Where exactly does the future of corn lie?

In the autumn of 2016, based on actual surveys in the production areas, it was going to be another bumper year for corn. At present, the latest forecast from the China National Grain and Oils Information Center puts China's corn output at 219 million tons, down 2.5% from last year's output, mainly due to a decline in corn planting area. In addition, China's consumption of the new-season corn is estimated at 199 million tons. In other words, although output has declined, there is still a surplus of 20 million tons between production and demand. Add to that more than 200 million tons of temporary storage inventory, and the road to de-stocking domestic corn will still be very long.

At this time of the autumn harvest, where does the way out for China's corn lie? Planting returns, the problem of selling grain, industrial development and price competitiveness are all "mountains" weighing on the corn industry chain.

The "road" lies in the separation of price and subsidy. After this year's Two Sessions, the state issued guiding policy for corn production, with the separation of price and subsidy as the overall guiding principle, canceling the previously implemented temporary storage purchase policy and letting market supply and demand determine this year's new-season corn price. In July-August, the state and various provinces and municipalities successively announced implementation plans for corn producer subsidies. Based on the sown area estimated in the August market supply and demand report of the China National Grain and Oils Information Center, the first batch of corn producer subsidies in the four northeastern provinces and regions should be between 120-136 yuan per mu, equivalent to 246-328 yuan per ton. Of course, this is only an estimate. Judging from current expectations for new-season corn prices, even if new-crop corn falls to 1200, the producer subsidy policy will still ensure that farmers can obtain a certain return. Therefore, this policy can both safeguard the implementation of the market pricing principle for corn and reduce raw material procurement costs for downstream industries in the corn industry chain, promoting sales of new-season corn to a certain extent.

The "road" lies in bottom-line purchase. After the Two Sessions, the second policy given for the corn issue was bottom-line purchase. As of now, because new-season corn has not yet come onto the market, no definite plan for this policy has been introduced. Bottom-line purchase has brought some hope to farmers and local governments, especially in Heilongjiang, where the production and sales surplus is the greatest, but the policy has been slow to land, leaving them anxious. From the current actual situation, storage capacity in most regions is already full. Although state auctions have released part of the inventory, it is still a drop in the bucket relative to corn output. So the feasibility of relying on the state for bottom-line purchase is not great, and the state has already canceled the temporary storage purchase policy for corn. Enterprises are another possible operating entity for bottom-line purchase. By March 2017, the final deadline for farmers to sell grain, the state may entrust central state-owned enterprises to enter the market and conduct bottom-line purchases at market prices, while giving enterprises corresponding storage or processing subsidies, so as to ensure that the corn in farmers' hands can be sold. Of course, this is only one possibility, and a better solution may also be introduced by then.

The "road" lies in international competitiveness. The last time China faced huge corn inventory pressure was around 2000, when corn exports were subsidized, resolving a considerable part of the inventory. Japan, South Korea and Southeast Asia were all consumption regions for China's corn. After the Two Sessions, the third key point regarding the corn issue was that corn prices should align with international markets, foreshadowing the possibility that the corn export market, almost closed for more than ten years, may open this year. Moreover, China's recent restoration of export tax rebates for corn deep-processing products also reveals that the state is again supporting exports in the corn industry. Based on previous export market estimates, the current annual absorption capacity of the corn export market is estimated at 10-15 million tons. Of course, this also requires China's corn prices to be internationally competitive. Based on a U.S. corn futures price of 350 cents per bushel, U.S. corn exported to Japan and South Korea converts to a RMB price of 1150-1200. Therefore, for China's corn to open up export markets, based on the current price model estimate, it cannot exceed a price of 1200 yuan/ton. Of course, corn exports can also be subsidized, making the post-subsidy export cost lower than this price.

The "road" lies downstream in the industry chain. Corn consumption is mainly in feed consumption and industrial consumption. According to the latest forecast of the China National Grain and Oils Information Center, corn consumption growth in 2016/17 reached 11.7%, with feed consumption accounting for 60% of total consumption and industrial consumption accounting for 30.5%. The growth in feed consumption mainly comes from increased demand for pig feed. By the end of this year, large pig farms will gradually begin production, and even more enterprises will begin production next year. Although it is still difficult to estimate what scale pig farming will recover to next year, growth of more than 10% is still very possible. The corn deep-processing industry has developed rapidly in recent years. Although national policy focuses on cutting overcapacity, due to corn's enormous output, the expansion of corn deep-processing capacity has still been relatively fast. However, the capacity utilization rate of the corn deep-processing industry is not high, averaging between 60-70% annually. This year, as corn prices fall, the capacity utilization rate of the corn deep-processing industry is expected to rise. Although it is still constrained by downstream demand, overall growth of 7-8% should still be maintained. Deepening downstream demand for corn, especially the demand growth brought by large-scale farming, will be what can help corn return to a balance between supply and demand in the next one to two years.

The corn surplus situation China has developed in recent years cannot be solved overnight. It requires relatively long-term planning, and guarding against adverse weather and other natural disasters is also of paramount importance. Four or five years ago, affected by La Nina weather, global corn production fell sharply, while China's corn demand rose rapidly due to the deep-processing industry, and corn production capacity could not match it for a time. Many international institutions predicted that China would open up corn imports, and global funds took the opportunity to wildly speculate on international corn prices. All those scenes are still vivid. It was also in recent years that global crop output continued to be abundant, depressing the prices of many agricultural products, but this does not mean that the food crisis is far from China. Once the world suffers sustained disastrous weather, no matter how large the grain reserves are, it may still be hard for the Chinese people to feel safe. Therefore, on the one hand reasonably planning corn planting and production, on the other promoting the scientific development of the downstream industry chain, and on the other improving the corn reserve management model, is the successful "road" for the development of the entire corn industry chain for a considerable period in the future.