Reforms aimed at tackling stockpiles issue
Although, the Chinese government has time
and again announced incentives to reduce its
corn stocks by disposing of the aged or moldy
corn at throw-away prices for the production
of domestic ethanol, these measures have also
not had much of an effect on reducing stores,
say market players, primarily because any sales
were offset by the fact that the acreage under
corn cultivation kept increasing.
compare this to, one could take Chicago
Board of Trade (CBOT) futures prices, add
the “basis” spread to account for an FOB Gulf
cash price, adding freight to the most likely
destination (South Korea), and then deducting freight from China. For 2015, this average
“export parity” amounted to $186.37/ mt,
meaning Chinese corn was $186.37/mt from
being competitive internationally.
In 2009, in a policy that has been flip
flopping, China went as far as removing value
added taxes to spur the export of processed
corn products. The measure was discontinued
again in January 2016 only to be resumed in
September 2016 for a limited time period,
but has not had much of an effect, because of
higher priced yet lower quality Chinese refined
corn products, say Asian traders. In its different
avatars, the export subsidy on corn-based
products has not had much of an effect on the
corn stored in Chinese elevators.
The gradual liberalization in 2016 led to a
further erosion of this export arbitrage, with
China’s theoretical FOB values falling to the
$250s/mt region in May 2016, while seaborne
prices as reflected by CBOT were in the $180s/
mt region, which indicated a spread narrowed
to around $70/mt.
With increasingly desperate steps being
taken, could it reach the final stage where the
local oversupply is cured by corn exports? For
this to happen, only one condition needs to be
met: for domestic prices to be low enough to
compete with other seaborne origins such as
the US, the Black Sea and South America.
The export arbitrage should be made
easier to reach because of China’s freight
advantage given that huge corn importers
are literally on its doorstep, including Japan
(world’s largest corn importer), South Korea
(number three), Taiwan (number eight) and
Vietnam (the largest importer of corn in
Southeast Asia). Certainly the latest price
trends point to this being possible very soon.
Domestic prices are perhaps best represented
by Dalian Commodities Exchange (DCE)
futures prices, which although they depict
derivatives can act as a reasonable representation of physical prices, traders say.
While domestic front month prices for
corn on the DCE had been as high as Yuan
2,455/mt ($400/mt) or more during early
2015, they had fallen to the low $300s/mt at
the end of the year. For ease of comparison
with seaborne prices, a “fobbing cost” of
$6.50/mt can be added to DCE values, giving
a theoretical FOB offer value. The average
theoretical FOB China corn prices hit an
average of $365.55/mt in 2015.
To provide a realistic seaborne price to
20
The latest auction results for domestic
Chinese corn conducted in Heilongjiang on
September 1, 2016 went as low as RM1,460/mt
or $218.62/mt at the domestic elevator, compared to an FOB value of $279.77/mt. Yet as US
prices fell in late August, the spread against the
US CFR China price widened again to $127.42/
mt making Chinese corn exports look like a
faraway dream.
For reasons of simplicity, the price comparison above assumes that Chinese corn quality is
at par with international corn. However, major
Asian and international traders could be forced
to apply quality discounts to Chinese corn sold
into the Asian market, even for the latest harvest. Besides still being too expensive to tempt
buyers, most international consumers are not
prepared to take the risk relating to quality
variance, and major Asian feed millers at least
expect a quality-related discount.
Even if Chinese corn was discounted $20-30/
mt from international prices, Asian buyers are
suspicious of the quality of the corn, reports a
Japanese trader. Buyers would not know about
the age of the corn being sold, says a market
source, and buyers are not sure whether even
the new corn would adhere to international
specifications, particularly on parameters like
aflatoxins levels, he adds.
International traders who have seen spreads
between Chinese corn and US corn prices melt
during 2016 and have offered Asian buyers the
possibility of Chinese corn stocks, have so far
seen little interest from buyers, though some
international traders have started adding China
as an additional permissible origin in their sales
to Asia, where possible.
Meanwhile, Chinese ethanol and corn starch
are not even tempting buyers due to their
high prices and lower quality, especially when
compared to US refined corn products, says a
trader, even in spite of the 13% tax subsidy on
refined corn product exports.
China used to be a net exporter of corn but
exports fell to under 1 million mt in 2008, from
a peak of 16 million mt in 2003, as domestic industrial use increased around 2000, to
produce feed ingredients, sweeteners, alcohols, food additives, and other products. The
Chinese government responded by introducing
subsidies to spur domestic corn production. It
was a program that was a bit too successful and
now, more than a decade later, the country is
struggling with an oversupply problem.
Chinese agricultural reforms are seriously
aimed at tackling China’s decade long corn
stockpiles issue, by reducing the production
of Chinese domestic corn. However, in the
absence of competitive pricing and huge
stockpiles whose quality has deteriorated
severely, the Chinese government will need
to take write-downs on the stored corn,
which could amount to billions of dollars,
by some estimates.
In rationalizing the stockpiles, there will be
some pain for China’s planners, on policies
that support the domestic farming industry.
The central government will try to reduce its
losses by trying hard to push its aged corn into
ethanol production, at highly discounted prices. China could try to subsidize farmers and
sell its new crop, which will start harvesting
in September at heavily discounted prices to
the Asian market, especially South Korea, but
that will involve additional cost to the Chinese
government, which is already struggling with
impending write-downs of its aged corn.
Whatever the outcome, Asian corn market
participants will continue to keep a close eye
on this potential source of price risk, and will
hopefully welcome the emergence of a new
tool to track regional corn prices. On August
22, 2016, Platts launched a daily assessment
tracking the cash price of corn on a CFR South
Korea basis. The decision to measure this market stemmed from the country’s openness to all
origins of corn and the frequency and transparency of its purchasing tenders, which have all
contributed to the South Korean market being
viewed as a benchmark across Asia.