Corn price-support purchases have become a double-edged sword, and the purchase price is the key

As China's corn enters the harvest season, the issue of temporary state reserve price-support for corn has once again become a focus of attention in the industry. Although the industry has different views on the temporary reserve price-support, in the face of the current situation of overproduction of corn in China, the temporary reserve is still an important means of resolving the quantitative contradiction. However, the price of the temporary reserve has also become the key to the survival of enterprises across the entire corn industry chain.

This summer, China's main corn-producing areas suffered drought, which affected this year's corn production, but at the “7th International Corn Industry Conference” held in Chengdu on the 22nd, participating industry insiders generally agreed in overall direction that this year is a bumper harvest year; although it may be lower than the historical record output of 2013, with a reduction of about 5%, it is still expected to exceed the total output of 2012.

Chai Xiaofeng of COFCO Trading Co., Ltd. believes that since the drought occurred in 2009, the state has invested heavily in agricultural drought resistance; judging from the impact of the drought, both the scope and intensity of this year's drought are less than those of the 2009 drought, and the impact on overall output is far lower than market expectations in the first half of the year.

However, China's current corn processing demand has already fallen far behind corn production capacity. According to data provided by the China National Grain and Oils Information Center, over the past two years, the supply capacity of the year has already exceeded consumption of the year by nearly 40 million tons.

“According to the balance analysis made by the China National Grain and Oils Information Center, if the volume of corn purchased for the temporary reserve price-support this year reaches 40 million tons, it can help the circulation market achieve a balance between supply and demand.” said Li Xigui of the Market Monitoring Department of the China National Grain and Oils Information Center.

However, news from the downstream of the corn industry chain is not optimistic. Because state reserve prices have continued to rise in recent years, the costs of the corn processing industry have continued to increase. Although downstream enterprises have reduced costs as much as possible through large-scale mergers and restructuring, technological upgrading, and other methods, almost all of them are on the edge of loss.

“We have already lost at the starting line.” said Zhu Yongsheng of the Biochemical Business Division of COFCO Group. Because domestic corn costs are high, corn deep-processing enterprises are struggling, while low corn prices in the international market create enormous pressure on domestic enterprises.

Zhu Yongsheng pointed out that China's corn deep-processing industry was unprofitable in 5 of 7 years, and “now China's corn deep-processing industry as a whole is hovering around the break-even point.”

News from the feed industry is also not optimistic, especially the pig-farming industry, where the situation of holding livestock in pens is currently relatively serious. Although in the short term it helps increase demand for feed, in the medium and long term it is bearish. An industry insider revealed that the current operating rate of the feed industry is very low, even less than 60%.

Downstream enterprises are struggling at the break-even point, which objectively reduces the actual demand for corn. In terms of quantity, digesting excess corn through the state reserve is conducive to balancing market supply and demand, but excessively high purchase prices leave downstream enterprises lacking raw materials, while state reserve warehouse capacity continues to be in critical shortage. In addition, the policy of selling at a price higher than the purchase price in state reserve auctions means that the cost for enterprises to obtain volume from the state reserve only increases, never decreases.

The key lies in how the purchase price is set. At present, this year's temporary reserve price for corn has not yet been announced, and “now cotton and soybeans are both piloting the target price mechanism, and we hope corn can also be included in the pilot as soon as possible.” said an industry insider.