Suppressing Grain Prices: Sinograin's Grain Trade Business Suspended

Sources have revealed that the grain trade business of China Grain Reserves Corporation (Sinograin) has been temporarily suspended, and the relevant document has been issued level by level down to the county and city-level grain systems.

Yesterday, First Financial Daily sought verification from Sinograin regarding this news. Sinograin responded that since the beginning of this year, due to the sharp rise in international agricultural product prices and speculative capital driving up domestic agricultural product prices, including grain prices, the state has adopted comprehensive measures to stabilize the prices of grain and other agricultural products. These include restricting the blind expansion of corn deep-processing enterprises, reducing subsidies for grain transport out of Northeast China, and reducing the number of market purchasing entities. At present, Sinograin has already complied with the requirements of relevant state departments: when market grain prices are higher than the minimum purchase price, it does not initiate the purchase of grain at the minimum purchase price, and currently only purchases grain for reserve rotation, in order to stabilize market prices.

Sinograin also stated: "At the same time, we are also closely monitoring the situation of farmers selling grain and the movements of foreign-funded enterprises. Under the current circumstances where farmers are reluctant to sell, the difficulty farmers face in selling grain is not yet serious; however, foreign capital is seizing the opportunity (there are no restrictions on foreign capital), and its intention to attempt a comprehensive layout in China's grain sector is becoming increasingly obvious."

Sinograin has always been the main force in domestic grain and oil purchasing. Its grain and oil business is broadly divided into two categories. One is policy-oriented grain and oil business, which involves purchasing various grain varieties at the minimum purchase price and temporary storage price stipulated by the state, storing them and conducting auctions. These all belong to policy-oriented grain business, and Sinograin can obtain state-issued purchasing and storage subsidies for engaging in these businesses. Analysts say that beyond this is Sinograin's trade business, including accepting commissions from grain processing enterprises to purchase and store grain on their behalf, or Sinograin purchasing grain at market prices and then selling it at an appropriate price. Trade business is an important source of revenue for Sinograin.

Sources say the purpose of suspending Sinograin's grain trade business is to stabilize grain prices. Currently, domestic market grain prices remain high and still show a trend of continued increase.

Market monitoring data shows that in the week ending October 31, the average transaction price of third-grade white wheat in major national grain and oil wholesale markets was 2,034 yuan/ton, up 18 yuan/ton from the previous week; the average transaction price of second-grade japonica rice was 2,680 yuan/ton, up 36 yuan/ton from the previous week; third-grade early indica rice was 1,992 yuan/ton, up 5 yuan/ton from the previous week; third-grade late indica rice was 2,105 yuan/ton, up 15 yuan/ton from the previous week. During the same period, the average transaction price of medium-grade soybeans in major national grain and oil wholesale markets was 3,800 yuan/ton, up 24 yuan/ton from the previous week. In addition, domestic edible oil market prices continued to rise during the same period. The average transaction price of first-grade soybean oil in major national grain and oil wholesale markets was 9,500 yuan/ton, up 167 yuan/ton from the previous week; the average transaction price of fourth-grade rapeseed oil was 9,432 yuan/ton, up 178 yuan/ton from the previous week. Among bulk grain products, only corn had an average transaction price of 1,929 yuan/ton in the week ending October 31, down 6 yuan/ton from the previous week.

A notice from the National Grain and Oils Exchange Center indicates that the vast majority of wheat entered the grain depots of state-owned grain enterprises such as Sinograin. The notice states that as of September 30 this year, various grain enterprises in 11 major wheat-producing provinces including Henan, Hebei, Jiangsu, and Anhui had purchased a cumulative total of 51.911 million tons of newly produced 2010 wheat. Of this, state-owned grain enterprises purchased 40.258 million tons, accounting for 78% of the total. Sinograin's commissioned purchasing and storage depots in five provinces including Jiangsu, Anhui, Shandong, Henan, and Hubei purchased a cumulative total of 22.409 million tons of wheat at the minimum purchase price, accounting for 56% of state-owned grain enterprises' purchases.

Previously, Sinograin was the sole enterprise purchasing grain at the state minimum price. However, as COFCO Group was approved for the first time this year to participate in the minimum-price grain purchasing market, the two sides bid up prices against each other in the major wheat-producing area of Henan in their competition for wheat. COFCO Group's wheat purchase price at one point reached 1.01 yuan per jin, far above the minimum purchase price of 0.90 yuan per jin. Ultimately, Sinograin issued a notice suspending wheat purchases. The suspension of trade business this time further demonstrates the state's determination to regulate grain prices.

Currently, the market has two major concerns about the trend of grain prices, and both are closely related to Sinograin. One is that since the first half of this year, in accordance with the requirements of relevant departments, Sinograin has released large quantities of rice and corn into the market to stabilize market prices, and the inventories of some Sinograin depots have been significantly reduced. If policy-oriented grain purchasing is initiated at this time to replenish inventories, it will inevitably stimulate grain prices to continue rising. The other concern is whether Sinograin's independent grain trading business will be carried out on a large scale. If it is, it will inevitably also drive grain prices up.

A person in charge of a grain processing enterprise said that in addition to the above concerns, a deeper problem with Sinograin engaging in trade business also remains to be resolved. He said: "Sinograin controls a large amount of grain sources, and processing enterprises find it very difficult to bargain with it in trade. Sinograin can, to a large extent, control whether market prices are high or low. On the other hand, some of Sinograin's policy-oriented grain business may also be exploited. For example, when market prices rise, some grain depots, in accordance with state regulations, auction policy-oriented grain, agreeing to auction it to designated units at a price lower than the market price, and then having these units sell it at market prices in the form of trade to processing enterprises that genuinely need grain, thereby profiting. This problem requires strict prevention."