By Lin Tan
DTN China Correspondent
BEIJING (DTN) -- China's state reserve will buy corn from farmers for $8.06 per bushel, a 12% decline from last year's price of $9.17 per bushel.
China will buy corn from Nov. 1, 2015, to April 30, 2016, according to the national Development and Reform Committee.
"This is the first time the government lowered the corn purchase price in the past eight years since the floor price purchase program started from 2008," said Zhonghua Wang, analyst of Zhaoshang Futures in Beijing.
China's state reserve started buying corn at a flat price to boost farmers' incomes, and initial purchases began at $5.58 per bushel in 2008.
But bumper harvests caused a swelling stockpile -- some have estimated it's as high as 150 million metric tons, or nearly 6 billion bushels -- which has put pressure on policymakers to reduce the floor purchasing price.
"The government's policy change is to help consume the stockpile now and reduce corn acreage next year," Wang said. "But it is not easy because of the difficult market situation in China, as well as the much lower international price of corn."
Since the floor policy has been in place, acreage shifted to corn and away from other crops like soybeans. A recent survey shows that 2015-16 corn production will be 219 million metric tons, about 2 mmt higher than last year. Soybean acreage decreased again, coming in at less than 11 mmt, Wang said.
"This new policy looks like a change in the right direction, but it's far from what the market needs," Wang said. "The high price has limited consumption of corn in China, and the government may need to change more in the future."
Current market prices are below what the government wants to charge for corn from its stockpile at $7.46 per bushel, or 1850 renminbi per ton. That's 150 renminbi cheaper than the government is charging.
"I am sure that the state reserve will put some restrictions in this year's purchase. The policy will require strict moisture, foreign matters, as well as other quality measures to avoid another year of huge purchase volume," said Wang. He thinks the state reserve may buy less than half of the 80 mmt it bought in the 2014-15 season.
The Chinese government is also taking steps to stimulate the processing industry's consumption of domestic corn. Jilin Province started a new program to subsidize its local corn processors. It's paying $1.41 per bushel if they buy corn from state and provincial reserves and $1 per bushel if they buy from the local market, according to the province's grain bureau.
The efforts to encourage more processing are targeted to starch and ethanol processors.
"Ethanol production is the most efficient way to digest these huge stockpiles," said Guanghua Xie, director of the National Bio-mass Center of China. "Ethanol plants can speed up domestic corn consumption, and the most important thing is that ethanol plants can also use the deteriorated corn in storage."
Poor storage and deteriorated corn quality have exacerbated China's difficulty in selling off its stockpile.
Xie said COFCO and several other companies are planning on building more ethanol plants, but the corn price is still too high. "If the corn market keeps a high price because of the government support, with the recent lower crude oil prices, ethanol plants will lose money without an intensive government subsidy."
Wang said market prices may continue to drop if end users are reluctant to buy from the state reserves, even at the reduced price.
"It looks like the government may not be able to support the floor price of $8.06 per bushel," he said.
(KM/AG)
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