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China Corn Glut No Barrier to Farmers as State Buys

April 8, 2014
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Even after four years of record corn harvests left China with the world’s biggest surplus since 2002, Zhang Fengyou and millions of farmers in the northeast provinces are planting more.

That’s because they know the government will buy corn at above-market prices, stockpiling enough to supply the 28 nations of the European Union for a year. State reserves are a strategic asset for China, the world’s most-populous nation, where corn used to feed hogs, cattle and poultry surged 44 percent over the past five years as meat consumption climbed.

"Nothing compares to corn for giving a stable and good return," said Zhang, 39, who plans to fill his entire 11- hectare (27-acre) farm in Baiwu, Heilongjiang province, with corn this year, a reversal from 2009, when most of the land was used for soybeans.

Rising corn production in China has dashed forecasts that economic growth and increased meat demand would make the nation the largest importer of the grain and send global prices higher. Instead, China’s self-sufficiency eased the strain of climbing world consumption. Futures on the Chicago Board of Trade are down 41 percent from a record in 2012.

Since government subsidies began in 2008, when global food prices tracked by the United Nations jumped to the highest ever, Chinese farmers boosted corn output by 43 percent, collecting a record 217.7 million metric tons in 2013, the U.S. Department of Agriculture estimated in March. Before the harvest starts in September, stockpiles will reach 72.2 million tons, almost twice the 37 million tons held in the U.S. and about as much as the 73.5 million the EU will use this year, USDA data show.

 

Paying More

 

The government paid farmers in Heilongjiang 2,220 yuan a ton ($9.08 a bushel) in 2013, up from 1,480 yuan in 2008, according to the State Administration of Grain website. Price gains were similar in the rest of the northeast, the main growing region, including the provinces of Jilin, Liaoning and Inner Mongolia.

On Zhang’s farm, outside the city of Suihua, about 550 kilometers (340 miles) northwest of Russia’s far eastern port of Vladivostok, last year’s corn crop earned him 10,950 yuan ($1,763) per hectare, twice the 4,000 yuan for soybeans. Zhang said he keeps 30 percent of his harvest to raise 50 pigs.

"China has reaped much more corn than we had realized, and as the government tries to deal with the glut, imports are not seen as necessary," said Li Qiang, chairman at research company Shanghai JC Intelligence Co., who has studied China’s agriculture industry for 30 years. He estimated the country will grow more corn than it uses for at least another two years.

 

Meat Lovers

 

Because output can be hurt by weather, pests and natural disasters, the government determined China needed ample supply to sustain livestock herds that feed a growing population. The country will have 1.356 billion people this year, or about 19 percent of the world total, U.S. Census Bureau data show.

Rising incomes are increasing demand for protein in China, where the economy doubled in five years to displace Japan as the world’s second-largest in 2010. About 72 percent of the corn China uses this year will be consumed as livestock feed, with the rest made into ethanol, starches and sweeteners.

Already the world’s largest pork-consuming nation, with a herd of 475.9 million hogs, or about six of every 10 on the planet, demand is up 11 percent since 2011, according to a November USDA report. China ranks fourth in beef consumption, has the third-largest cattle herd and is the second-largest milk producer. For chicken, only the U.S. eats more than China, the data show.

 

‘Protect Farmers’

 

The State Administration of Grain, in a 2009 statement, said government stockpiling would "protect farmers’ interests" and "stabilize market prices," which the previous year dropped from a record during the global financial crisis. In a March 2010 report, the agency urged "building agricultural infrastructure, increasing technological investment and promoting high-quality, high-yield corn" while "increasing the size of state corn reserves." The temporary stockpiles would be sold later "at prices in line with the market," according to the report.

With the government as a buyer, growing corn became more profitable. Farmers on average earned 2,965 yuan per hectare in 2012, after all costs including labor, twice the return from soybeans of 1,543 yuan, according to the Compilation on Costs and Returns of China Agricultural Products, a report published last year by the National Bureau of Statistics.

 

‘Social Stability’

 

"The Chinese government has always viewed stable grain prices as a foundation of social stability," including the cost of rice, wheat and corn, said Feng Lichen, the Dalian-based general manager at Yigu Information Consulting Ltd., a provider of crop data to farmers and traders.

