Why the Temporary Corn Procurement Price Can No Longer Be Temporary

Domestic temporary procurement price rises while international market prices fall

The temporary corn procurement policy has reached its eighth year, and the news farmers received is that the temporary procurement price has been lowered from 1.12 yuan per jin to 1 yuan per jin - the first cut in eight years. In Inner Mongolia, the large-scale corn grower Wang Wuhou seemed to have been mentally prepared long ago:

Wang Wuhou: (If) the state purchase price can be higher, all the better, but as market conditions change, it is impossible for it to give you more.

What Wang Wuhou hopes for - "the more the better" - refers to the temporary corn procurement price. To prevent low market prices from hurting farmers' interests, China began in 2007 to implement a support policy for corn - the state sets a temporary price for purchasing corn based on that year's conditions, and farmers can sell corn to state procurement granaries at that price. In 2007, the temporary procurement price was only a bit more than 7 mao per jin, but by 2013 it had surged to 1.12 yuan, an increase of nearly 60%. In contrast to domestic corn prices, which only rose and never fell, international market prices declined for three consecutive years. At present, the difference between the corn import price and the domestic temporary procurement price has reached about 500 yuan per ton. Li Guoxiang, a researcher at the Rural Development Institute of the Chinese Academy of Social Sciences, said that this year's drop in the corn temporary procurement price is the general trend, and it can no longer rise without falling as in previous years:

Li Guoxiang: When corn (supply) is loose, if the price cannot be adjusted in time, it will lead to a serious surplus. The market distortion caused by the temporary procurement policy is its biggest drawback.

The temporary procurement price has drifted further and further from its original purpose in operation

According to the original intent of the policy design, temporary procurement should embody the concept of "temporary." Whether the state purchases should be determined according to market conditions, and the procurement price could also be adjusted flexibly. But in actual operation in recent years, it has to some extent deviated from the original intent of the policy design: the price has basically only risen and not fallen, and the quantity has changed from the limited procurement originally designed to open-ended procurement. But after eight years, price distortion has caused market failure, and downstream enterprises, inventory pressure and fiscal funds can no longer bear the burden, making this "temporary procurement" mechanism no longer able to remain "temporary."

First, consider the farmers. Since the corn temporary procurement policy was implemented in 2007, farmers have gradually developed a mentality of dependence: no matter how market demand changes, the state will purchase corn.

⟧ Northeast large-scale grower Xu Shengquan: The price we ordinary people sell at depends on state policy. If the state (procurement) price is high, we sell a bit higher; if the state (procurement) price is low, we sell a bit lower. jS9 China Feed Industry Information Network - based on feed, serving animal husbandry

The greater impact is on downstream enterprises. Jin Xiubin, the head of a company in Jilin that needs corn feed, saw a bumper corn harvest but found it hard to be happy. With the temporary procurement price on the high side, he had to pay close attention to the price gap at home and abroad; the slightest carelessness would mean losses.

Jin Xiubin: The market now changes from one day to the next. I make several phone calls a day to contact manufacturers, feed mills and small farmers. If I do not grasp the market well, I will lose money.

Guarding against losses is still relatively good. More small downstream business owners in corn deep processing worry not only about losing money, but even more about being unable to operate under the pressure of the price gap. Yang Yuling, head of Linghua Group, said that in the monosodium glutamate industry, one third of enterprises have already stopped production:

Yang Yuling: Two and a half tons of corn produce one ton of monosodium glutamate. As the corn price rises, one third of the monosodium glutamate industry has already stopped production, and only large enterprises are still operating.

Even large enterprises with procurement capacity cannot bear the high domestic cost price. Cheng Guoqiang, a researcher at the Development Research Center of the State Council, found in his research that high-priced domestic corn puts relevant enterprises at a disadvantage in international competition.

Cheng Guoqiang: If corn processing enterprises use domestic raw materials, they have relatively high costs, and their downstream enterprises also have relatively high costs, so they cannot compete internationally.

Domestic corn prices are too high, so some downstream enterprises have no choice but to seek afar instead of nearby and buy imported corn. Customs data show that in 2009, China's corn imports were only 84,000 tons, while this year, in the first eight months alone, that figure was refreshed to 4.37 million tons. However, corn imports are subject to quota restrictions, and some enterprises, forced to the point of having no way out, have no choice but to look for substitutes.

Cheng Guoqiang: If an enterprise makes feed, it will certainly choose lower-priced (materials) or substitutes, such as sorghum.

Inventory pressure is heavy, and the days of relying on fiscal bailouts will eventually pass

With large amounts of imported corn and the search for substitutes, as long as there is still a way to manage, downstream enterprises will not use high-priced domestic corn. The direct consequences are two major pressures: inventory pressure and fiscal pressure.

Data show that China's state corn reserves have now reached a record 150 million tons. What does this inventory figure mean? Cheng Guoqiang, a researcher at the Development Research Center of the State Council, explained:

Cheng Guoqiang: Our annual output is 200 million tons. Inventory close to the annual output or consumption is already very high at 20%-30%. 150 million tons accounts for 60%-70% of total output, possibly the highest inventory in history. Annual consumption is estimated at 170-200 million tons.

However, corn purchased at high prices for the granaries cannot be sold at a loss at low prices even if there is not enough room to store it. In the end, it can only be covered by fiscal funds, and the fiscal pressure can be imagined. Data show that in 2012 the fiscal capital cost of temporary corn procurement was 61 billion yuan, and by 2014 this figure surged to 180 billion yuan, with fiscal expenditure nearly tripling.

Qin Fu, director of the Institute of Agricultural Economics and Development of the Chinese Academy of Agricultural Sciences: If the market price increasingly falls below the temporary procurement price, the answer is certain: the fiscal burden required for reserves will become higher and higher.

The even more severe situation is that in recent years China's corn planting area has also risen sharply. Data from the China Statistical Yearbook show that in 2007 China's corn planting area was less than 30 million hectares, and by last year this figure had become more than 37 million, with an expected increase of another 1.3% this year. The corn industry has already contracted a "three highs" syndrome: high output, high inventory and high imports.

Counting this year, China's grain output will show the gratifying situation of twelve consecutive years of increase. As China's third-largest staple grain, corn's temporary procurement policy has made tremendous contributions to consecutive years of grain output growth and farmers' income growth. But it cannot be denied that the temporary procurement price, which in the past only rose and never fell, was like a thorn stuck in the middle of the corn production and sales channel, making it difficult for market supply and demand to keep in step. This year's price cut has led people to begin re-examining the temporary procurement policy.