Coexistence of Bullish and Bearish Factors: Corn Market Unlikely to Perform Well

Currently, the domestic corn market can be described as having a coexistence of bullish and bearish factors. On the one hand, China's temporary storage corn procurement continues in full swing, but the market's interpretation of it is becoming increasingly rational. With temporary storage corn inventories about to break through the 200 million ton mark, the Dalian corn futures price has touched the policy ceiling level, and the futures market was the first to see a rational pullback. After all, the massive release of temporary storage corn inventories will remain a long-term constraint on the upside room for futures prices. On the other hand, various policy rumors emerged continuously at year-end, such as targeted sales and another cut in the new-year temporary storage corn procurement price, which formed bearish pressure on market sentiment. In addition, weak terminal demand at year-end pushed starch prices lower, severe losses in alcohol production constrained processing enterprises' willingness to operate, and the still unclear future subsidy policy greatly reduced procurement enthusiasm. There is still one week left before the end of 2015. Under the combined influence of the above factors, the domestic corn market is expected to be unlikely to perform well.

Market Performance

Performance One: The Northeast corn market was stable with some movement. Since late December, weather conditions in the Northeast production areas have improved, farmers' grain-selling progress has accelerated, and temporary storage corn procurement volumes have returned to a relatively high level, providing bottom support for corn prices. However, some deep-processing enterprises maintained a cautious purchasing attitude because the future subsidy policy remains unclear. At the same time, most traders stayed on the sidelines because profits in the intermediate trading segment were not high and movement in the sales areas was sluggish. Affected by this, Northeast corn prices were generally relatively stable, with slight fluctuations in some areas. As of now, the ex-factory price of third-grade corn with 15% moisture at deep-processing enterprises in Zhaodong, Heilongjiang is 1790 yuan/ton, basically stable; in Changchun, Jilin it is 1880-1910 yuan/ton, down 10 yuan/ton from last weekend; in Shenyang, Liaoning the ex-factory price at deep-processing enterprises is 1950-1970 yuan/ton, down about 10 yuan/ton from last weekend. Processing enterprises reported that corn procurement volumes are currently increasing, and the number of grain-delivery vehicles has increased noticeably from last week.

Performance Two: North China deep-processing procurement prices were lowered. Since late December, weather in North China production areas has improved and grassroots supply has increased somewhat, but the moisture content of grassroots grain sources remains relatively high, enterprises' purchasing willingness is not strong, and current enterprise inventories remain at a relatively low level. Judging from the overall current procurement situation, high-quality corn with low moisture content commands a higher price, while the opposite is true for lower-quality corn, and polarization is quite prominent. At the same time, as Hebei grain prices continued to weaken, procurement of Hebei corn by Shandong and other peripheral regions increased, and the overall selling sentiment of grassroots farmers in North China was stable. As of now, the ex-factory price of third-grade corn with 14.5% moisture at Shouguang Golden Corn in Shandong is 1920 yuan/ton, down 20 yuan/ton from last weekend; the ex-factory price of third-grade corn with 14.5% moisture at Shengtai Pharmaceutical is 1930 yuan/ton, down 30 yuan/ton from last weekend.

⟦NL> Performance Three: Corn prices at northern and southern ports were stable to slightly strong. This period's temporary storage procurement data show that the pace has not yet slowed, and relatively firm grain prices in the production areas supported a steady-to-upward trend in northern port procurement prices. Current grain sources arriving at northern ports are mainly from Inner Mongolia and western Liaoning, and limited dry grain in North China means its impact on northern port procurement is very limited. However, traders' margins are currently poor, and the risk in later grain price trends remains relatively high. Cautious procurement and shipment led to low inventories at southern ports, and corn transactions at Guangdong port remained firm for the time being. As of now, the mainstream corn procurement price at Jinzhou port in the north is 2060 yuan/ton, with a cargo-hold price of 2090-2110 yuan/ton. The arrival price of Northeast corn with 15% moisture at Guangdong port is about 2200-2220 yuan/ton, up 10-20 yuan/ton from last weekend; the arrival price of North China corn is 2170-2190 yuan/ton, up about 10 yuan/ton from last weekend. Corn prices at Guangdong port were relatively strong mainly because port corn inventories were relatively small. On the 21st, the corn volume at Guangdong port was 102,000 tons, down 42% from the previous period and down 85% year-on-year. At the same time, corn prices at Guangdong port rose slightly, imported sorghum and barley prices rose significantly, and the price gap with corn narrowed, but the price advantage remained obvious. At present, the prices of sorghum and barley at Guangdong port are about 1950 yuan/ton and about 1720 yuan/ton respectively, and the price gaps with corn are about 260 yuan/ton and about 490 yuan/ton respectively, still noticeably higher than the substitution threshold price gap. It is expected that in the short term the advantage of imported sorghum and barley will remain, because there is not much room for further decline in corn prices at Guangdong port.

Influencing Factors

Factor One: Temporary storage corn procurement continued in full swing. According to statistical data, as of December 20, cumulative temporary storage corn procurement in the Northeast reached 42.62 million tons, with Heilongjiang, Jilin, Liaoning, and Inner Mongolia accounting for 56%, 23%, 4%, and 17% respectively, and the weekly warehousing progress remained above 5 million tons. Procurement maintained a fast pace, thereby providing certain support to the domestic corn spot market. At the same time, because China's temporary storage corn inventories are approaching the 200 million ton mark and the government has not yet introduced any inventory-reduction measures (such as the rumored targeted sales), the pressure to release inventories later is growing. Meanwhile, after the price of the Dalian corn 1601 contract successfully broke through 2050 points on December 9, along with the rapid advancement of temporary storage corn procurement, the futures market maintained a strong oscillating pattern. However, current temporary storage corn procurement cannot fundamentally solve the problem of high domestic inventory pressure, but only delays it, so the market began to show a mentality of selling short on rallies, which is in fact a rational move.

