Lower corn prices support a rising pig-to-grain ratio, potentially squeezing room for price increases
The National Development and Reform Commission recently released data showing that the national pig-to-grain price ratio has declined somewhat. On September 30, the pig-to-grain ratio was 7.82, down 0.89% from September 23. Jiang Chao, a macro bond researcher at Haitong Securities, believes that the current pig-to-grain ratio remains around 8, far above the break-even line of 6, which shows that the only factor that had been pushing up CPI has also settled down. He may lower the fourth-quarter CPI forecast to below 2%. This opens the door for the central bank to cut interest rates. Related company stock trends
The so-called pig-to-grain price ratio refers to the ratio between the ex-farm price of live pigs and the wholesale price of corn, and is a break-even measure for calculating profit and loss in hog farming. Looking at the industry as a whole, after hog prices reached their lowest point in March 2015, a relatively rapid round of increases began, driving the pig-to-grain price ratio upward.
In August this year, CPI (the national consumer price index) rose 0.5% month on month and 2.0% year on year. From a month-on-month perspective, the sharp rise in food prices such as pork, fresh vegetables and eggs in August was the main reason for the relatively high month-on-month CPI increase. In August, pork prices rose for the fourth consecutive month in a recovery, with a month-on-month increase of 7.7%, contributing 0.25 percentage points to the CPI increase.
China's CPI index is strongly affected by domestic food prices, among which pork has the largest weight in CPI, at roughly around 10%. Although pork's share of residents' meat consumption has gradually declined, the weight of pork prices in CPI has not changed.
Entering September, hog prices began to decline. From the middle of the month, hog supply began to increase continuously, slaughtering enterprises' intention to press prices down became increasingly obvious and took shape on a larger scale, and the decline in ex-farm hog prices accelerated. Especially in the latter part of the month, during the period before the Mid-Autumn Festival, because slaughtering enterprises intensified price suppression, farmers engaged in concentrated sales and panic selling.
After the ”National Day“ holiday ended, market analysis said that terminal demand during the holiday period fell short of expectations, the boost was not strong, and hog prices maintained a volatile downward trend. The obvious increase in supply starting in September caused an imbalance between supply and demand, and a phased phenomenon of oversupply emerged, keeping hog prices continuously low. This is an adjustment to an overall market trend that had been too high.
Corn prices fall
Corn is one of the main feed sources for the livestock industry and is also an important raw material for industrial products, widely used in sectors such as food and medicine. Since May this year, the domestic market price has run counter to normal patterns, not only failing to rise but instead showing a continuous downward trend.
In early September, average wholesale prices in domestic producing areas and sales areas fell 14.9% and 11.8% respectively year on year. Among them, prices in the North China and Huang-Huai producing areas fell 20.2% year on year, the lowest level since May 2011, and prices in some areas have fallen below 2,000 yuan/tonne.
The price decline has a real basis, including past historical reasons, namely the enormous pressure of domestic corn inventories, the continued sluggish consumer demand caused by the economic downturn, the recent adjustment of the temporary purchase and storage policy, and the new corn harvest about to arrive as the market faces a new round of supply pressure, among multiple reasons.
Driven by the temporary purchase and storage policy, the comparative returns of corn were obvious. In recent years, corn planting area increased, and output increased accordingly. In 2012, when China's total grain output achieved nine consecutive years of increase, corn output surpassed rice for the first time, becoming China's largest grain crop variety. According to statistics, from 2012 to 2014, temporary storage corn purchases launched for three consecutive years accumulated more than 180 million tonnes, while auction sales during the same period amounted to only more than 30 million tonnes. Domestic corn inventories continued to increase, supply pressure intensified, and the pattern of phased oversupply further worsened, putting pressure on corn price trends.
On the demand side, downstream demand for deep processing remained persistently weak, and growth in industrial corn consumption was sluggish. Feed processing enterprises were clearly squeezed by both high raw material costs and the downturn in the livestock industry, and their operating conditions were poor. Although hog prices rebounded significantly, hog production capacity still declined markedly, and it will still take time to return to normal levels. According to monitoring data released by the Ministry of Agriculture, in August 2015, the national hog herd fell 10.4% year on year; the breeding sow herd fell 14.2%. The continued sluggish consumption of corn has compressed the room for domestic corn prices to rise.
Because the price inversion between domestic and international corn is severe, China's corn imports have increased substantially this year. In addition, whether feed enterprises or corn processing enterprises, they have successively imported substitutes to reduce production costs, further worsening the degree of oversupply of domestic corn.
