Aging Grain Crisis May Recur, China's Food Security Faces a Test
China's grain prices are inverted relative to the international market, the scale of grain inventories is growing daily, and auctions of temporary reserve grain continue to face difficulties. At the April 9 auction of state temporary reserve paddy rice, the transaction rate was only 0.02%, and the transaction rate for temporary reserve corn was only 5.13%.
Under the halo of “11 consecutive increases” in grain production, inventories of the three major staple grains remain high. During the “Two Sessions,” Ren Zhengxiao, director of the State Administration of Grain, publicly stated that “some varieties have seen phased oversupply, most prominently corn. Corn and rice have shown a superposition of high output, high procurement volume, and high inventory, the ‘three highs.’”
Take corn as an example. In the 2013/14 marketing year, market institutions said temporary reserve corn procurement had created “astronomical inventories.” As of March 31, cumulative temporary reserve corn procurement for the 2014/15 marketing year reached 76.11 million tonnes, an increase of 12.96 million tonnes over the same period last year. China does not publicly release grain inventory figures. According to data from relevant institutions provided by Wind Information, China's corn inventory in the 2013/2014 marketing year reached a historic high of 106 million tonnes, with the year-end inventory-to-consumption ratio as high as 59.73%, far above the 17% food security standard set by the UN Food and Agriculture Organization. Even if some people believe China's grain circulation conditions are poor and the safe value should be around 30%, the existing inventory is still much higher.
⟦NL> Under enormous inventory pressure, on April 9, before the temporary reserve corn procurement period had ended, the State Administration of Grain launched corn auctions, more than a month earlier than last year, planning to sell 311,449 tonnes of 2012 state temporary reserve corn. However, even though large-scale temporary reserve procurement caused a sharp reduction in the market supply of corn, only 15,968 tonnes were actually sold, at an average transaction price of 2,497 yuan/tonne. In 2014, the total transaction rate of state temporary reserve corn auctions was only about one quarter.
Sales of temporary reserve paddy rice were even worse. Of the 1,282,297 tonnes of 2013 mid-to-late indica rice planned for sale on April 9, only 220 tonnes were actually sold, a transaction rate of 0.02%, at an average transaction price of 2,700 yuan/tonne. According to statistics, in 2014 the state put a total of 64.4759 million tonnes of policy-based temporary reserve paddy rice onto the market, with actual sales of 4.2274 million tonnes, a transaction rate of 6.56%. By the end of 2014, temporary reserve paddy rice procured since 2011 had seen only about 4.28 million tonnes digested over three years. Adding about 1.53 million tonnes sold through special auctions in January 2015, total outbound volume was still less than 6 million tonnes.
Ma Wenfeng, an analyst at Orient Agribusiness, told Caixin that poor temporary reserve sales are closely related to poor grain quality. Grain stored year-round deteriorates in quality, and many enterprises are unwilling to take it. He said grain should be released from storage after one year, “but the corn being sold this time is still from 2012.” The price-support procurement begun in 2004 has become increasingly unsustainable. Under the original design, after the state reserve purchased large quantities and controlled grain sources, it could sell at a profit. However, in recent years the situation has changed greatly. “I suggest relevant departments abandon profitable-price sales, otherwise the grain cannot be sold,” Ma Wenfeng said.
Market participants generally believe that a very important change in the situation is the huge price gap at home and abroad. On April 8, the total cost of US No. 2 yellow corn delivered to a Chinese port after tax was about 1,570 yuan/tonne, nearly 1,000 yuan lower than the average transaction price of temporary reserve corn. In March, each tonne of domestically produced corn, rice, and wheat was about 810 yuan, 900 yuan, and 700 yuan higher, respectively, than the import after-tax price of the same variety, while the price gap for soybeans was even larger, reaching 1,600 yuan/tonne. Under the huge price gap, China's imports increased sharply. In 2014, China imported 19.51 million tonnes of grains (that is, the grain category under international statistics), up 33.8% year on year, a record high. According to estimates by the Ministry of Agriculture, in 2014 about 0.5 billion tonnes of China's grain were non-essential imports. Relevant official leaders have publicly acknowledged that a considerable amount of smuggling exists.
At present, China's three major staple grains have 65% out-of-quota tariff protection, so imports are not yet enough to form a comprehensive shock to the domestic market. However, Han Jun, deputy director of the Office of the Central Leading Group for Financial and Economic Affairs, said at the “Tsinghua Three Rural Issues Forum 2015” held at the end of 2014 that if the current trend continues and no policy adjustments are made, in 5-7 years, around 2020, grain will break through the second line of defense, “and by then we will have no way to withstand the strong shock of low-priced foreign agricultural products.”