The record surge in Chinese corn output is over, and Dong Yushan doesn’t have to look much farther than his dusty fields in Henan province to see why.
A lack of rain from May to August turned into the worst drought the 67-year-old farmer ever saw. He could irrigate only twice and harvested just 2.5 metric tons of grain, half his normal haul from 8 mu of land, an area equal to 0.5 hectares.
“Some of my neighbors are not so lucky,” Dong said by phone from his home near Pingdingshan on the North China Plain. “There isn’t enough irrigation for everyone in this region.”
While the U.S. is collecting the world’s biggest crop ever and prices have plunged, China, the No. 2 grower, will produce less for the first time in five years. Output will fall 3.6 percent, the biggest drop in a decade, to 210.6 million tons, according to SGS SA, which interviewed 307 farmers in China’s top growing regions for Bloomberg during September and October.
“The drought impact was serious in some provinces, with yields not as good as hoped for,” said Fred Gale, a senior economist for market research on China at the U.S. Department of Agriculture in Washington.
The SGS survey suggests output will drop more than the Oct. 12 forecast by the USDA of 0.7 percent to 217 million tons, signaling China will need to tap more of its inventories.
China, already the second-largest corn user, is becoming less able to grow as much as it consumes and will supplant Japan as the world’s top importer by 2020, the USDA estimates. As the economy grew almost sixfold over the past decade, higher incomes led to a surge in meat demand and the need for more grain to feed cattle, hogs and poultry. China is the largest consumer of pork, ranks second in chicken, and trails only the U.S. and Brazil in beef, USDA data show.
A “rolling drought” moved from Hebei and Shanxi provinces to Henan, hurting corn plants during key periods of growth just after pollination, said Drew Lerner, the president of World Weather Inc. in Overland Park, Kansas. Drought also affected Jilin, Shandong and Liaoning, he said.
Of the seven provinces visited by SGS, only Shandong and Heilongjiang, which account for a combined 24 percent of China’s output, showed rising production. Henan, where surveyors found stunted plants and small cobs, is the fifth-largest growing region at just under 9 percent.
About 89 percent of the farmers interviewed said the weather was too dry this season, according to SGS. Average irrigation costs in 2014 rose to $72 a hectare, an almost fourfold jump from the previous year, when most areas had ample or excessive rains.
The output decline may have little impact on global prices because supplies are abundant, especially in the U.S., where the USDA forecast farmers will collect 367.7 million tons, the most ever and 4 percent more than the record in 2013.
Before this year, China boosted production by 33 percent since 2010 with four straight years of record harvests. The government began subsidizing output in 2008 when global food costs surged to a record, amassing the world’s biggest corn stockpile at 77 million tons by paying farmers above-market prices for their grain.
Now, food costs tracked by the United Nations are the lowest in four years, corn futures in Chicago touched a five- year low in October and China’s inventory before this season’s harvest was the largest since 2002, after increasing by 57 percent over three years, according to USDA data.
“It’s likely that the government will continue to buy corn this year,” said Xia Rui, an analyst at Shanghai Flow International Trade Co. who estimated state inventories have already swollen to 120 million tons.
World output will be 979.7 million tons, the London-based International Grains Council said on Oct. 30, raising its outlook for a sixth time in as many months.
“A reduction of up to 8 million tons in Chinese corn production is really insignificant when the base is more than 200 million tons,” said Feng Lichen, the Dalian-based general manager at Yigu Information Consulting Ltd., a provider of crop data to farmers and traders. “In the context of the global production, it almost doesn’t matter.”
Corn futures have tumbled 12 percent this year on the Chicago Board of Trade, trading at $3.6975 a bushel by 11:38 a.m. Beijing time. On the Dalian Commodity Exchange, the contract for May delivery was at 2,390 yuan a ton ($9.93 a bushel), up about 2 percent this year.
The government paid farmers in Heilongjiang 2,220 yuan a ton in 2013, up from 1,480 yuan in 2008, according to the State Administration of Grain. Prices were comparable in the rest of the northeast, the main growing region. China will continue to pay prices similar to last year, with an official announcement on the program expected before the end of this month, Feng said.
With government purchases continuing to keep domestic prices high, corn remains more profitable than other grains and farmers are dedicating more land to it, Xia said.
“China may be reaching the capacity to grow corn,” with increased demand for vegetable crops near cities and limited irrigation in areas that can support corn cultivation, said Mark Oulton, the research manager for SGS North America who conducted the survey for Bloomberg.