State Cut to Corn Temporary Storage Price Triggers Market Fluctuations

Recently, Hua Shujun, a large-scale corn grower in Gaojia Village, Songyuan City, Jilin Province, often goes to the state reserve warehouse near the village to inquire about corn purchase prices and intake conditions.

Besides farming, Hua Shujun also runs a planting cooperative. This year, all of the more than 60 member households planted corn. A few days ago, some members sold corn with a moisture content of about 26%, at 0.81 yuan per jin.

On November 1, the state officially launched this year's temporary storage corn purchase in the three northeastern provinces and the Inner Mongolia Autonomous Region, one month earlier than the same period in previous years. According to regulations by the National Development and Reform Commission and three other ministries and commissions, this year's temporary corn storage price is 1 yuan per jin, a reduction of 0.12 yuan per jin compared with last year. Since the temporary corn storage policy was implemented in 2008, the purchase price has been lowered for the first time.

In farmers' words, “last year, dry corn with a moisture content of about 14% could sell for one yuan and one mao two fen per jin; this year, it can sell for at most one yuan.”

In Northeast China, freshly harvested corn has a moisture content of about 30%. “After deducting a few fen for threshing and transportation, it sells for less than 8 mao per jin.” Hua Shujun said. Unless they urgently need money, most members of his planting cooperative are still storing their harvested corn in their own yards.

Although Hua Shujun knows the state temporary storage price will not change overnight, he still gathered the members to discuss waiting another 20 days or so. They calculate that if the state treasury does not collect enough grain this year, then after a while corn with 26% moisture content might sell for the price of corn with 24% moisture content, earning a few extra fen.

What they do not know is that the temporary corn storage warehouses in the three northeastern provinces are under enormous inventory pressure. In Jilin Province alone, corn inventories in state reserve warehouses are already more than 3 times the normal level.

But the huge inventory volume has not brought good news to corn deep-processing enterprises. Corn purchase prices that had been rising year after year made it hard for corn deep-processing enterprises to bear the high production costs, and they either lost money, suspended production, or went bankrupt. In the view of several heads of corn deep-processing enterprises, a reduction of 0.12 yuan per jin in the temporary corn storage price is a drop in the bucket for enterprises.

Farmers cry losses, enterprises cry losses. What exactly is wrong with corn prices?

“I never expected that growing corn would also lose money”

High yields, guaranteed harvests despite drought or flood, and, most importantly, state policy support: these are the reasons Hua Shujun and the farmers in his cooperative chose to grow corn.

In recent years, farmers have indeed benefited from this. From 2008, the temporary corn storage purchase price in the Jilin area was 0.75 yuan per jin, rising to a high of 1.12 yuan per jin last year. Following the rise in corn purchase prices came farmers' farming costs. In all regions of Jilin Province, land rents rose year after year. Several years ago, in Gaojia Village, Songyuan City, the best plots rented for 7000 yuan per shang; this year the rent has reached more than 10,000 yuan per shang.

This year, Hua Shujun planted 14 shang (140 mu) of corn. The rent is 8500 yuan per shang, and together with spending on seeds, fertilizer and pesticides, the cost is about 12,000 yuan per shang. Hua Shujun said this does not even include labor costs.

Unfortunately, in July this year, right during the corn tasseling period, many places in Jilin Province suffered drought. Hua Shujun's cornfields lost nearly half their yield. Normally each shang can harvest more than 20,000 jin, but this year only more than 10,000 jin. Combined with the cut in the temporary corn storage price, Hua Shujun not only made no money this year, but also lost more than 1500 yuan per shang. “I never expected that growing corn would lose money; the more you plant, the more you lose.”

In Jilin, farmers like Hua Shujun who rent land to grow corn and lose money are not few.

While lowering the temporary storage price, the state also raised the quality standards for corn purchases. In previous years, corn with a mold rate within 5% could enter the state treasury; this year it must be controlled within 2%.

