Agriculture

Cereal killer

Challenges ahead as China tries to reduce its corn reserves

Corn-w

$10 billion in stockpiles?

The introduction of corn to Chinese farms is said to have been one of the factors that helped take the country’s population past 100 million during the early part of the Qing Dynasty. Its popularity has endured: the non-native but easy-growing crop even overtook rice as the country’s main source of starch in 2012, says the Economic Observer. However, another bumper harvest this autumn could bring more problems than profits for policymakers in China.

In April the US Department of Agriculture (USDA) published a report suggesting that the Chinese government was facing paper losses of more than $10 billion on its state-owned corn reserves as Beijing begins to cut agricultural subsidies. More than 20 million tonnes of China’s corn reserves, the USDA said, are mouldy and no longer fit for human consumption.

The State Administration of Grain rebuffed the report, insisting that there were no incidents of large-scale grain deterioration. But reports from local media in the harvest season seem to have confirmed some of the USDA’s concerns.

China introduced floor prices for a series of crops in 2004 to protect farmers from price volatility. The programme began with rice and wheat and was extended to cover corn in 2008. When prices fall below the stipulated floors, the government snaps up supply.

The support policy reflects the government’s desire to stabilise rural incomes. But it proved so popular that farmers grew more of many of the crops in question, leading to mounting surpluses. In fact, in recent years the bulk of the new corn has been purchased by the state, and only a small portion find its way to market, Xinhua reckons.

While the government never publishes figures about its grain reserves, Time Weekly reported last week that the corn reserve has topped 260 million tonnes (more than double the estimated figure in 2009). And that’s before harvesting season got started this month.

Taking into account the purchasing costs, the storage and maintenance fees, as well as the financing expenses, the cost of the world’s largest corn stockpile could be as much as Rmb65 billion ($10 billion), says Time Weekly.

Whittling down the stockpile is tough too. China doesn’t export much corn and selling supplies would violate WTO agreements.

Corn degrades faster than other stockpiles, for example, cotton. This means that Chinese regulators are under pressure to sell at lower prices before it degrades beyond use. Indeed, the government has been trying to auction some of the stockpile and it scrapped the price support policy this spring (replacing it with direct subsidies to farmers).

The overhaul is seen as one of the key “supply-side” reforms designed to make the agricultural sector more efficient. However, the immediate result is that prices have dropped to their lowest in 10 years.

According to Time Weekly, spot prices for local corn fell to Rmb1,673 per tonne in late September, or nearly 17% below its level a year earlier. Worse still, the corn costs more than imports from the US, which stood at Rmb1,358 per tonne during the same period.

Sinograin, the state firm in charge of managing the grain reserve, had plans to auction 1.1 million tonnes of corn from the 2014 ‘vintage’. But when it did so last month only 2% of the amount was offloaded.

The overhang is proving problematic in the US as well, the Wall Street Journal notes, because the corn auctions are posing a threat to “what last year was a more-than $10 billion imported animal-feed market, much of which originates from the US and has been popular with Chinese livestock farmers because it was cheaper than local corn”.

As corn imports from the US slow, expect howls of complaint from American farmers. Indeed, Washington’s politicians may take up their case in the months ahead.


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