In addition, this year's corn area increased steadily, climatic conditions were generally favorable, and this year's corn is expected to achieve another bumper harvest. After new corn comes onto the market on a large scale, market supply will increase significantly, and the market will face a new round of supply pressure. Domestic corn prices are expected to continue to face downward pressure later.
The 2015 corn temporary storage purchase policy, to be launched on November 1 this year, while lowering the listed purchase price for temporary storage corn, requires strict implementation of national standards and no longer relaxes relevant quality standards such as the content of moldy kernels. For corn that fails to meet the quality requirements, local governments shall organize purchases in accordance with the provincial governor responsibility system for food security and the local responsibility system for food safety.
Last year, the relevant national authorities had already sent a clear signal in a notice that “in 2015, the price differential for grades exceeding the moldy kernel standard will be further expanded or stricter purchase quality standards will be implemented.” This year's temporary storage corn purchase policy is also consistent with the wheat minimum purchase price policy in requiring strict implementation of quality standards.
Market analysis suggests that with the lowering of the 2015 temporary corn storage price, purchase quality standards will be stricter than in previous years, and the volume purchased for storage may therefore fall sharply. This has led processing enterprises to be cautious in purchasing and to successively lower purchase prices, while traders have accelerated sales of grain in their hands, causing overall market prices to move downward.
Corn joins the adjustment of the temporary storage policy
In September this year, although officials issued a notice that the corn temporary purchase and storage policy would continue to be implemented in the three northeastern provinces and Inner Mongolia in 2015, the listed purchase price for temporary storage corn was lowered, set at 1 yuan per jin (national standard third-class quality standard), down 11.5% from the highest level of 1.13 yuan/jin in Inner Mongolia and Liaoning in 2014. This means that the corn temporary purchase and storage policy, which has been in effect for 8 years, has begun to be adjusted.
The minimum purchase price policy began in 2004. Looking back now, that year was also exactly the starting year for China's total grain output to achieve “eleven consecutive increases.” Grain production then began consecutive years of bumper harvests, and grain prices faced relatively greater downward pressure. To avoid repeating the old path of “cheap grain hurting farmers,” the state decided to implement a minimum purchase price policy plan. From 2004 and 2006, rice and wheat in main producing areas respectively began implementing the minimum purchase price system. Since 2008, corn, soybeans, rapeseed rapeseed, and sugar also successively began implementing temporary purchase and storage policies. In 2011, the cotton temporary purchase and storage system was established. However, Ye Xingqing, director of the Rural Economy Department of the Development Research Center of the State Council, said that these two systems, established against the background that domestic agricultural product prices were lower than international prices at the time, had relatively large limitations from concept to operation.
However, with the price support policy centered on the minimum protection price and temporary purchase and storage implemented for many years, market participants' path dependence on this policy has become increasingly serious. Since the launch of temporary purchase and storage, storage purchase prices have shown a steadily upward trend. Taking corn as an example, its storage purchase price has risen from 1,500 yuan/tonne in 2008 to 2,200 yuan/tonne in 2014. But if market support purchases continue, corn inventories will remain high. China's corn inventories are currently as high as more than 100 million tonnes, while total annual corn output is only 200 million tonnes. The enormous inventory not only brings pressure on storage capacity, but also sharply shrinks the value of corn.
However, the government has already begun to make adjustments. Tracing back from the government's decision in 2014 to pilot target price reform for cotton and soybeans in some areas, to this year when the rapeseed temporary purchase and storage policy has begun to shift, corn has now also joined this ranks.
⟧ Previously, a document released by the Ministry of Agriculture titled “Summary of Replies to Recommendation No. 1480 of the Third Session of the Twelfth National People's Congress” clearly stated that for varieties such as corn, soybeans, cotton and rapeseed, which have high demand elasticity, long industrial chains and a high degree of linkage with domestic and international markets, attention should be paid to giving play to the decisive role of the market in price formation, guiding production through market price signals, regulating supply and demand, and promoting the sustained and healthy development of the industry. This means that, in addition to the already piloted cotton and soybeans, the prices of corn and rapeseed will also bid farewell to the temporary purchase and storage policy and move toward a framework in which prices are decided by the market.
The reason corn was chosen is that, to ensure food security, the state's determination to protect staple grains is obvious. Ma Wenfeng, an analyst at Beijing Aige Agriculture and a special economic analyst for Xinhua News Agency, once told a reporter from China Business News that rice, wheat and corn are distinguished because their status is different. The first two are food grains, while the latter has a long industrial chain and, in addition to being eaten, can also be used for feed and industrial processing. “Food grains must be ensured.”