Analysis of the Reasons Why Corn Prices Keep Rising Despite Oversupply

As the year draws to a close, the corn market is about to face its 2016 "finale," and a downward trend in corn market prices is beginning to emerge. Here, we must review this autumn's corn price movements. Against the backdrop of a strongly bearish market in the earlier period, since the northern corn harvest in October, prices have repeatedly risen instead of falling. Why, under the dual pressure of the market and policy, did corn prices not show the expected continuous decline? What exactly are the factors affecting market price movements? Recently, a downward trend in market prices has begun to emerge. Will corn prices keep falling all the way before the Chinese New Year, and will they once again break through the market price floor? Please follow China Grain and Oil Information Network analyst Zhang Xiaofeng (the author) in a brief exploration of the factors affecting recent corn prices and the later trend.

I. Main Factors Supporting Corn Prices

1. Farmers Reluctant to Sell

When this year's new corn recently came onto the market, bearish sentiment was strong, and grain-using enterprises and corn purchasers and sellers had a strong inclination to push prices down.

The market opening price was too low. In Northeast China, the lowest point for national standard second-grade grain reached 1,230 yuan/ton, and in North China, the lowest point for national standard second-grade grain reached 1,450 yuan/ton. Farmers' planting costs and profits were severely out of balance, and their willingness to sell dropped sharply. In order to seek higher income, most farmers chose to harvest corn with the cobs and store it for later sale, hoping to sell naturally dried corn after the moisture content decreased and thereby increase their income. Therefore, this year the selling time in the major corn-producing provinces across the country was generally delayed, creating the strange situation in which basic raw grain was abundant while the amount of raw grain available for market purchase and sale was insufficient. This played an initial supporting role for corn market prices.

2. Rising Freight Costs

Since the implementation of the vehicle load limit policy in China in September, domestic corn circulation has suffered the most severe blow. According to this network's understanding, corn transport costs have generally risen by 30-40%. At the same time, according to the load limit requirements, the amount of corn loaded per transport vehicle has decreased, and transport pressure has increased, creating situations in various places in corn transport where "a vehicle is hard to find" and "there is a price but no vehicle."

On the one hand, enterprises continuously raised purchase prices in order to guarantee procurement volume, hoping to increase arrivals at factory gates. On the other hand, corn purchasers and sellers suppressed purchase prices, hoping to pass transport costs onto raw grain profits, which further suppressed farmers' willingness to sell. Rising transport costs and the difficulty of finding vehicles pushed up enterprise purchase prices, but also restricted the purchasing and selling willingness of corn traders as well as farmers' willingness to sell, further reducing the circulation volume of corn in the market and playing a sustained supporting role for market prices.

3. Weather Factors

Since the listing of the new-season corn, there have been repeated periods of continuous rainy weather in China, severely restricting corn market purchasing and sales.

For farmers: Affected by rainy weather, farmers' harvest time was delayed, it was difficult for corn moisture to decrease, and the corn sales progress was restricted.

For traders: Affected by rainy weather, traders' purchase volume was insufficient. Although market prices showed phased increases, traders had a strong wait-and-see attitude and mainly engaged in short-term trading of wet grain. The operating rate of drying towers was relatively low, and dry grain was scarce in the market.

For enterprises: Affected by rainy weather, arrivals at enterprise factory gates were sluggish, and the purchase price of national standard second-grade grain at individual enterprises once rose to a high of 1,900 yuan/ton.

Based on the above reasons, the market expectation of a sluggish autumn corn price situation did not continue to appear, and corn prices fluctuated frequently up and down with market supply.

II. Abundant Basic Raw Grain

As can be seen from the table below, basic raw grain in China's main corn-producing areas is abundant, corn sales progress in each province is slow, and most remaining grain is still stored in farmers' hands. At the same time, according to this network's understanding, entering December, farmers' willingness to sell still had not increased significantly. In Northeast China, as winter arrives and temperatures drop, farmers' corn storage will not become moldy, and many are considering selling after the Chinese New Year. In North China, the moisture content of basic remaining grain is still around 20-25%, and farmers' willingness to sell remains relatively low. It is expected that in mid-to-late December, when the moisture content of basic remaining grain drops below 18%, willingness to sell will increase significantly.

III. Enterprises Stocking Up Before the Chinese New Year

Compared with previous years, this year the market has abundant remaining grain, enterprise inventory reserves are relatively low, and enterprises generally follow a purchase strategy of buying as needed. As the year draws to a close, domestic corn-using enterprises will begin the pre-Chinese New Year stocking stage in order to ensure safe production during the holiday. At the same time, affected by transport tightness, grain-using enterprises will stock up earlier. It is expected that entering December, grain-using enterprises will gradually increase inventory reserves, market demand will increase somewhat, and this will also play a supporting role for market prices.

The Author's Brief Analysis:

From the above three points, it can be seen that domestic basic raw grain is abundant. As the Chinese New Year approaches, the impact of weather factors will decline, and farmers' willingness to sell will increase somewhat. This is also the main reason for the recent slight decline in domestic corn prices. However, most of farmers' remaining grain will still be kept for sale after the Chinese New Year, and market supply will continue to remain stable. At the same time, entering December, enterprises will begin to increase inventory reserves, market demand will rise, and coupled with the impact of transport capacity tightness, market prices will be supported. The author predicts: entering December, domestic corn prices will continue to maintain a stable trend with slight fluctuations, while affected by abundant basic remaining grain, concentrated farmer selling after the Chinese New Year, and declining enterprise demand, the market price trough should appear in February-April 2017. Farmers and traders are reminded to pay more attention to market conditions and may choose to sell before the Chinese New Year at an appropriate time and price, in order to prevent unnecessary risks brought by a later sharp price decline.

(Source: China Grain and Oil Information Network Author: Zhang Xiaofeng)