Chinese Domestic Corn Clearance is a Move Toward an Increased Free Market Feed Grains Model
In late March the Chinese Government went to extreme measures to curb their ballooning domestic corn stock pile with the announcement they will move closer to a free market system. Since 2009 the Government has supported domestic production by implementing a price floor on corn. The price support system worked too well. China is now in a situation where they have a domestic glut of corn within a global balance sheet that is well supplied with feed grains.
Interestingly, China has faced this exact predicament previously. In 1999-2000 ending stocks rose uncontrollably and the government was caught holding huge intervention stocks. However, the years following quickly turned the situation around. Low prices were followed by a severe drought which plagued China from 2001-2002 eating up corn stocks and creating a bullish market.
Transparency into China is difficult by all accounts. Stockpile figures are difficult to ascertain but average and conservative estimates have them sitting on 180MMT of corn. This number does seem enormous, but it needs to be put into perspective. China consumes approximately 800KMT of feed grains a day, which equates to 225 days’ worth of corn consumption. The growth in stockpiles has created worry for several reasons. Corn storage space is sparse and due to the length of time it has been stored, there are some quality concerns.
Chinese consumers are paying inflated values for their feed grains compared to global prices. Over the past several seasons Australian feed grains have been very successful into China as it has been far cheaper than domestic corn prices. In fact, it has been cheaper to load grain from Australia, ocean freight to China, discharge the vessel and deliver the stock to up country homes, than it was to buy corn 50 kilometres down the road where their feed mill was. This is another example of government intervention leading to inefficient market practice.
Restrictions have been put on international traders for feed grains. The Chinese Government wishes to limit grain entering the country through stricter control of import permits and tighter regulation of phytosanitary requirements. This has helped domestic consumption for local corn increase but was offset by another record corn harvest in October of last year.
What does this all mean? As you can see by the chart below, Chinese Corn (yellow line) has been inflated over the US Corn Market (purple line) and is starting to level with the global marketplace. The function of their market will now be to decrease price back to global values and consume domestic corn stock. Low prices cure low prices and it is expected that corn acres will decrease for the upcoming plant into soybeans.
Australian barley and sorghum exports to China for 2015/16 season have been 50% behind pace from this time last year. It is likely to remain below pace for the next 12 months while China goes through this clearance process. However, the longer term outlook is positive. The China-Australia Free Trade Agreement has recently been enacted and will reduce import tariffs and open barriers to trade. We anticipate the Chinese Government will move closer to a free market for feed grains once the corn clearance process has been completed. This will make way for increased Australian sorghum and barley trade in line with global values and a consumer oriented China of the future.