Stockpiling policies for rice were introduced by the government starting in 2004, and wheat was added in 2006, according to the National Development and Reform Commission.

With the help of subsidies, corn output last year increased by the equivalent of total imports for the previous six years, USDA data show. That’s limited demand for imported grain even as China became the world’s largest corn consumer after the U.S. While the USDA projects imports of 5 million tons in the 12 months ending Aug. 31, actual purchases may be less as orders are canceled, said Yigu’s Feng.

Rabobank Groep NV in 2010 predicted China would overtake Japan as the world’s largest importer by 2015, buying as much as 25 million tons. The USDA said in February it may take until 2021 for China to top Japan as the top importer of corn.

 

Cheaper Imports

 

Government stockpiling can be expensive for consumers because imports are cheaper. Corn from the U.S., the world’s largest grower and exporter, was trading at its widest discount ever to cash grain on China’s Dalian market on Jan. 9 at 1,394 yuan a ton, according to data compiled by Bloomberg. While the discount has narrowed as Chicago prices rose this year, it’s still up about 39 percent from a year ago.

Corn futures on the Chicago Board of Trade closed yesterday at $4.9925 a bushel (1,221 yuan a ton), compared with a record $8.49 in August 2012. On the Dalian Commodity Exchange, the contract for September delivery closed at 2,352 yuan today, up about 40 percent from five years ago. Soybean futures on Dalian are up about 20 percent since April 2009.

China also uses a quota system to keep out cheaper corn imports, with grain processors in southern provinces required to buy from northern producers, according to Li of Shanghai JC. The central government provides transportation subsidies of 140 yuan per ton for companies that ship corn out of the northeast provinces, the grain administration said in November.

 

Shipping Soybeans

 

The picture is different for soybeans, which as an oilseed is seen by China as less strategic than rice, wheat and corn. Imports of the crop, used as feed and to make food and cooking oil, have doubled in six years as processors take advantage of cheaper supplies from the U.S. and Brazil.

"China is not as efficient in producing soybeans as other nations," Chen Xiwen, deputy head of the Agricultural Work Group of the Communist Party Central Committee, said at a State Council press conference in February 2012. "It’s better to increase imports to spare the land grown to soybeans to other crops, producing high-output, high-value crops. This is good for the development of China’s agriculture."

Better returns on corn are helping to increase investment in farm machinery, fertilizer and higher-yielding seeds, according to Yigu’s Feng. Production improved without the use of genetically modified seeds more common in the U.S.

"The development of rural cooperatives has also led to consolidation of farmland in the northeast," Feng said. "You’ll see one farmer plowing fields with tractors that used to be manned by a thousand farmers."

 

Better Yields

 

On average, Chinese farmers produced 6.028 tons per hectare last year, up 2.7 percent from 2012, while soybean yields dropped 2.1 percent to 1.78 tons, according to China National Grain & Oils Information Center. The nation’s corn yields are up 25 percent in the past decade, compared with 12 percent in the U.S., where farmers still are more productive at 9.97 tons per hectare on average, according to the USDA.

Heilongjiang farmers increased corn planting by 41 percent from 2010 in 2013, according to a statement on the provincial government website.

China’s inventories may expand even more next year. A report yesterday from the USDA’s Foreign Agricultural Service predicted another record crop in 2014 that will leave corn stockpiles at 87.14 million tons before the 2015 harvest.

 

Food-Makers

 

The subsidies are having the desired result for government policy makers, at least for now, as they try to preserve a portion of China’s food-making ability as rapid economic growth draws more people to the cities and away from the farm.

While domestic corn prices are 6 percent lower than their peak in 2012, they’re still about 50 percent higher than six years ago, according to data compiled by Shanghai JC Intelligence.

Zhang said he continues to make a good living off the land. Because he expects the government to keep buying corn, he plans to convert three hectares he planted with potatoes last year so that all his land will be used to grow the grain.

"I earned money through my own hard labor, but it’s far better than working as a migrant worker in the cities," Zhang said.

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