⟧ After learning that temporary storage corn purchase standards had been raised, Zhang Yanhua of Dongxing Village, Changling County, Songyuan City, sold her corn one week after bringing it home. She felt that if she continued to wait, the price would not be raised, and storing it at home might increase the mold rate. “If it cannot enter the state treasury, the loss is even greater.”

Cui Lei, supervisor of Huaguan Planting Professional Cooperative in Nong'an County, Changchun, told China Youth Daily that of the cooperative's nearly 30,000 corn growers, only one third have sold their corn so far. After learning that the standards for corn entering state reserve warehouses had been raised, the usual practice adopted by farmers is to turn over and sun-dry the corn still on the cob stored in their yards one by one and remove moldy kernels. “It is estimated that in this way, the mold rate should be controlled within 2%.”

Although Jilin Province has continuously promoted scientific grain storage in recent years, there are still many farmers who pile corn directly on dirt ground after harvest. According to statistics from the Jilin Provincial Grain Bureau, the average loss rate of farmer household corn storage in the province is about 11.8%.

What should be done with corn whose mold rate is between 2% and 5%? The state stipulates that local governments shall organize purchases in accordance with the requirements of the provincial governor responsibility system for food security and the local responsibility system for food safety. Wang Tao, director of the Regulation Division of the Jilin Provincial Grain Bureau, told China Youth Daily that the output of corn with a mold rate in this range in Jilin Province is still being counted, and how to purchase and handle it remains to be discussed.

“I do not know whether normal production can continue next year”

In the 7 years since the temporary storage policy was implemented, although farmers have benefited, corn deep-processing enterprises have had a hard time.

The temporary storage policy has led to an inversion between two corn markets. One is the inversion between domestic and foreign corn prices. Xiao Fei, general manager of a corn deep-processing enterprise, said that at the highest point, the domestic corn price difference was 1000 yuan per ton higher than the international corn price. This restricted exports of products from corn deep-processing enterprises in Jilin Province. In the past, a large number of corn deep-processing products from Xiao Fei's company were exported to Southeast Asia, Japan, South Korea and other countries and regions. “In the past three or four years, this part of the export orders has disappeared, and customers have been lost.”

The second price inversion is between provinces and regions that implement the temporary corn storage policy and those that do not. At present, the policy is implemented only in the three northeastern provinces and the Inner Mongolia Autonomous Region. “In the past, corn deep-processing enterprises in Jilin still had the advantage of being in the raw material production area; 1 ton of corn could save 150 yuan to 200 yuan, and this price exactly covered the cost of transporting products to the main sales areas in the south.” Xiao Fei said that now this advantage is gone too.

In previous years during the corn harvest season, Xiao Fei would rush to buy a batch of corn that could not enter state treasury temporary storage. “But the quantity was far from enough.” Because the temporary storage price was high, farmers mostly focused on corn quality and tried to sell to the state treasury. Around March each year, it was very difficult for enterprises to buy corn on the market.

“To produce normally, one must go to state reserve warehouses to auction temporary storage corn.” Last year, the state reserve warehouse purchase price was 2240 yuan per ton, and it was at least 2400 yuan per ton by the time it reached enterprises. Xiao Fei's enterprise could hardly bear such high costs.

Corn deep-processing enterprises in the three northeastern provinces, which no longer have the raw material price advantage, find it very difficult to compete with similar enterprises abroad or even in other domestic provinces.

From mid-August to the end of September this year, the difficulties of corn deep-processing enterprises in Jilin Province reached their peak. Of the 22 corn deep-processing enterprises in the province, most suspended production, and some had already gone bankrupt or were in a state of closure.

As a result, in the fourth quarter, Jilin Province implemented subsidies for corn deep-processing enterprises, subsidizing 250 yuan for every ton of corn purchased by an enterprise.

With the subsidy, Xiao Fei purchased a batch of new corn locally at 1850 yuan per ton, ensuring the enterprise could produce at full capacity in the fourth quarter. “At least we are not losing money anymore.”

