China's Reform on Corn Starts an Earthquake of Agriculture?
Guangzhou, China, May 5, 2016 (Newswire.com) - The cancellation of Corn Temporary Purchase and Storage Policy may be just a start of a quake on China’s corn and its deep-processing industries and agricultural structure. And all of them is the trend under the supply-side reform, a crucial step for China’s economy, according to CCM.
Three highs force the quit of corn temporary purchase and storage
After eight years’ implementation of policy corn temporary purchase and storage, a severe and challenging problem----three highs (high output, high inventory, high import) occurs.
Among them, the inventory of corn has reached 250 million tonnes, which required more than 10 billion dollars for protection and storage. Meanwhile, the increasingly falling international price of corn makes a big pressure for de-stocking. Now the average international price of corn is about USD 191/t (RMB 1250/t), but the domestic purchase price is USD 307/t (RMB 2000/t), according to CCM’s research.
So if the new policy---“market-oriented purchase + subsidy" ---comes into force, how the government offers subsidy to corn farmer is also very awkward. But in a long-term perspective, CCM considers it a necessary step towards a healthy corn industry, even the agricultural structure.
The most effective weapon---Price
The new policy shows China’s government’s determination to make full use of price----the most effective weapon for resource allocation. It‘s also a strong signal that Chinese government will respect the market discipline and make policies via the real relation between supply and demand.
If carried out, the new policy will cause big changes on corn deep-processing industries and agricultural structure, according to CCM.
The quake of corn deep-processing industries
Corn-feed industry
There is no doubt that things will be totally different in corn deep-processing industries if the price of corn is made by market.
The corn-feed industry will rebound with the larger demand for meat, eggs and milk due to the implementation of two-child policy and the progress of urbanization.
For example, currently, the breeding industry is experiencing a bleak time. The high price of corn in these years put big pressure on corn-feed industry because the feed spend occupies around 70 percent of total cost. However, if the corn price falls, it will be a piece of exciting news for corn-feed enterprises, according to CCM’s research.
Starch sugar industry
The falling price of corn will accelerate the integration of starch sugar industry. Because there will be no cost support to the starch sugar price, which probably will decline to the lowest point in recent years. For instance, in 2015, the markets price of F55 HFCS (= high fructose corn syrup) was down by 4% YoY to USD 495/t, the lowest in the past five years, according to CCM’s research.
“Currently, China’s starch sugar industry is overcapacity. In 2015, the total capacity of China’s starch sugar is approximately 19.80 million tonnes per year while the overall production just about 12million tonnes per year. Obviously, the figure of rate of capacity utilization---60%---is not so optimistic,” stated by CCM’s researcher.
Therefore, some mid- and small starch sugar enterprises may go bankrupt while big companies can benefit from lower cost, predicted by CCM.
Ethanol fuel
It also may advance the use of ethanol fuel in China. And Chinese government may offer subsidy and favored policies to some related enterprises. This idea is also an alternative way to digest the high inventory of corn. Therefore, the development of ethanol fuel may be promoted by the falling price of corn, according to CCM.
The reshape of agricultural structure
Besides the deep-processing industries, the planting structure will be reshaped in the next few years. Currently, the farmers in northeast provinces prefer planting corn due to the high purchase price by state. But with the new policy carried out, they may be hesitated because of the unstable condition. CCM predicts that some policies related to soybean, rice and wheat will follow, so as to dispel the worry of farmers who want to plant another crop. For example, the government can set a lowest target price for soybean and improve its yield rate.
About CCM:
CCM is the leading market intelligence provider for China’s agriculture, chemicals, food & ingredients and life science markets. Founded in 2001, CCM offers a range of data and content solutions, from price and trade data to industry newsletters and customized market research reports. Our clients include Monsanto, DuPont, Shell, Bayer, and Syngenta. CCM is a brand of Kcomber Inc.
For more information about CCM, please visit www.cnchemicals.com or get in touch with us directly by emailing econtact@cnchemicals.com or calling +86-20-37616606.
Source: CCM, China's Ministry of Agriculture
