Under policy dominance, spot corn prices are unlikely to see major gains
[Introduction]Looking at the domestic corn market in recent years, market prices have all been dominated by policy, with domestic corn prices closely fluctuating in line with changes in the state reserve purchase price and purchase volume.
Since the start of the state reserve purchase policy in 2008, domestic corn market prices have consistently been strongly supported by the state reserve policy, keeping corn prices in Northeast China firm, while the massive state reserve purchase volume has led to a shortage of high-quality corn supply in Northeast China, attracting corn from North China to flow into the Northeast market, driving a general rise in corn prices across the main northern production areas and simultaneously pushing the national corn price into an upward trend.
State reserve prices continue to be raised
Looking at the state reserve corn purchase prices from 2008 to 2014, they were continuously raised, with an increase of 48%. The state reserve's continuous raising of purchase prices provided strong support for corn market prices and also stimulated domestic corn prices to show a trend of rising year after year.
In 2015, in order to control domestic corn production, reduce corn planting area, and narrow the price gap between domestic and international corn, the state lowered the purchase price to 1 yuan/jin, with the four northeastern provinces adopting a unified purchase price, in the hope of reducing state reserve purchase volume. However, bearish sentiment toward the market outlook was relatively strong, corn prices fell severely, and the state reserve purchase price remained higher than the mainstream market price, still playing a price-supporting role to a certain extent.
State reserve purchase volume supports market prices
Since the implementation of the state reserve price-support policy began in 2008, as can be seen from the figure below, from 2008 to 2012 the state reserve's price-support efforts were moderate and had little impact on market prices. But starting in 2013, compared with previous years, the state reserve purchase volume differed greatly, and as state reserve purchase volume rose in a straight line, high-quality raw grain flowed into the state reserve, raw grain in the market became scarce, thereby affecting corn prices. From this it can be seen that state reserve purchase volume supports domestic corn prices in maintaining a high level to a certain extent.
Market prices strengthen in a straight line
Under the influence of the state reserve purchase price and purchase volume, domestic corn prices rose in a straight line from 1400 yuan/ton in 2008 to 2200-2400 yuan/ton in 2014. At the same time, because high-quality raw grain from the main production areas of Northeast and North China continuously flowed into the state reserve, raw grain in the market became scarce, and the purchase prices of grain-using enterprises were generally higher than the state reserve price. As can be seen from the figure below, stimulated by the massive state reserve corn purchase volume in 2014/2015, market corn prices rose to a maximum of 2500 yuan/ton.
From the above three points, it can be seen that in recent years the domestic corn market has all been dominated by the state reserve purchase policy, mainly because the continuous raising of state reserve purchase prices and the continuous increase in purchase volume have pushed domestic corn prices into an upward trend.
Although in 2015 the state reserve purchase price was lowered to 1 yuan/jin, it was still higher than the mainstream market price. Since the start of state reserve purchases on November 1, market prices, stimulated by the release of the state reserve policy in Northeast China, have continued to be dominated by the state reserve policy. Favorable policies for the corn market have appeared frequently, and corn deep-processing enterprises have also slightly recovered. According to statistics, as of mid-November, the operating rate of the domestic corn starch industry was about 65.78%, up 0.56% year on year; the operating rate of the alcohol and starch industry was about 64.54%, up 0.12% year on year. At present, the state reserve policy continues to dominate corn market prices, but will the corn market still be a policy-driven market later on?
Later, the policy-driven market will shift to one dominated by supply and demand
From historical experience, the state reserve purchase policy still has an obvious supporting effect on corn prices. With the full launch of state reserve purchases, corn market prices have seen a wave of gains. But looking at storage capacity, after seven years of purchasing and storage, the state's corn reserve inventory has reached as high as 150 million tons. Although the state has actively planned and built new warehouses and continuously carried out cross-provincial warehouse transfers, overall storage capacity is still on the low side, making it difficult to sustain high-volume reserves continuously. In terms of quality, this year the state has set relatively high quality requirements for state reserve corn, with mildew controlled within 2%.
Corn quality affects the quantity that can be admitted into storage; if quality deviates, it cannot be admitted into storage. A large amount of raw grain that fails to meet standards will continue to be consumed by the market, which will push down corn prices in the circulation market. At the same time, the oversupply situation in the corn market cannot be changed. China's corn output in 2014/15 is forecast at 217 million tons because of higher yields per unit area and expanded sown area. The massive amount of corn will still need to be consumed by the market later, so from this perspective, the domestic corn spot market remains in a situation of ample supply.
And although demand in the downstream markets of domestic corn deep-processing enterprises and feed enterprises shows slight signs of recovery, the overall growth is not large, with industrial demand and feed demand growing by only 2-3%. Overall, the problem of weak downstream demand for domestic corn is difficult to resolve in the short term. It is expected that in the short term only favorable weather factors will provide support, and later processing plants' demand for raw corn will still remain relatively sluggish. From this it can be seen that later the corn market will shift from a policy-driven market to one dominated by the market, and spot corn prices will find it difficult to see the major gains of previous years.