According to Wang Tao, the annual production capacity of corn deep-processing enterprises in Jilin Province totals more than 15 million tons. After the subsidy, 14 enterprises continued to maintain production, with starch products slightly losing money and alcohol products slightly profitable.

Xiao Fei calculated that for an enterprise not to lose money, the factory-gate corn price must be lower than 1600 yuan per ton. In the past, mid-November each year was when corn prices were lowest, and Xiao Fei's enterprise would store more than 100,000 tons to 200,000 tons of corn, ensuring more than 20 days to one month of use.

“Now everyone does not dare to build inventory again; they all buy and use as they go.” Xiao Fei said that the domestic corn market is currently changing too quickly, and many long-term orders cannot be signed either. Their enterprise currently has a production capacity of 750,000 tons and had planned to double capacity in recent years. But in the past 3 years, the enterprise's cumulative losses have reached 200 million yuan. “The larger the temporary corn storage volume, the more deep-processing enterprises lose.”

Whether Jilin Province will continue to subsidize corn deep-processing enterprises next year is not yet known.

What exactly is the appropriate corn price?

Many industry experts believe that the state's consecutive increases in the temporary corn storage purchase price mobilized farmers' enthusiasm for planting and safeguarded national food security, but affected supply and demand in the domestic corn market, causing domestic grain prices to be significantly higher than international market prices, corn inventories in main production areas to remain high, and fiscal burdens to become increasingly heavy.

In the view of Shu Kunliang, deputy director of the Northeast Regional Agricultural Development Research Center, the high inventory in main production areas is a structural surplus. The upstream temporary storage policy has distorted the market, inventory cannot be absorbed, and downstream demand for industrial and feed corn cannot be satisfied.

“Under the premise that the state currently cannot sell temporary storage corn at a favorable price, the only option is to start adjusting from the supply side, that is, reducing corn planting area.” Shu Kunliang said.

How can corn planting area be effectively reduced? Shu Kunliang believes that a large amount of research and calculation is needed, not only on corn prices, but also considering other competitive crops, such as exactly what the price of soybeans should be, so that farmers voluntarily reduce corn planting area.

Jilin Province is not only a golden corn planting belt, but also a golden soybean planting belt. Shu Kunliang said that in recent years, high-yield corn replaced low-yield soybeans that also required rotation, and soybean planting area shrank sharply.

Data released by the National Bureau of Statistics show that in 2012, corn surpassed rice to become the largest domestic grain crop. In 2014, the national total grain output reached 607.09 million tons, of which corn output was 215.67 million tons.

At present, no one can say clearly exactly what the domestic corn price should be. Many experts point out that corn is a quasi-public product and cannot be fully marketized. What various parties are now studying and discussing is the target price of corn, that is, a price that takes into account the corn market, other competitive crops, and state subsidies.

Shu Kunliang said the state and major corn production areas can have a contractual relationship. He and his corn development situation research group suggest that the state should clarify how much corn major production areas need to produce and sign orders with major production areas. The order quantity should match the corn target price to ensure farmers produce the ordered amount of corn. Precise regulation and production should be the trend of future corn planting.

Facing this year's cut in the temporary corn storage price, Jilin Province has opened 901 temporary storage warehouse points and will continue to set up more than 200 more. Wang Tao said that opening more temporary storage warehouse points can both help farmers reduce transportation costs and form healthy competition among grain warehouses, presenting a seller's market and helping farmers sell grain.

In addition, the Jilin Provincial Grain Bureau is also using television publicity and guidance to let farmers know that “1 yuan per jin” is already this year's highest purchase and storage price, hoping thereby to reduce farmers' wait-and-see and reluctance to sell.

What should be planted next year? Cui Lei, who has grown corn for 6 years, said that apart from his own 3 shang of land, he will not rent additional land to grow corn. The Nong'an Huaguan Planting Cooperative he belongs to also plans to encourage members to reduce corn planting area and support projects such as greenhouse vegetables, melons and fruits.

Hua Shujun, who has grown corn for more than 10 years, estimates that land rents should fall next year. He will still plant corn on a large area. “Our place is most suitable for growing corn.”