China's new approach to corn

by Arvin Donley
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China corn
Corn production in China recently peeked at 224 million tonnes in 2015-16, according to the USDA.
China recently announced it was ending its corn stockpiling program and is in the process of trying to significantly reduce corn inventory, which peaked at 250 million tonnes in 2016.

In March of last year the Chinese government officially announced the end of its nine-year state corn procurement program. The aim of the program was to stabilize corn acreage and boost rural incomes. But the program also distorted the market equilibrium, leading to artificially inflated domestic prices and a massive inventory held by the state reserve.

In 2015-16 alone, domestic production exceeded consumption by nearly 80 million tonnes. The government will bear an estimated $10 billion to $15 billion per annum in the coming years, including storage costs, interest subsidies and other fees — and that’s not even considering the inventory write-downs due to falling prices. Rabobank estimates China will register another 30-million-tonne surplus in corn in 2016-17.

A recent analysis of the situation by Rabobank entitled, “Cutting China’s Massive Corn Inventory,” examined the kinds of measures China will take to shrink its inventory and how long this de-inventory process will take.

Rabobank said the process will involve four measures.

The first is switching corn acres to soybeans and other crops. Facing excessive oversupply, the Chinese government plans to reduce corn acreage by 9% by 2020, especially in the so-called “sickle-shape region” — an environmentally fragile, cold, arid, mountainous and eroded area on the fringes of the key corn production regions. With declining corn prices, Rabobank said it expects some farmers to switch to other crops such as soybeans, forage grass, potatoes and coarse grains. These measures come after the government already has encouraged crop rotation in order to improve soil fertility. Rabobank said the planting structure adjustment won’t be accomplished in the next planting season, but that it will take the next few years.

China corn
Source: U.S. Department of Agriculture.
“A chunk of the corn acreage reduction will be filled by domestic soybeans,” Rabobank said. The Chinese Ministry of Agriculture (MOA) released guiding opinions to increase domestic soybean acreage and improve yields in the next five years. According to the MOA’s plan, China’s soybean output will reach 19 million tonnes by 2020, compared to 10 million to 12 million tonnes in 2015. Nearly all of the additional domestic soybeans, which are non-GM, will be used for consumer foods such as tofu and soy milk.

The second measure China is taking is reducing its imports of non-corn feed grains. Although corn imports are protected by quota, China imports a significant amount of alternative feed grains such as sorghum, feed barley and DDGS, Rabobank said.

“It is worth mentioning that China accounts for roughly 20% of global feed grain imports — three-quarters of all sorghum trade, one-third of all barley trade (even though 30% of it is for brewing) and nearly half of U.S. DDGS exports,” Rabobank said. “In 2015, the import volume of sorghum, barley and DDGS were 10.69 million tonnes, 10.73 million tonnes and 6.82 million tonnes, respectively.”

While plummeting corn prices already will reduce the appeal of imported feed grains, the government will still want to pose more protective trade policies, further impeding imports in order to boost domestic corn consumption and to absorb the massive overhang in state reserves, Rabobank said.

China’s slowing demand also will have consequences for exporting countries. Rabobank said a proportion of the feed grains will need to find a different outlet in the world market, and therefore they will be exported to other traditional destinations, while larger volumes also will need to be used in the country of production.