China to cut domestic corn prices to spur demand, cut imports

Date:02-01-2016

China, the world’s second-largest corn consumer, will cut domestic prices to spur demand from downstream industry and reduce cheaper imports, a senior government official said.

China had a crop stockpiling policy to protect its rural population from fluctuating prices and prop up incomes. However, corn reserves are now at record highs, officially at about 100 million tonnes but as much as 170 million by some private analysts’ calculations.

Demand for cheaper overseas supplies has spiked because the stockpiling elevated domestic prices. Increases in corn imports have been modest, but imports of corn substitutes such as distillers grain and sorghum have soared, hitting record highs of more than 35 million tonnes last year.

“If corn prices were set rationally on basis of supply and demand, China wouldn’t need to import at all,” said Chen Xiwen, deputy director with the Communist Party’s Central Rural Working Leading Group, the country’s top rural policy maker.

“Domestic corn prices are not competitive, and the price needs to be set by the market to reduce imports of corn and corn substitutes,” he said.

He said the import price of $342 per tonne was accepted by downstream corn processors and should be considered a “rational” level for domestic corn.

The import price is 20 percent lower than the state support price for the current marketing year ending September and is lower than the $385 price proposed earlier by China’s top planning agency.

January 2017 corn futures on the Dalian Exchange fell 1.95 percent on Thursday to $329 per tonne.

However, some traders oppose the cuts, saying they would erode farmers’ incomes and cause losses for the government, which paid more than $427 per tonne for the reserves.

“A big price cut will not help consumption. The industry is still not willing to build inventories as they know that the government has massive stocks,” said Feng Jilong, a senior corn trader with a state-owned firm.

Chen said Beijing is looking how to subsidize farmers without artificially raising prices, and is also studying whether to abandon the price support system and let the market decide.

China is running out of space for the corn stockpiles and some of the aging crop is deteriorating. However, reducing the stocks would take time because a rapid sell-off would have too big an impact on the market, said Han Jun, Chen’s deputy.

The government plans to reduce the domestic corn acreage next year and encourage farmers to grow other crops, such as soybeans, of which the country is the world’s top buyer.