China to end controls on its corn market

China plans to scrap its corn stockpiling scheme and allow markets to set prices for the grain, pushing to boost efficiency on its farms and to narrow a gap between local and international prices that has sparked a surge of cheaper imports.

The government will instead subsidise corn growers and encourage commercial firms to buy grain from farmers at market prices, the State Administration of Grain said in a statement on Tuesday.

The move could disrupt the international corn trade as exporters that have recently scaled up feed grain and feed product exports to China are forced to find other markets.

The new policy, which marks the biggest reform in China’s grains sector for a decade, is aimed at improving quality and efficiency in its agricultural sector as part of the country’s “supply-side reform”.

But it could prove costly for Beijing, potentially leaving it with huge financial losses as falling prices devalue its massive stockpile, which accounts for half the world’s corn stocks.

And as domestic prices start to fall in line with international markets, Chinese demand for imports of corn and corn substitutes such as sorghum, feed-grade barley and distillers’ grains is expected to tank.

Ukraine, Russia and Brazil have supplied most of the corn, while the sustitutes have come from the United States and Australia.

“We hope the new reform would let the market play more of a role in the formation of prices,” Liu Xiaonan, a deputy director with the National Development and Reform Commission (NDRC), was quoted as saying in the statement.

The new policy will take effect in the world’s No. 2 corn consumer from the 2016-17 marketing year that starts in October.

“Imports after autumn would be very difficult and could come to a halt,” said Li Qiang, an analyst with commodity advisory Shanghai JC Intelligence Co Ltd (JCI).

“Given the market-oriented reform of domestic corn prices, it is possible that China would be able to export both corn and corn products.”

Beijing’s nine-year-old stockpiling system, designed to support its huge rural workforce, has artificially lifted corn prices around 30-to 50-percent above global markets, triggering a record volume of imports of corn and corn substitutes in 2015.

Government officials signalled the policy change last month. Chen Xiwen, deputy director with the Communist Party’s Central Rural Working Leading Group said the move would make domestic corn prices cheap enough to deter imports.

The step was also flagged over the weekend by local television, and has already driven down domestic corn prices.

The new crop corn contract on the Dalian Commodity Exchange shed about two percent in the Tuesday morning session after falling over three percent the day before.

Massive state sales loom?

After years of stockpiling coupled with weakening domestic demand, the government has been saddled with about 250 million tonnes of corn in its reserves, more than the country can consume in a whole year, with the quality of the stored grain deteriorating.

The government is likely to sell more than 40 million tonnes from stockpiles this year, possibly starting from next month, with prices potentially below market price, said JCI’s Li.

Traders will be watching developments closely as the sell down of Chinese reserves, said Tobin Gorey, director of agricultural strategy at Commonwealth Bank of Australia.

Exports of U.S. corn to China so far this year are fairly modest at but it has exported 4.8 million tonnes of sorghum. In 2015 it exported 6.3 million tonnes of distillers grain to China.

Beijing hopes that the policy will cut domestic corn production, but that could be dashed in the short term, as many farmers have already bought seed ahead of the planting season that starts next month, analysts said.

“Farmers may not reduce acreage as much as the government expects. Corn could still be in surplus during the autumn harvest,” said an analyst with an official think-tank, who declined to be identified due to the sensitivity of the issue.

China has already abolished stockpiling in cotton, soybeans and rapeseed, and the Tuesday statement said it would also look into reforming wheat and rice, the two remaining staple food commodities subject to minimum purchase prices set by the government.