Will the corn market really cool down?

As is well known, the current domestic corn market as a whole is constrained by the very limited supply of grain circulating in the market, and prices have begun to enter an upward channel. The main buying and selling activity in the market is concentrated at the policy grain targeted sales auctions held every Tuesday (Wednesday). Even though this batch of targeted-sale corn is mainly aged grain from 2012, its transaction rate has been continuously pushed higher, rising from nearly 50% in the first two sessions to a high of nearly 70%, and then, starting last week, the overall transaction rate fell back to 50%. After the total volume offered this week returned to the initial level of more than 2 million tons, the transaction rate fell again, and yesterday's auction overall transaction rate was only 36.13%. With the volume offered sharply reduced and the transaction rate sliding further, does this reflect that the overall supply of corn in the market is no longer tight, and that the corn market will soon see a cooldown brought about by the easing of supply tightness?

Investigation and analysis show that the recent decline in the transaction rate of targeted corn sales cannot truly reflect changes in the supply and demand pattern of the corn market. In other words, the drop in the transaction rate is not because the supply pressure in the corn market itself has been eased. On the contrary, the author believes that although the total amount of policy grain corn recently put onto the market has reached as much as 8.56 million tons, which appears to be a huge quantity, if we calculate it based on the annual corn usage, the amount of corn used for feed in our country each year is about 110 million tons, and after the import volume of imported grains was restricted on a large scale this year, the overall corn usage is expected to increase from the original basis, while the corn usage of deep-processing enterprises averages about 55-60 million tons. In addition, the task of corn capacity reduction this year was highlighted at both the Two Sessions and other major meetings, which means that the corn usage of deep processing this year is very likely to exceed 60 million tons. Adding these two together already exceeds 170 million tons, averaging more than 14 million tons per month. And the current season is exactly the starting point of the peak demand period for feed and breeding; in other words, after entering the third quarter, corn usage will reach a peak for the year. Then, averaging to each month, corn usage conservatively estimated will also exceed 15 million tons. Looking back again at the 8.56 million tons of targeted-sale corn per month, that can only satisfy about half of the national corn usage. Moreover, a large part of the 2012 corn cannot be used by feed-processing enterprises, which means this batch of targeted-sale corn can basically satisfy the use of deep-processing enterprises, but the overall demand of feed enterprises remains difficult to meet.

Let us look at the decline in the auction transaction rate from another angle. From the auction lots, it is not difficult to see that in Hebei, Shandong and Henan, where the transaction rate had previously remained at nearly full completion, the volume offered was sharply reduced. Even so, Hebei and Shandong together offered only about 30,000 tons and it was still snapped up entirely. Henan even stopped offering. Including yesterday's transaction volume, the total transaction volume of the three provinces of Hebei, Henan and Shandong reached 3.64 million tons, accounting for 42% of the total transaction volume. This sharp cut in the transaction rate was precisely caused by the sharp reduction or even suspension of offerings in the above three provinces.

Therefore, the sharp fall in the auction transaction rate in the past two weeks, especially yesterday (June 30, 2016), was fundamentally caused mainly by the fact that a large part of the remaining lots do not match the structure of market demand. After a month of competitive bidding, the short-term supply pressure on deep-processing enterprises has been somewhat eased, while feed enterprises cannot use the aged grain currently being auctioned and can only choose to stand by, which in turn caused the auction transaction rate to decline. On the other hand, the sharp reduction in offerings and the suspension of auctions in the three provinces of North China, including Hebei, Shandong and Henan, where the transaction rate had consistently been above 90%, also objectively became the main reason for the sharp cut in the auction transaction rate. It is precisely because of this that the current decline in the transaction rate of policy grain auctions in the corn market cannot reflect the true supply and demand relationship of the corn market, nor can it lead to the conclusion that the supply pressure in the corn market has been eased and that corn prices will fall in the future. In the short term, the supply pressure in the corn market, especially the supply pressure of high-quality corn used by feed enterprises, is still very great. Only the full-scale launch of nationwide auctions of 2014 corn in the future can relieve the current supply pressure in the corn market. In the short term, it is still quite difficult for spot corn prices in the market to fall back from their high levels.