With the corn market in the doldrums in 2015, how should the temporary storage policy be reformed?

This year the domestic corn market has been “badly hurt”. As the old saying goes: nobody loves it, nobody wants it! The corn price, which should have been supported by temporary storage purchases, instead began a volatile downward trend in April, and last year's soaring rally can be said to be gone for good. From July, the price decline widened and accelerated. Especially recently, as new corn in some regions has come onto the market one after another, the temporary storage policy that has been propping up the market's “price” has again and again sent out signals of adjustment or withdrawal, making the already sluggish corn market even more mired in a long bearish road.

1. How exactly will the temporary storage policy be changed?

Recently, rumors about the corn temporary storage purchase policy have appeared frequently. Although there are many versions, those bearish on the outlook remain the mainstream. Let us set aside for now how the policy will be adjusted. Since the temporary storage policy was implemented in 2008, both the purchase price and the purchase volume have shown a trend of increasing year by year, and this year it ended with a huge volume of 82.79 million tons. In addition, there were consecutive huge volumes of corn temporary storage purchases in 2013 and 2014. As for temporary storage auctions, in 2014 only 28.783 million tons were released from storage, and this year, as of the end of July, only about 5 million tons had been auctioned. The amount of corn leaving storage can only be called the tip of the iceberg of the high inventory. A rough calculation shows that corn in temporary storage warehouses has already accumulated to a high inventory of more than 150 million tons. If the new-season corn comes in and the temporary storage purchase policy is continued once again, when will the huge inventory be digested? Judging from the current market, the probability of the new-season corn temporary storage policy being withdrawn is very small, while a downward adjustment of the purchase price is basically certain. But the size of the purchase price reduction is also highly disputed, with some even claiming it will be adjusted to near the market price. No matter what, for the outlook this will undoubtedly play a role in pushing prices lower.

2. What is the market impact of the substitution wave?

In fact, another “black hand” that cannot go unmentioned in this year's pressure on the corn market is the large influx of imported corn and substitutes. In recent years, corn prices have risen steadily due to the support of the temporary storage policy. As an important feed ingredient, major enterprises, in order to reduce costs, have had to use lower-priced imported corn or crops such as sorghum and barley to replace corn. It is understood that sorghum can achieve 100% substitution for corn in livestock and poultry feed, and theoretically sorghum's substitution for corn in pig feed can also reach 100%. At the same time, imported sorghum and barley, unlike corn, are not subject to import quota restrictions, so import volumes grew substantially this year. Data released by the General Administration of Customs of China show that in July 2015 China's imports of corn and substitutes (including barley, sorghum and corn distillers' grains) hit a record high. Among them: China's corn imports in July were 1.11 million tons, about 10 times higher than the same period last year; China's barley imports in July were 1.28 million tons, up 68% from the same period last year; China's sorghum imports in July reached 1.11 million tons, up 183% year on year. This is also a major important reason for the continued weakening of domestic corn prices. However, the pressing task at present is destocking the state reserve, so the state will also take measures. Starting from September 1, China's Ministry of Commerce will require importers of barley, cassava, corn distillers' grains and sorghum to register import details in detail, which will restrict imports.

3. When will feed demand recover?

As the saying goes: three feet of ice does not form in a single day. Although pig prices began a continuous upward trend in March, mainly due to tight supply, that is, the rise in pig prices caused by a low number of live pigs on hand, demand for corn has instead shown a continuously declining trend. Information on live pigs at 4,000 monitoring points in July released by the Ministry of Agriculture shows that live pig inventory rose 0.20% month on month and fell 10.43% year on year; breeding sow inventory fell 0.59% month on month and fell 14.59% year on year; and fattening pig inventory rebounded 0.29% month on month and fell 9.94% year on year. In July, live pig inventory ended nine consecutive months of month-on-month decline, showing a trend of stabilization. The rise in pig prices can indeed spur the enthusiasm of breeders (farms) to restock, but whether restocking sows or piglets, the growth of future live pig inventory requires a certain cycle. In other words, for prices to rise, inventory to stabilize and feed raw material use to increase, a certain transmission time is needed. Judging from the current corn usage of feed mills, some small and medium-sized pig and poultry feed mills use 2-3 tons of corn per day on average, less than one third of the same period in previous years. The editor also noted at the beginning of this paragraph: three feet of ice does not form in a single day. It can be seen that on the downstream demand side, the corn price still has a stretch of sluggish road to travel.

4. How will prices perform after new corn comes onto the market?

Since mid-to-late July, corn prices have continued to fall, with the decline gradually widening. At present, autumn grain is gradually coming onto the market in increasing volumes in various places, and the prices of the new crop and the old crop corn are moving toward each other, while the price center is continuously shifting downward. In some areas of Liaoning, farmers have already begun selling new grain in scattered lots, with prices ranging from 1600-1680 yuan/ton and moisture around 30%. New corn in Henan, Shandong, Hubei and other places has come onto the market one after another. After the new corn came onto the market, prices have already been reduced by a large margin, with some areas at a low of 0.8 yuan/jin (1600 yuan/ton). However, according to the editor's understanding, some grain stations in Anhui have purchased corn in large quantities, driving a wave of rising prices. According to local farmers, because of rumors that the state may restrict corn imports, demand for domestic corn has been boosted, driving them to hoard grain. Overall, after the new corn comes onto the market, it will bring relatively great pressure to the corn market at the current stage, and prices are expected to remain in a continuous downward trend.

On the whole, at the current stage the domestic corn market still has a rough road to travel. From the overall market environment, no matter how the state's temporary storage purchase policy is adjusted, the market will still have ample inventory. In addition, with new corn coming onto the market and downstream demand recovering slowly, the editor believes that this year's corn market is unlikely to see a rising trend, and some institutions predict that it is a high-probability event that this year's corn trading price will be below 0.95 yuan.