Market conditions force first cut in corn temporary storage price in 7 years
The temporary corn purchase and storage policy, once rumored to be ending this year, has taken the stage again.
Last Friday evening, the long-awaited 2015 temporary corn storage policy was finally announced. Liu Dong, a corn analyst at Zhuochuang Information, told the Daily Economic News that the biggest change in this year's temporary storage policy is the unified price, with the three northeastern provinces and one region all adopting the same purchase price of 2000 yuan/ton. Calculated on the basis of last year's 2240 yuan/ton in Jilin Province, the decline exceeds 10%.
Liu Dong believes that as new corn gradually comes onto the market, combined with the bearish impact of the policy, corn prices are expected to show a fairly obvious decline.
Unified price becomes the biggest change this year
⟦NL> Last Friday, the National Development and Reform Commission, the State Administration of Grain, the Ministry of Finance, the Agricultural Development Bank of China and other departments jointly issued a notice: the state temporary storage corn listed purchase price is set at 1 yuan per jin, which is at most 0.13 yuan per jin lower than last year's temporary storage price, and is also the first cut in the temporary storage price since the state introduced the corn temporary storage policy in 2008. “The biggest change in this year's temporary storage corn price is the unified price, with the three northeastern provinces and one region all at 2000 yuan/ton.” Liu Dong told the Daily Economic News, “Calculated on the basis of last year's 2240 yuan/ton in Jilin Province, the decline reaches 10.71%. At a time when corn prices have not yet become fully market-based, the announcement of the temporary storage price is clearly bearish news for the market, though of course the market already had certain expectations before the policy was announced.”
In fact, both before and after the announcement of the corn temporary storage policy, corn prices suffered repeated declines.
According to monitoring by Zhuochuang Information, as of September 21, the national average corn price was 2105 yuan/ton, down 5.61% from the beginning of this month. The price in the same period last year was 2511 yuan/ton, a reduction of 406 yuan/ton, a year-on-year decline of 16.17%. “Before the policy was announced, the decline in corn prices was mainly affected by the supply and demand environment. First, corn production has increased year after year in recent years, and the corn supply has continued to grow, but downstream demand has not improved noticeably, especially demand from downstream feed enterprises.” Liu Dong said that according to Zhuochuang monitoring, many feed mills saw obvious declines in feed sales this year, with declines of 20%-30% being fairly common, and many feed enterprises even seeing sharp declines of 40%-50% in feed sales. Another factor is that domestic corn prices are far higher than foreign prices, causing the quantity of imported corn substitutes to increase noticeably and further depressing domestic corn prices.”
Corn temporary storage approaches the critical point for reform
In fact, lowering the corn temporary storage price is already a measure taken as a last resort under the implementation of the temporary storage policy.
As a northeast temporary storage corn price-support policy implemented since 2008, it caused the corn temporary storage purchase price to keep rising for many years. In the Jilin area, the price of corn per ton rose by 740 yuan over the five years from 2008 to 2014. Under the influence of high purchase volumes and high purchase prices, domestic corn prices rose in a straight line, and state reserve corn stocks were difficult to clear. This created a situation in which cheap “foreign goods” entered the market while high-priced “domestic goods” went into storage.
Under these circumstances, calls grew louder for “for varieties such as corn, soybeans, cotton and rapeseed, attention should be paid to giving play to the decisive role of the market in forming prices.”
During this year's national “Two Sessions,” some deputies to the National People's Congress proposed “liberalizing the prices of major crop agricultural products,” and the Ministry of Agriculture replied that for the two staple grain varieties, rice and wheat, the minimum purchase price should continue to be upheld, while for varieties such as corn, soybeans, cotton and rapeseed, which have large 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 forming prices, guiding production through market price signals and regulating supply and demand. “In recent years the corn temporary storage price has been on the high side, and it has now reached a point that is difficult to sustain.” Li Xirong, executive vice president and secretary-general of the China Feed Industry Association, believes that “now corn cannot be stored and cannot be sold, and it is also being hit by foreign competition. The biggest user of corn is feed enterprises, and because of the price inversion, they began importing large quantities of substitute products such as sorghum, wheat and barley. When corn supply exceeds demand, yet large quantities of substitute products are also imported, this further intensifies the contradiction between corn supply and demand. How China's corn purchase and sale policy will be adjusted this year or in the future is a major issue we all face.”
So what reform path will corn temporary storage take? Li Xirong said, “A common view now is to appropriately lower the temporary storage price. Personally, I think that lowering it too much would have a relatively large impact on farmers' income, and it would also create problems for the state reserve's sales at parity. Then if it is lowered too little, can it still work? I think an appropriate adjustment is necessary. It could even be done in two steps: lower it by 7-8 fen this year, observe the results, and adjust a little more next year. I think doing it this way is both proactive and prudent.” “Given the current situation of oversupply in the corn market, lowering the temporary storage corn price is also an inevitable choice.” Liu Dong told the Daily Economic News, “Although the temporary storage policy faces many drawbacks, directly canceling it is obviously inappropriate. The original intention of the policy was to protect farmers' interests. If the policy were directly canceled, corn prices would certainly fall sharply, and the damage to farmers would be too great. Policy adjustment must proceed step by step and involve a process of continuous repair.”