grain purchase and storage meeting also explicitly proposed to “promptly introduce measures for purchasing corn that does not meet quality standards.” Since temporary storage purchases can currently only buy corn with mold within 2%, all purchasing entities are currently relatively strict about corn mold requirements.
In addition, temporary storage began on November 1, and the purchase volume in the first week was clearly higher than in the first week of the previous year. In this regard, Lin Guofa said the market worries that the temporary storage price will support corn prices in Northeast China, that large amounts of corn will enter temporary storage depots, reducing pressure on market circulation, and at the same time driving up prices in North China. Corn futures, affected by policy, rose strongly, and driven by capital effects, the main corn contract once hit the daily limit up on the 9th.
Lin Guofa believes, however, that we need to note that domestic corn inventories are high. After corn prices rise rapidly, corn prices in southern regions will become too high, and the substitute import volume of sorghum and barley will still remain at a relatively high level, which is not conducive to destocking corn. At present, the 2000 yuan/ton corn price in Northeast China is the top for the 2016 corn contract, and corn prices are unlikely to keep rising.
Corn deep processing enterprises receive subsidies
Since new-season corn came onto the market, North China corn prices have formed a low-lying area for national corn prices. In the early stage of new grain marketing, grassroots purchase prices even fell to 1600-1700 yuan/ton. After the Northeast temporary storage corn purchase policy was announced in mid-September, the market already had certain expectations for corn prices during the purchase period. Therefore, after new grain came onto the market in Northeast China, purchase prices at northern ports were around 1900 yuan/ton, and the 200-300 yuan/ton price spread drove North China corn to flow to Northeast China.
Lin Guofa believes that after the 2015 Spring Festival, corn prices in Northeast China were relatively expensive, and at one point corn from northern areas of Hebei and Henan flowed into Northeast China and entered state reserve depots. After new corn came onto the market in the 2015/2016 season, corn from Hebei likewise flowed into Northeast China. It is precisely the temporary storage policy factor that made the Northeast grain-producing region a “high-price zone,” causing corn to flow in reverse.
In addition, because starch is downstream of corn, according to historical statistics from the spot market, the price spread between starch and corn is generally 500-550 yuan/ton. But this year the situation has changed somewhat. In mid-September, the Jilin provincial government raised its subsidy policy for corn deep processing. In the “Notice on Raising Subsidy Standards for Corn Deep Processing Enterprises,” it stipulated that in the fourth quarter of 2015, continued subsidy support would be given to corn deep processing enterprises in the province with annual processing capacity of more than 100,000 tons.
At the same time, for state temporary storage corn and provincial reserve rotation corn auctioned out of storage (before the end of the year) and used for self-processing, the original subsidy standard of 150 yuan per ton is planned to be raised to 350 yuan, of which 100 yuan is subsidized by the state and the 250 yuan difference is subsidized by the province (for auctioned provincial reserve rotation corn, the full 350 yuan is subsidized by the province). Subsidy settlement and disbursement shall be carried out in accordance with state regulations.
“Since 70% of starch pricing still comes from corn, the rise in starch futures is also moving closer to spot prices, so it can be said that the pace of price increases is basically the same as that of corn. Looking only at the starch spot level, after the earlier sharp fall in corn prices, enterprises' starch quotes also fell sharply accordingly, which stimulated downstream enterprises' purchasing enthusiasm. At present, starch enterprises generally have low product inventories and are mostly executing earlier contracts, which has also prompted enterprises to raise product quotes.” Wang Baoquan said in an interview with reporters.
Because raw material costs have fallen sharply, the market competitiveness of corn deep processing products has strengthened, and the use of substitute raw materials has decreased. In addition, the state has already given production subsidies to deep processing enterprises in Jilin, and whether the scope of subsidies will be further expanded in the future is also worth watching. Supported by both the market and policy, it is expected that the operating conditions of corn deep processing enterprises this year will be better than last year.
“At the same time, as starch prices decline, the substitution advantage of starch sugar becomes significant. The starch 1605 contract traded on the Dalian Commodity Exchange once showed a price of 1910 yuan/ton at the end of October. If calculated at that price, the production cost of high-fructose corn syrup (F55) is less than 2000-2100 yuan/ton. To ensure enterprise profits and make allowance for part of the price fluctuation risk, high-fructose corn syrup enterprises can completely quote 2300-2500 yuan/ton in the first and second quarters of 2016, which converts to only 3000 yuan/ton for white sugar.” Lin Guofa said in an interview with reporters.
According to the current domestic sugar supply and demand situation and current white sugar prices, the price advantage of high-fructose corn syrup has already surpassed its historical highest level. Starch demand has improved and prices are low. Hedging according to earlier board prices has resulted in losses. Assuming that North China corn even falls to the worst case of 1600 yuan/ton, and combining that with current by-product prices remaining unchanged, the forward direct production cost of starch is 1980 yuan/ton. That cost does not include interest expenses and management expenses. If an enterprise actually wants to obtain a profit of 10-20 yuan/ton, the starch sales price should be 2050-2100 yuan/ton.
Industry insiders believe that precisely because starch prices were low earlier, bullish funds entered, open interest continued to increase, and divergence was obvious. In the end, the starch 1605 contract fell to 1908 yuan/ton and rebounded from the bottom. Temporary storage started, corn prices rose, and starch futures prices rose further. On the spot side, there was even a sell-out situation. In the end, within half a month, the starch 1605 contract rose by another about 220 yuan/ton, an increase of more than 10%.
Lin Guofa said that overall, whether starch can rise depends on the trend of corn. The risk of corn exceeding 2000 yuan/ton is extremely high. The subsidy for corn deep processing in Northeast China is 350 yuan per ton, which is equivalent to a corn cost of 1650 yuan/ton, limiting starch prices from continuing to rise crazily. The starch 1605 contract exceeding 2200 yuan/ton requires attention to risk, since domestic corn inventories are too large, and excessively high corn prices will limit destocking and increase later price pressure.