Corn prices keep falling step by step, and the pressure to release state reserves is great
Recently, the Ministry of Agriculture held a symposium on agricultural structural adjustment for the four northeastern provinces and regions in Changchun, Jilin Province, specifically requiring the four northeastern provinces and regions to reduce corn planting area. The author believes that since 2008, the bull market feast in which corn output and prices rose together due to state reserve purchases will come to an end. In terms of trend, at least before the government deals with the current large state reserve inventory, corn prices will enter a long bear market. However, during this period, the possibility of corn price fluctuations caused by factors such as a sharp decline in output cannot be ruled out.
From the successive important speeches of Minister of Agriculture Han Changfu, one can clearly see the process of change in the government's attitude toward corn production and imports.
In 2010/2011, domestic corn supply was tight and prices soared. China was forced to import 5.23 million tons of corn from the international market in 2011/2012 to replenish inventories, namely the imported corn later auctioned within Shanhaiguan. In 2012, Minister Han published a long article in People's Daily titled "A Brief Discussion of Corn" to explain the important position and role of increasing corn production capacity.
In 2013/2014 and 2014/2015, the state purchased 69.19 million tons and 83.29 million tons of corn respectively in the four northeastern provinces and regions for two consecutive years. Corn prices fluctuated sharply, feed enterprises and corn deep-processing enterprises bore huge market risks, and the central finance also could not bear the burden. In June this year, Minister Han held a symposium on agricultural structural adjustment for the four northeastern provinces and regions in Jilin Province, pointing out that the focus of corn planting structure adjustment is the Northeast region, and the four northeastern provinces and regions must reduce corn planting area next year.
It must be acknowledged that the corn state reserve purchase policy did indeed play an important role in raising farmers' income and corn production capacity. Since the implementation of corn state reserve purchases in 2008, total domestic corn output increased from 166 million tons to the highest value of 218 million tons in 2013, with output increasing by 31.7% and planting area increasing by 24%.
It is reported that among the several government departments originally involved in the corn state reserve purchase policy, the Ministry of Agriculture and the governments of the northeastern provinces and regions opposed purchase price reductions from the perspective of protecting farmers' income, while the Ministry of Finance and other departments hoped to reduce the purchase price of state reserve corn from the perspective of saving government expenditure. On June 28, Minister Han's speech meant that the Ministry of Agriculture had already changed its concept, that is, government institutions at the central level had unified their thinking, and a reduction in the new autumn state reserve corn purchase price was basically settled.
For corn and even corn starch futures and spot, the adjustment of the state reserve purchase price is the Sword of Damocles hanging overhead. Considering the working procedures for setting the state reserve purchase price and the release times last year and the year before, it is expected that the final outcome will have to wait until late November. Before then, corn and even corn starch futures prices will remain under pressure and will find it difficult to rise effectively, with only local rebounds occurring.
At present, market rumors about the price reduction range include several versions: 200 yuan/ton, 120 yuan/ton (as low as the 2012 level), and below 100 yuan/ton. Based on logical inference from the information the author has, the price reduction should be within 100 yuan/ton. The main reason is that last year the minimum support prices for wheat and rice were not reduced, so the reduction in the corn state reserve purchase price will not be very large either.
The author believes that this autumn's state reserve purchase method will have the following changes: first, the price reduction will be below 100 yuan/ton; second, quality standards will be raised, and it is expected that corn exceeding the moldy grain standard will be excluded from state reserve purchases, which can be compared with the 2015 wheat minimum support price purchase that only purchased wheat produced in 2015 at national standard grade three or above; third, state reserve purchase volumes will be released in batches, which can be compared with the 2008/2009 corn state reserve purchases of 40 million tons in four batches.
At the same time, the author also believes that the Chinese government will not let corn become the next soybean, that is, the government will avoid imports of low-priced corn impacting domestic production capacity. Therefore, the dual control measures of corn import quotas plus genetically modified policy will exist for a long period. This also means that the domestic and international price gap will not narrow in the short term, and large imports of substitutes and related products for corn and corn starch, such as sorghum, barley, cassava, cassava starch, and DDGS, will exist for a long time, as long as the profit given by the market is ample enough.