Corn price rise is too rapid, with a short-term inflated component

In recent times, the domestic corn market has been affected by tight supply and increased demand, and corn prices have continued to strengthen. As purchase prices in Northeast China have been continuously raised, market trends in production and sales areas have risen in tandem, and corn prices have hit a new high in recent years. Market monitoring shows that in early April, the national average scale purchase price of corn in production areas was 1787.85 yuan/ton, up 29.31 yuan/ton from the same period last month; the national average scale out-of-warehouse price of corn in production areas was 1799.62 yuan/ton, up 34.34 yuan/ton from the same period last month. At present, many grain-using enterprises believe that current domestic corn demand is on the eve of a seasonal recovery, and the excessively rapid rise in corn prices cannot be continuously accepted by the market. As the quantity of corn supply increases, it will be difficult for corn prices to rise rapidly again.
Favorable factors
First, policy provides strong support for corn prices. In April, the state continued to implement the temporary purchase and storage policy in Northeast production areas and provided subsidies to qualified enterprises in sales areas for purchasing Northeast corn. To support enterprises in doing a good job in the temporary storage and purchase of corn, starting from March 10, 2010, the loan for corn drying costs was adjusted to 70 yuan per ton; previously the loan for drying costs was 50 yuan. The increase in drying costs will raise the out-of-warehouse cost of corn and also have a certain supporting effect on prices.
Second, diversified competitive purchasing is conducive to upward price movement. Because deep-processing enterprises currently have relatively ample operating profits, since March Northeast deep-processing enterprises have successively raised prices to purchase, competition among diversified market entities in purchasing is very intense, and purchase prices have continued to rise. At the same time, boosted by policy subsidies, feed enterprises in sales areas and central state-owned enterprises have continued to increase their purchasing efforts in Northeast production areas, and central state-owned enterprises have repeatedly set the highest record this year for Northeast corn purchase prices. At present, only one month remains before the deadline for the procurement subsidy policy. Even though purchasing in some areas has approached or exceeded the level stipulated by policy, the procurement costs of purchasing entities remain high, which still has a supporting effect on medium-term corn prices.
Third, grain-using enterprises still need to replenish inventories. Because enterprise inventories were consumed heavily during and after the Spring Festival, most deep-processing enterprises and feed enterprises need to replenish inventories, and enterprise purchasing enthusiasm is relatively high. To meet production needs, most corn deep-processing enterprises in Northeast China have recently adopted the strategy of raising prices to compete for purchases, which has played a certain guiding role in the rise of market prices.
Fourth, the lagging impact of drought on the market will continue. Since the beginning of this year, Southwest China has suffered a once-in-a-century drought, with most areas at severe drought and extreme drought levels. According to data from relevant national departments, last year the total corn output of Yunnan and Guizhou provinces was 9.5 million tons, accounting for 6% of national output. If it is not alleviated for a long time, then the expectation of reduced production will be extremely strong, and the duration and degree of impact will be very large. The recent continuation of the drought in the Southwest has caused transactions of corn transferred across provinces to continue heating up, and transaction prices in sales area markets have generally exceeded 2000 yuan/ton.
Bearish factors
First, the amount of corn coming onto the market later will continue to increase. This year, because the cold winter weather lasted a long time, the period during which farmers could store corn was extended, and the time for farmers to sell grain in a concentrated manner was postponed, so staged supply pressure in the later market is still unavoidable. On the one hand, as the weather warms, farmers in various parts of Northeast China have gradually begun raising funds for spring planting, and their ability to convert grain into cash will increase; on the other hand, because corn purchase prices have continued to rise recently, some farmers have somewhat accepted the current purchase prices, their enthusiasm for selling grain has increased, and it is estimated that the quantity of corn sold later will continue to expand. In addition, as temperatures continue to rise, the difficulty of storing corn increases, especially for some high-moisture corn, which is highly prone to mold. Because there was more rain and snow last winter and this spring, Northeast farmers have relatively more high-moisture corn. It is reported that the moisture content of corn in Heilongjiang is generally higher than in the same period in previous years, at 28%-35%, and some corn has already shown isolated mold. Once this high-moisture corn comes onto the market in a concentrated manner, the impact on the market should not be underestimated.
Second, feed demand from the breeding industry is not likely to be optimistic. As the main consumption field for corn, feed demand for pigs in the breeding industry has always attracted much attention. Affected by the decline in demand after the festival and excessive slaughter triggered by the recent foot-and-mouth disease epidemic, pork prices fell sharply, and the pig-to-grain price ratio was significantly below the break-even point. Relevant survey data show that since March, pig feed sales in most domestic areas have fallen by 20%-30% month-on-month, with some relatively high declines reaching about 40%. Because the current live pig market supply is still abundant while corn prices remain high, the profitability of the downstream breeding industry is not optimistic, and farmers' enthusiasm for restocking is not high. Losses in live pig breeding will inevitably reduce corn feed demand, thereby bringing certain pressure to the corn market.
Third, with domestic corn prices high, exports are difficult. Customs data show that in February China's corn export volume was 0.032 million tons, a year-on-year decrease of 2.35 million tons and a month-on-month decrease of 4.16 million tons. From January to February, cumulative corn exports were 4.226 million tons, ending the situation of continuous increases in China's corn export volume since October 2009. The main reason is that international corn prices fell while China's corn prices operated at a high level, weakening export competitiveness.
In summary, objectively speaking, the recent upward market movement in corn is caused by a short-term imbalance between supply and demand, and the drought in the Southwest has also provided a certain boost to the market. Given sufficient domestic corn inventories, it is estimated that this situation of relatively tight supply and demand in the market will soon be alleviated. On the one hand, as the weather warms, farmers may sell grain in a concentrated manner, and staged supply pressure is unavoidable; on the other hand, the continued decline in pork prices has made corn feed demand relatively weak, and corn feed demand is not optimistic. Therefore, corn prices have a short-term inflated component, and it will be difficult for prices to rise rapidly again. In some areas with excessively high local prices, there may even be a risk of staged declines.