Corn purchase prices cut for the sixth time in a row — why do they keep falling?
On December 19, 2016, COFCO Biochemical Energy (Yushu) Co., Ltd. recently cut its corn purchase price for the sixth time in a row. Latest purchase prices: from 8:00 on December 19, 2016, the price for grade 2 or above at 14% moisture is 1380 yuan/tonne, the price for grade 3 at 14% moisture is 1340 yuan/tonne, and the price for grade 4 at 14% moisture is 1320 yuan/tonne; corn with moisture exceeding 42% is rejected. Over a period of about one week, after six consecutive cuts in the purchase price, grade 2 corn at 14% moisture was cut by a cumulative 40 yuan/tonne, and grade 3 and grade 4 corn at 14% moisture was cut by a cumulative 60 yuan/tonne.
From 2004 to 2015, China's grain output achieved “twelve consecutive increases.” However, since the second half of 2011, under the influence of the temporary purchase and storage policy's “supporting the market,” a sustained “inversion” has appeared in which imported grain prices are lower than domestic grain prices. This created the awkward situation of imported grain entering the market while domestic grain went into storage, and also drove the continued increase in grain imports.
Taking corn as an example, as corn inventories continued to increase, the contradiction in purchasing and storing the new crop and the pressure of safe grain storage in core producing areas such as Northeast China also became fairly prominent. The eight consecutive years of the temporary storage policy distorted domestic corn market prices, and especially in an environment of global grain oversupply, the government needed to deal with an astronomical corn inventory (about 250 million tonnes in inventory, 220 million tonnes of new production, and annual consumption of about 180 million tonnes).
Government purchase prices encouraged domestic production, but at the same time stimulated a large increase in imports, because food and feed producers turned to cheaper imported corn. On the other hand, because of price comparisons, farmers tended to choose varieties that were more safely “supported by the market,” for example choosing to plant corn and giving up planting soybeans, which caused corn inventories to pile up while soybeans faced a structural shortage.
It is this astronomical corn inventory that has caused the current continued slide in the corn market!
In recent years U.S. corn prices have been low, domestic and foreign prices have been inverted, and domestically produced corn is already in dire straits. By agreement, the corn import quota is 7.2 million tonnes; in fact imports have not yet reached that figure, but imports of other agricultural products that can replace corn as feed have increased greatly, such as sorghum, cassava, barley and so on. These varieties can bypass quota restrictions, enjoy low tariffs, and the tariffs themselves are also very cheap. As a result, domestically produced corn is difficult to sell, and inventories are as high as 250 million tonnes.
If corn had no tariff quota restriction, what kind of situation would that be?
Not only would imports of these substitutes directly appear as corn, in fact import demand is far greater than that. In the past two years, feed and deep-processing enterprises have competed unusually fiercely for corn import quotas. In 2015, more than a thousand enterprises fought over the limited quota, with companies such as New Hope, CP, Dabeinong, Wens, Zhengbang and COFCO all among those competing. Feed production alone requires 150 million tonnes of corn nationwide every year.
At the same time, if domestically produced corn is to be sold, it has no choice but to keep cutting prices; buying at 70 fen per jin cannot hold. Fighting a price war to the death with imported corn will leave no profit to speak of.