Large volumes of corn flowing to state purchasing enterprises, market anomaly may persist

The corn market trend in 2014 has textbook-style demonstrative significance for 2015, and has had a major impact on the procurement models and inventory strategies of farmers, trading enterprises and grain-using enterprises in the 2015 market.

In 2014, the domestic corn market experienced dramatic fluctuations, showing a situation of “record surplus production, record temporary storage purchases, and record price increases.” Under expectations of increased production, inventories fell sharply, and the domestic corn market was oversupplied, leading to massive temporary storage purchases. The corn market showed the “three changes” characteristics of “changes in inventory structure, changes in trade models, and changes in pricing mechanisms.”

Temporary storage purchases may repeat last year’s “frenzy”

In 2014, the national total grain output once again broke through the 600 million ton mark, of which corn output reached 21,567.3 million tons, the second-highest output in history. With demand slowing and output remaining at historic highs for consecutive years, the domestic corn market showed a pattern of oversupply and weak demand. Corn was clearly in oversupply, causing large volumes of corn to enter the national temporary reserve.

According to estimates by the National Grain and Oils Information Center, over the past 3 years, domestic corn oversupply has exceeded 20 million tons each year. Among this, the annual surplus reached 24.89 million tons in 2013 and 39.76 million tons in 2014.

The full-year supply-demand surplus for 2015 is also expected to be 29.5 million tons.

Under this new normal of oversupply, in order to protect farmers’ interests and their enthusiasm for growing grain, and to promote grain production, the state carried out open-ended temporary storage corn purchases in the 4 northeastern provinces and regions. As of February 28, 2015, the total temporary storage purchases in the 4 northeastern provinces and regions had reached 59.59 million tons, 11.1 million tons higher than the same period of the previous year.

From the perspective of purchase progress, in January, temporary storage purchases in the Northeast accelerated significantly, with monthly purchases reaching 33.7 million tons; in early and mid-February, temporary storage continued to purchase in large volumes, with purchases from February 1 to 15 also reaching 13.45 million tons; in late February, affected by the Spring Festival holiday, temporary storage purchases basically stalled.

From the perspective of remaining grain held by farmers in the Northeast, based on an estimated 5% of grain retained by farmers for their own use, after the Spring Festival the remaining commercial corn held by farmers in the Northeast was about 15 million tons, and grain held by traders was about 7 million tons. Market grain stocks are limited, and the room for temporary storage purchases to continue increasing substantially is limited. At present, the inventory level of grain-using enterprises in the Northeast is about 1 to 1.5 months, and some enterprises are expected to reach 3 months when inventory plus forward contracts are included. Later in the market there will be a relatively large grain-using gap, and after June grain sources will depend on policy grain with relatively high costs, so market participants are strongly bullish. From the perspective of North China, the overall grain-selling progress of farmers in Henan, Hebei and Shandong reached 60%, with farmers still holding nearly 40% of their grain, and supply is relatively sufficient. Before last year’s Spring Festival, corn sales in North China were slow. But after the Spring Festival, in March and April, large volumes of corn from Hebei, Shandong and Henan flowed back to the Northeast, causing local corn to be consumed rapidly. At the same time, inventories of grain-using enterprises were generally low, and serious grain shortages appeared in July and August.

At present, with massive temporary storage purchases in the Northeast, some North China corn may still flow back, but local trading enterprises and grain-using enterprises are more active in building inventories than last year, and this has driven local corn prices up. The corn price gap inside and outside the pass has narrowed, and the backflow trend of corn will be relatively

strongly suppressed. But from the overall situation, because temporary storage purchases in the Northeast are too large, there will be a relatively large gap in market commercial grain sources. Later, the market will still depend on the release of policy grain sources, and there may be a phase in which large volumes of wheat substitute for corn. At the same time, in view of the relatively high cost of policy grain sources, corn prices in North China are expected to show a continuously rising trend.

⟦NL> Corn feed demand will be weak

For pig farmers, 2014 was an extremely testing year. Pig prices continued to fall, and breeding profits suffered repeated losses, a rare occurrence in history.

In 2014, pig farming continued to lose money, becoming the most severe loss year since 2011, and the duration of losses set the longest record. The time from near the break-even line to deep loss lasted as long as 12 months. For the whole year, the pig-to-grain price ratio was above 6:1 for only two weeks at the beginning of the year, and even during consumption peak seasons such as the Spring Festival there was the rare situation of losses.

It was precisely because the pig market lost money throughout 2014 that breeding enterprises accelerated the culling of excess sow capacity, especially in the fourth quarter of 2014. Therefore, the market expects that the pig inventory in 2015 will decline to a certain extent compared with 2014, and the downward trend may continue until the end of 2015.

This is because, for the inventory to increase, sow restocking must first begin and drive an increase in sow inventory. Only after sow inventory begins to increase does inventory begin to increase more than half a year later, and only after 12 months does pig supply increase.

Sow restocking is expected to take place in the second to third quarter of 2015, while the increase in inventory will appear at the earliest at the end of 2015, or even in the first half of 2016. Throughout 2015, pig inventory will maintain a trend of continuous slow decline. The decline in pig inventory will place relatively great pressure on the feed market and on the corn market upstream in the feed ingredient market, and corn feed demand will be weak.