Global bumper harvest crushes grain prices: China's 11 consecutive years of increases meet a historic US harvest

The crop harvest season is approaching, and China is expected to see an 11th consecutive year of grain harvests. But according to an analysis by The Wall Street Journal, the government's long-standing purchasing policy has severely distorted grain prices, with corn prices even reaching 3 times the international price, and the bumper harvest is instead creating more problems.

Chinese officials estimate that the mainland's 2014 grain reserves will reach 150 million tons, including the three major crops of rice, wheat, and corn, far higher than the 75 million tons in 2013. This will worsen the oversupply of such agricultural commodities, and the oversupply is putting pressure on prices.

China once experienced severe famine, so a grain surplus is something to be proud of, but the inefficient and costly government purchasing system has caused severe distortions in grain prices. On the 25th, corn futures prices on the Dalian Commodity Exchange closed at 2,390 yuan per ton, while corn prices on the Chicago Mercantile Exchange were about 3.67 US dollars per bushel, equivalent to about 890 yuan per ton.

Image source: The Wall Street Journal

Official data show that over the years, the government has often purchased at least 1/3 of the corn output. Official media estimate that over the past two years, when market prices hit bottom, the government spent 220 billion yuan purchasing corn.

At the same time, how the mainland handles its huge stockpile is also a difficult problem. Thomas Pugh, an economic analyst at Capital Economics in London, said China's corn inventory accounts for about 40% of the global total. 70% of corn is used to feed livestock, while the rest is processed into syrup or starch.

The grain surplus problem is especially troublesome this year, because the rapid growth of US crop production has pushed local prices down to near 4-year lows. Huang Jikun, director of the Center for Chinese Agricultural Policy at the Chinese Academy of Sciences, said the price gap encourages traders to import corn from overseas rather than domestic corn, whose price has remained high.

According to a message on the website of China's National Food and Strategic Reserves Administration, Premier Li Keqiang of the State Council said that in the past the requirements were to store grain widely, store good grain, and store grain well, and now the mechanism must also be reformed so that grain can be bought in, stored well, and sold out.

In early 2014, China began reforming the purchasing system for cotton and soybeans, switching to a pilot target price subsidy program. Under the rules, the government will no longer buy agricultural products from the market in order to keep prices at a specific level, but will instead subsidize the price difference when the market price falls below the target price.

In addition, since the end of 2013, officials have also released 10 million tons of reserve cotton, which means China's cotton import demand may remain low in the coming years. So far this year, US cotton futures have fallen by more than 20% cumulatively.

Fred Gale, an economist at the US Department of Agriculture, said the Chinese government's recent corn auction in Heilongjiang Province went poorly, with only one-fifth of the corn sold at 2,200 yuan per ton, more than twice the price US feed processors are currently paying for corn.

China and the United States encountered grain oversupply in the same year. The US Department of Agriculture expects this year's US corn harvest to reach a record 14 billion bushels. Jason Britt, president of the brokerage Central States Commodities Inc. in Kansas City, Missouri, said corn futures have already fallen 15% this year and fell 40% last year, and China's reluctance to buy US corn will put further pressure on corn prices.

Britt said the lack of purchasing from China is one of the reasons for the decline in corn prices, and now all the market can do is fall to a price level that can attract demand.

In January this year, the Chinese government said it would launch a pilot target price subsidy program for cotton and soybeans, ending the stockpiling policy, with the pilot starting first with cotton in Xinjiang and soybeans in the Northeast, in order to better let the market play a decisive role in the formation of agricultural product prices. Strategically, cotton and soybeans are slightly less important.

According to the pilot measures, the government will no longer buy agricultural products from the market in order to keep prices at a specific level, but will instead subsidize the price difference when the market price falls below the target price. The purpose of setting target prices for agricultural products is to better let the market play a decisive role in the formation of agricultural product prices, which should in turn affect farmers' planting plans.

In addition, since the end of last year, China has also been releasing 10 million tons of reserve cotton, which means China's import demand for cotton may decline in the coming years. This has dealt a heavy blow to cotton prices. So far this year, US cotton futures have fallen by more than 20% cumulatively.