China's corn temporary storage price may continue to be lowered in 2016/17

According to industry sources, the Chinese government plans to lower the domestic corn purchase price for a second consecutive year, aiming to boost stagnant demand from the crisis-hit processing industry and draw down massive corn stockpiles.

China's corn prices are the highest in the world, making it difficult for the domestic processing industry to stay afloat. The government is preparing to cut the 2016/17 corn purchase price by a further 10%, to 1,800 yuan per ton, or about $282 per ton. It had already announced a 10% reduction in the 2015/16 (October to September) corn purchase price.

China is the world's second-largest corn consumer. Processors use corn to produce feed, sweeteners and ethanol, among other things. Lower corn purchase prices will also affect demand for feed grains such as sorghum, corn distillers' dried grains and barley. Relevant analysts say that given the massive stockpiles, domestic corn prices remain far above import costs, and the government needs to lower corn prices.

Industry sources said the government may also provide freight subsidies to feed processors in southern sales regions that buy corn from the northeast. They did not disclose when the government would provide the subsidies. Three industry sources said the government may announce the new purchase price early next year. China's corn planting begins in March.

Lower Chinese corn prices will help curb domestic processing plants' demand for overseas corn, putting downward pressure on international corn prices. China is the world's second-largest corn consumer. Relevant analysts say imports of corn and corn substitutes will be lower than we earlier expected, possibly down 50% or more from a year earlier.

The Chinese government has no choice but to gradually withdraw from the corn stockpiling program, because by April 2016 domestic corn stockpiles could surge to 200 million tons, equivalent to China's annual consumption. The stockpiling program was intended to protect farmers' incomes, but it also led to excessively high domestic corn prices, leaving processors and deep processors facing losses. Sources said that over the past three years, as much as 60% of deep-processing capacity has been shut down.

In September this year, China lowered the corn purchase price for the first time since 2008. Deep-processing enterprises in the northeast also received subsidies for purchasing domestic corn. These measures helped narrow the 20% price gap between domestic and imported corn, but they are still not enough to draw down stockpiles or encourage feed processors and sweetener producers, among others, to increase investment.

⟧ However, at least one company has already benefited from falling raw material prices. Officials at Dacheng Biochemical, Asia's largest corn deep-processing enterprise —— said the company last week began restarting idle corn sweetener and lysine production lines. By the end of November, the lysine plant in Jilin will operate at full capacity, with annual capacity reaching 500,000 tons.

But sluggish demand from the livestock industry may constrain efforts to revive many corn processing enterprises. Some poultry farmers' flocks are recovering from avian influenza outbreaks, and China's hog slaughter has depleted inventories. Relevant analysts say corn demand will not quickly return to the record 120 million tons seen in 2012.