Factor Two: Falling starch prices constrained enterprises' willingness to operate. Since December, new corn prices in China's main production areas have risen to near the temporary storage price, and there have been many rumors about temporary storage corn policy, causing corn production enterprises to wait and see in procurement, with short-term corn prices maintaining narrow oscillation. Weak terminal demand at year-end, rising inventories at corn starch plants, continued declines in starch prices, and increased production losses in the deep-processing industry. Over the past week, domestic corn market prices fluctuated within a narrow range, market buying and selling were relatively stalemated, the pace of North China corn market arrivals accelerated, and deep-processing enterprises' corn procurement prices oscillated by 20-40 yuan/ton, with a price range of 1870-1990 yuan/ton; temporary storage corn procurement standards in some parts of the Northeast were tightened, and Northeast deep-processing enterprises' corn procurement price range was 1710-1960 yuan/ton, stable week-on-week.

It is understood that at present Jilin corn starch processing loses 90 yuan, and after including the new grain subsidy, it earns 160 yuan/ton; Shandong starch processing loses 96 yuan/ton; weak terminal demand at year-end has kept corn starch prices falling, while corn by-product prices remained stable; Heilongjiang alcohol processing losses were flat at 568 yuan/ton, and recently corn alcohol remained sluggish while DDGS rose in some areas. Recent estimates put the starch industry operating rate at 75% and the alcohol industry operating rate at 56%. Overall, in recent times domestic corn raw material costs have oscillated within a narrow range, corn deep-processing product price trends have closely followed supply and demand, terminal demand for starch and alcohol at year-end has been weak, market prices have been stable with some declines, and corn by-product manufacturers' inventory pressure has been relatively small, with quotations remaining firm. As the end of the year approaches, Heilongjiang's deep-processing subsidy policy has still not been introduced, while Jilin's new grain subsidy is about to end. Later, attention should be paid to Northeast temporary storage corn policy developments and whether deep-processing enterprises can continue to enjoy the policy “dividend”.

Factor Three: Northeast port corn inventories hit a new high. Monitoring shows that on December 18, corn inventories at the four northern ports were 2.6 million tons, an increase of 110,000 tons in one week, the highest inventory level since the end of August; that week's bulk grain seaborne volume was 199,000 tons, down 37,000 tons from the previous week. So far this year, cumulative bulk corn seaborne volume from the four northern ports has been 2.236 million tons, compared with 4.448 million tons in the same period last year, a decline of 49.7%. There are two reasons for the increase in corn inventories at the four northern ports: first, local farmers in Liaoning accelerated corn selling progress; monitoring shows that as of December 22, Liaoning farmers' corn selling progress was 44%, up 6 percentage points in one week, 6 percentage points slower than the same period last year, but the lagging margin has narrowed. Second, seaborne volumes from the four northern ports continued to remain at a relatively low level. Recently, North China corn prices moved lower, further highlighting the price disadvantage of Northeast corn, and it is expected that seaborne volumes will be difficult to increase noticeably in the short term.

Factor Four: The medium- and long-term inventory-reduction target may become a constraint. Last week, because the north-to-south grain transportation trade once showed obvious losses (Guangdong corn transactions at 2160 yuan/ton, Northeast port mainstream cargo-hold at 2100 yuan/ton), corn prices at Guangdong port rebounded in the latter half of the week on expectations of reduced later arrivals. Market analysis believes that as the year-end approaches, it takes about half a month to procure corn from northern production areas and ship it to the south, and increased pre-year stocking demand may drive a rebound in corn markets in some areas that had long been inverted. Of course, given that China's medium- and long-term corn inventory-reduction target remains unchanged, and that Northeast corn prices are already close to the temporary storage support price level, this point may become a constraint in the later price rebound process.

Outlook

Looking ahead, according to the current implementation of temporary storage corn procurement, the policy support effect before the end of temporary storage procurement will remain significant, and local risks caused by unclear policy (such as targeted sales and north-to-south grain transportation subsidies) need to be guarded against; at the same time, current corn-demand enterprises as a whole maintain low inventory, and whether deep-processing enterprises or feed-processing enterprises, inventory levels are basically kept at safe levels, with little willingness to procure excessively. And recent rumors suggest that targeted sales may appear, which would further suppress deep-processing enterprises' procurement enthusiasm. However, it is worth noting that the previously heavily suppressed corn markets at northern ports and Guangdong port have rebounded. After all, in the short term, domestic grain-using enterprises generally have low inventory levels at year-end, continued inversion has reduced the volume of corn shipped south, and pre-year stocking demand by grain-using enterprises can easily create rebound opportunities. Of course, we need to be clear-headed that, with domestic corn inventory release as the primary medium- and long-term goal, policy uncertainties such as targeted sales will remain an obvious “constraint” on market price strength. At the same time, whether higher-than-normal northern temperatures before the year-end will lead to a decline in corn quality also deserves our close attention.