January 25, 2020

Updated: China Reformed Domestic Corn Policy, But “Headaches” Persist for U.S.

Wall Street Journal writer Lucy Craymer reported today that, “China’s effort to overhaul its bloated corn sector has sent local prices to their lowest levels in 10 years—and left animal-feed imports from the U.S. more expensive for Chinese livestock farmers.

“China has been trying to auction down its stockpile—the largest in the world—amid the latest step in reforming its agricultural sector: The government this spring scrapped a minimum-price support program for corn started in 2007-08. That program, in which the government bought corn to keep prices above a certain level, had proved so popular that farmers grew more. The stockpile soared, doubling in size between 2009 and now.

The combination—holding weekly auctions of corn and removing a floor for prices—has driven down China’s corn prices in recent months.”

The Journal article noted that, “Beyond China, the changes are pressuring what last year was a more-than $10 billion imported animal-feed market, much of which originates from the U.S. and has been popular with Chinese livestock farmers because it was cheaper than local corn.

“One such U.S. product in particular could suffer: a byproduct from the making of ethanol known as distiller’s dried grains with solubles (DDGS), more than half of whose sales last year were in China. Now U.S.-produced DDGS must compete with the cheaper Chinese corn. Adding to the pressure, DDGS on Sep. 26 was hit by a 33.8% duty by the Chinese government after the U.S. was cited for dumping the product. The U.S. was then slapped with a second tax of between 10% to 10.7% a week later.”

Ms. Craymer added that, “But China’s corn prices, propped up for so many years, still have a long way to drop before they would start to compare to international ones: The most widely traded corn futures contract on the Chicago Board of Trade this week was around US$137 a metric ton—about 34% less than prices for the most-traded Chinese corn contract.

“The prices of corn vary, naturally, according to whether the corn is from a new harvest or from earlier ones, which usually end up as animal feed or ethanol. But a look at prices on China’s Dalian Commodity Exchange shows how much prices have fallen from when the price-support mechanism was abandoned: Last Friday, the most recently available price in China, the January corn contract closed at 1,392 yuan—about $208—a metric ton. That was down 12% from March 29 when the price floor was removed.

“Adding to pressure on the Chinese government: new corn from the 2016 harvest is now entering the market.”

Recall that the United States last month launched a challenge at the World Trade Organization regarding China’s price supports for domestic wheat, corn and rice.

More specifically, Reuters writers Karl Plume and Tom Polansek reported last month that, “U.S. wheat farmers, struggling to make money as prices sink and global supplies swell, could be the main beneficiaries if Washington wins a case it brought last week against China over an estimated $100 billion in domestic grain market supports.

“On Tuesday, U.S. trade officials said they would file a case at the World Trade Organization (WTO) against China over allegations that aggressive pricing supports prompted Chinese farmers to overproduce corn, wheat and rice, fuelling a global crop glut and depressing world prices.”

The Reuters article noted that, “While the U.S. allegations cover corn and rice as well as wheat, China has already reformed its corn policy and rice exports were never a major part of U.S. agricultural income.”

UPDATE: The Wall Street Journal editorial board indicated in an item posted on Thursday evening (“China’s Corn Mountain“) that, “Corn prices in China fell more than 20% in the past year, the result of Beijing’s decision to cancel a major subsidy program. That’s good news for farmers as well as consumers, but Beijing still wastes money by the bushel keeping prices of other grains high.”

The Journal added that, “Beijing got smart in March and switched to a policy of ‘market-oriented purchase and subsidy.’ The market will set the price of corn, and farmers will receive cash payments based on acreage. The price of corn could fall another 30% to the global level.

“The problem of what to do with a mountain of rotting corn remains. State trading companies plan to export some of it, but the U.S. government estimates that China will have to write off $10 billion of spoiled grain.

“The disastrous corn policy shows again that China hurt itself by listening to the alarmism of Malthusian prophet Lester Brown, who periodically claims that China faces famine. The best way to make Chinese agriculture efficient is to expose it to international competition. Next on the chopping block should be wheat and rice support prices that the U.S. claims cost nearly $100 billion more than World Trade Organization rules allow.”


Recent Livestock Issues: Lower Prices for Beef, Pork; and, Consumer Preferences

Bloomberg writers Shruti Singh and Lydia Mulvany reported on Tuesday that, “Cattle ranchers who quickly expanded their herds after a prolonged Texas drought now have become their own worst enemies.

“The industry-wide buildup was the fastest Shelby Horn, a fourth-generation cattleman with a family ranch in Nebraska, had seen in at least 30 years. The result: An explosion of beef on the market and a 30 percent drop in wholesale prices from a record set in May 2015, when supplies were tight after the drought. And with many of the calves still a year or two from slaughter, the industry finds itself with no easy way to adjust.”

The Bloomberg writers explained that, “Beef production will rise 5.2 percent this year and climb a further 3.4 percent in 2017 to a five-year high, the U.S. Department of Agriculture projects. Output is increasing as the cattle, hog and chicken industries expand simultaneously, leaving the nation set for a year of record meat production and declining prices. Consecutive years of bumper grain harvests have also sparked expansion as feed costs fell.”

And yesterday, Bloomberg’s Simon Casey tweeted that, “Hogs hit 13-year low.”

Purdue University ag economist Chris Hurt pointed out earlier this week that, “Lower corn and soybean meal prices this fall will drop estimated costs of production to about $47 to $48 per live hundredweight. With hog prices in the higher $30s this fall and winter, estimated losses will be $25 to $30 per head.”

Meanwhile, with respect to consumer meat preferences, Wall Street Journal writer Jacob Bunge reported earlier this week that, “U.S. food regulators need to take further steps to curb antibiotics use in livestock to maintain the drugs’ ability to defend human health, according to an advocacy group.

By early next year, animal drugmakers have agreed to abide by U.S. Food and Drug Administration guidelines to stop using antibiotics used in human medicine to help livestock and poultry gain weight faster. Some antibiotics had been used for that purpose on farms for decades, alongside treating and preventing disease.

“But researchers for the Pew Charitable Trusts said Tuesday in a review of livestock antibiotics that the new guidelines don’t go far enough. The Philadelphia-based group said regulators need to clamp down on how long some antibiotics can be used, and more closely scrutinize some uses that may not directly relate to keeping animals healthy. Pew is a nonpartisan, nonprofit group that researches consumer, environmental and health issues, including a focus on the impacts of large-scale food production.”

Mr. Bunge added that, “Regulators’ efforts to scale back antibiotics use on farms gained momentum as some of the biggest U.S. restaurant chains, including McDonald’s Corp. and Subway, over the past few years announced plans to buy meat produced with less antibiotics.”

Lastly, Kelsey Gee and Heather Haddon reported in today’s Wall Street Journal that, “In grocery store cases stuffed with exotic grass-fed and organic meats, new ‘single-origin‘ cuts are taking the local food craze to new heights.

“Retailers including Whole Foods Market Inc., FreshDirect, and Inc. are building farm-to-store meat operations that sate some consumers’ desires to trace their burger or bacon all the way back to an individual animal.”

Graph from today’s WSJ

The Journal writers explained that, “These efforts take aim at the industrial meat processors like Cargill Inc. and Tyson Foods Inc. that sit at the center of a hub-and-spoke system tying hundreds of thousands of farmers across the country with retailers and food distributors.”

Gee and Haddon added that, “Sales of conventional meat last year grew less than 3% in value, compared with a 12% uptick for meat labeled ‘natural’ and a 23% gain in sales of labeled ‘antibiotic free,’ according to market research firm Nielsen.”