Long-term trends in China's corn market look positive as industrial policy reforms keep improving
On September 17, the 8th International Corn Industry Conference, jointly held by the Dalian Commodity Exchange and the China Feed Industry Association, opened in Wuhan, Hubei Province. With the theme of “innovating risk management, helping transformation and upgrading”, the conference aimed to build an important platform for information sharing, communication and business cooperation. In the course of just one day of proceedings, experts from national macroeconomic decision-making departments, industry management departments, the business world, industry organizations and financial investment institutions used their wisdom and experience to create a brilliant resonance. Through the pains they have endured and the blueprints they have described, we can see a clear direction.
Industrial policy keeps improving through reform
China is a major country in corn production and consumption. From 2004 to 2014, the corn planting area expanded from 381 million mu to 556 million mu, and its share of the total grain area rose from 25% to 33%; corn output increased from 260.6 billion jin to 431.3 billion jin, and its share of total grain output rose from 27.8% to 35.5%. For several years corn ranked first in China's grain output. Consumption increased from 231.3 billion jin in 2004 to 361.3 billion jin in 2014, and its share of grain consumption rose from 24% to 30%. In June this year, corn inventories held by various enterprises nationwide exceeded 400 billion jin, creating a phase of oversupply, and in some main producing areas a situation emerged in which the crop could not be purchased, could not be stored, could not be sold, and could not be subsidized by the finances.
In this regard, Hu Hengyang, inspector of the Department of Agriculture and Rural Economy of the National Development and Reform Commission, believed that the problems existing in the grain regulation policies of the past ten years had finally come to the surface in concentrated form. Neither the temporary storage price nor the purchase price played a good leading role in the market value formation mechanism. The volume directly released by the government grew larger and larger, which not only increased fiscal expenditure but also increased circulation costs, forming a production and sales model of “imports entering the market, domestic grain entering warehouses“. At present, China's agricultural product import and export trade deficit keeps widening, and regional balance is becoming more difficult. Output in main producing areas increased, the gap in main sales areas widened, and cross-regional grain flows increased. At present, 75% of grain inventories are in main producing areas, while main sales areas account for only 9%; the increase in products has added transport pressure and risk.
⟦NL> Improving regulatory policies is urgent. First, the mode of regulation must be changed. On the one hand, the minimum purchase price and temporary storage policies must be shifted toward “separating price from subsidy”, raising the target price insurance level and target price loan quota, among other things. On the other hand, subsidies for agricultural products must be increased to ensure farmers' stable incomes. Second, import and export regulation must be shifted from “mainly controlling imports” to “effectively utilizing the international market”. On the basis of making greater use of the international market, the regulatory role of agricultural products will become more prominent. Third, reserve regulation must be shifted from a “price intervention type” to a “supply and demand regulation type”. Under normal circumstances, the central government will no longer conduct temporary storage or release reserves into the market, and local reserves must be further strengthened.
The next key tasks are: first, actively adjust the import and export strategy for agricultural products, reasonably determine the import scale of major agricultural products, actively implement a diversification strategy for imports, be more pragmatic and flexible in opening markets and market access, strengthen the combination of imports and reserves, and establish an import-reserve regulation mechanism. Second, encourage agriculture to “go global”. Emphasis should be placed on building a market and policy support system for agricultural products. Going global is not for the purpose of shipping things in, but to enhance the international production competitiveness and contribution rate of Chinese agriculture.
Corn is the main component of feed and the main raw material of China's pig industry. Yang Zhenhai, deputy director of the Department of Animal Husbandry of the Ministry of Agriculture, introduced that at present China's live pig prices have entered an upward cycle, and this trend is international in nature. In the United States, since May this year, pork prices have risen by more than 25%; in China, since March, live pig prices have cumulatively risen by 50%, and pork prices by 33%. But in 2014, 735 million pigs were slaughtered nationwide, with losses of 80.9 billion yuan. Pig farming did not achieve high profits; it only entered a recovery and compensatory rise after a long period of low prices and farming losses. The current upward cycle will last for some time. As long as there is no major epidemic, there will be no major fluctuations for some time to come. The stability of feed prices such as corn also shows that the factor of cost-driven increases is very small.
The Chinese government is making every effort to promote the modernization of the pig industry, using means such as scaling up and standardization to promote industry stability. Hubei has vigorously promoted large-scale pig farming over the past ten years; at present, the share of pig farming with more than 500 head slaughtered reaches 41.8%, 7.3 percentage points higher than in 2010. The focus of the Ministry of Agriculture's measures to stabilize industry development is to reduce direct government intervention in production and the market and further strengthen information monitoring and early warning services. Greater attention will be paid to support policies such as finance and insurance, especially the three major difficulties of farming land, manure treatment and loans; credit guarantees and interest subsidies will be actively explored to guide financial capital into the sector. The coverage of policy-based pig insurance must be expanded to remove worries about financial support, and pilot programs for pig target price insurance must be actively promoted.
Enterprises gradually find the right direction for development amid the pains
China's corn starch processing is mainly concentrated in two regions: the Northeast and North China, which account for 80% of the country's corn processing. In recent years, as cassava starch imports have kept expanding from south to north, cassava starch's share of starch has expanded from a few percent to 30%. Tong Yi, general manager of the biochemical business division of COFCO Group, is deeply worried about this. He believes that the state's market-support purchase price has pushed the corn market price too high. The auction price of corn purchased under the Northeast market-support program is 2330 yuan/ton, and after processing it is above 2400 yuan. Because of high costs, corn starch processing in the Northeast has kept shrinking, cutting corn processing volume by about 3 million tons and reducing corn starch output by about 400,000 tons.
In addition to corn starch, the prices of higher-technology by-products processed by enterprises, such as corn germ oil and corn meal, are also sluggish; they account for 30% of all processed products, and their prices have fallen by 9%. Corn starch was basically loss-making from 2012 to 2014, and starch demand continued to decline in the first half of this year. Enterprises lose 300 to 400 yuan for every ton of corn processed, and lose 700 yuan for every ton of feed processed. When corn is processed into fructose for beverages and beer, the return is only 1% to 2%.
But on the whole, China's starch consumption has grown from 10 million tons in 2004 to 17 million tons now, maintaining a growth trend throughout. Tong Yi believes that after the fluctuations, downstream demand in the industry will eventually improve. Enterprises must make new preparations for this. First, they must prepare to cope with more pressure, including not only high costs but also the impact of imports. National policy is constantly opening up, and enterprises' carrying capacity must also keep rising. Second, as marketization advances, corn, this basic raw material, will inevitably form a stable market system. The processing industry will emerge from its difficulties under the new normal and move toward a comprehensive growth model relying on technological upgrading, cost reduction, product development, brand effects and the effective use of new information technology and market operation techniques, achieving stable development.